U.S. SEC Chairman: Will formulate rules for the issuance, custody and trading of crypto assets

Source: U.S. SEC Chairman Paul S. Atkins, keynote speech at the Cryptocurrency Working Group Tokenization Roundtable; Compiled by: AIMan@Golden Finance

I am very happy to speak to all the distinguished guests at today's tokenization roundtable.

The topic discussed this afternoon is very timely because Securities are increasingly migrating from traditional (or "off-chain") databases to distributed ledger systems based on blockchains (or "on-chain").

The transition of securities from off-chain systems to on-chain systems is similar to the transition of audio recording from analog vinyl records to tapes to digital software decades ago. The ability to easily encode audio into digital file formats and easily transmit, modify and store it has brought tremendous innovation to the music industry. Audio has broken free from the constraints of static, fixed format creation. It has suddenly become compatible and interoperable across a variety of devices and applications. It can be combined, split and programmed to form entirely new products. It also enables the development of new hardware devices and streaming content business models, greatly benefiting consumers and the U.S. economy.

Just as the shift to digital audio revolutionized the music industry, the move to on-chain securities has the potential to reshape every aspect of the securities market by enabling entirely new ways to issue, trade, hold, and use securities.For example, on-chain securities could leverage smart contracts to transparently distribute dividends to shareholders on a regular basis. Tokenization could also facilitate capital formation by transforming relatively illiquid assets into liquid investment opportunities. Blockchain technology promises to enable a wide range of new use cases for securities, spawning new types of market activity that are not contemplated today by the Commission’s traditional rules and regulations.

In order for the United States to become the “crypto capital of the planet” that President Trump envisions, the SEC must keep pace with innovation and consider whether regulatory reforms are needed to accommodate on-chain securities and other crypto assets. Rules and regulations designed for off-chain securities may be incompatible or unnecessary with on-chain assets and inhibit the development of blockchain technology.

One of my key tasks as SEC Chairman is to develop a sound regulatory framework for the cryptoasset market that sets clear rules for the issuance, custody, and trading of cryptoassets, while continuing to deter bad actors from breaking the law. Clear rules are essential to protecting investors from fraud, and especially to helping them identify scams that are not legitimate.

It’s a new day at the SEC. Policymaking will no longer be based on ad hoc enforcement actions. Instead, the SEC will use its existing rulemaking, interpretation, and exemptions to set practical standards for market participants. The SEC’s enforcement approach will return to the original intent of Congress, which is to regulate violations of these established obligations, especially with respect to fraud and manipulation.

This work requires coordination across multiple offices and divisions within the SEC, so I’m pleased to see Commissioners Uyeda and Peirce working together to form the Cryptocurrency Task Force. The SEC has long been plagued by siloed policymaking. The Cryptocurrency Task Force exemplifies how our policy departments are coming together to quickly provide the American public with the clarity and certainty they have long needed.

I will now focus on three key areas of cryptoasset policy—issuance, custody, and trading.

Issuance

First, I would like the SEC to develop clear and reasonable guidelines for the issuance of cryptoassets that are securities or subject to investment contracts. Only four cryptoasset issuers have conducted registered offerings and Regulation A offerings. Issuers have largely avoided such offerings, in part because of the difficulty in meeting the related disclosure requirements. It is also difficult for issuers to determine whether a cryptoasset constitutes a "security" or is subject to an investment contract if the issuer does not intend to issue ordinary securities such as stocks, bonds, or notes.

Over the past few years, the SEC initially adopted what I call an "ostrich mentality" approach—perhaps hoping that cryptocurrencies would fade away. It then reversed course and adopted an enforcement and regulatory strategy of "shoot first and ask questions later." The SEC’s claims of willingness to communicate with potential registrants, “just come visit,” have proven to be short-lived at best and often misleading, as the SEC has not made the necessary adjustments to registration forms for this new technology. For example, Form S-1 still requires detailed information on executive compensation and use of proceeds, information that may not be material to an investment decision in crypto assets. Although the SEC has previously adjusted its forms for asset-backed securities offerings and real estate investment trust offerings, it has not made adjustments for crypto assets despite the growing investor interest in crypto assets over the past few years. We cannot encourage innovation by “fitting a square peg into a round hole.”

I am committed to pushing the SEC to develop new guidelines. The SEC staff recently issued a statement on certain registration and offering disclosure obligations. The staff also clarified that certain offerings and crypto assets do not implicate the federal securities laws, and I hope that the staff will continue to follow my instructions to provide clarifications for other types of offerings and assets. However, existing registration exemptions and safe harbors may not be entirely appropriate for certain types of crypto asset offerings. I believe these staff statements are only temporary—the SEC’s actions are critical and necessary. In the meantime, I have asked the SEC staff to consider whether additional guidance, registration exemptions, and safe harbors are needed to create pathways for issuing crypto assets within the United States. I believe the SEC has broad discretion under the securities laws to accommodate the crypto industry, and I intend to do just that.

Custody

Second, I support providing registrants with more autonomy to decide how to custody crypto assets. The SEC staff recently rescinded Staff Accounting Bulletin No. 121, removing a significant hurdle for firms seeking to provide custody services for crypto assets.  This announcement was a serious mistake. The staff had no authority to take such a broad action outside of SEC action and without notice and comment rulemaking. The action created unnecessary confusion and has implications far beyond the SEC’s jurisdiction. However, the SEC can do much more than rescind SAB No. 121 to enhance competition in the market for legal and compliant custody services.

It is necessary to clarify which types of custodians qualify as “qualified custodians” under the Advisers Act and the Investment Company Act, and to identify reasonable exceptions to the qualified custody requirements to accommodate certain common practices in the cryptoasset markets. Many advisors and funds have access to self-custody solutions that employ more advanced technology to safeguard cryptoassets than some custodians in the market. As a result, custody rules may need to be updated to allow advisors and funds to engage in self-custody in certain circumstances.

In addition, it may be necessary to repeal the “special purpose broker-dealer” framework and replace it with a more reasonable regime. There are currently only two special purpose broker-dealers in operation, apparently due to the significant restrictions imposed on these entities. Broker-dealers have never been restricted from serving as custodians of non-security cryptoassets or cryptoasset securities, but the SEC may need to take action to clarify the application of customer protection and net capital rules to such activities.

Trading

Third, I support allowing registrants to trade a wider variety of products on their platforms and to respond to market demand by engaging in activities that were previously prohibited by the SEC.For example, some broker-dealers have attempted to enter the market through “super apps” that offer integrated trading of securities, non-securities, and other financial services. Federal securities laws do not prohibit registered broker-dealers with alternative trading systems from facilitating non-securities trading, including through “pairs trading” between securities and non-securities. I have asked the SEC staff to assist us in designing ways to modernize the ATS regulatory regime to better accommodate crypto assets. In addition, I have asked the SEC staff to explore whether further guidance or rulemaking is needed to facilitate the listing and trading of crypto assets on national securities exchanges.

While the SEC and its staff work on developing a comprehensive regulatory framework for crypto assets, securities market participants should not be forced to go overseas for blockchain technology innovation. I would like to explore whether conditional exemptions might be appropriate for registrants and unregistered persons seeking to bring new products and services to market that may be incompatible with existing Commission rules and regulations.

I am eager to coordinate with my colleagues in President Trump’s Administration and Congress to make the United States the best place in the world to participate in the crypto-asset markets.