New U.S. SEC Chairman Talks About Crypto Regulatory Vision

I am very happy to share my views at this tokenization roundtable.

The topic of discussion is timely, as we are witnessing the gradual migration of securities from traditional ( “off-chain” ) databases to blockchain-based ( “on-chain” ) distributed ledger systems.

This shift from off-chain to on-chain is similar to the evolution of audio recordings from vinyl to tape to digital formats decades ago. Digital audio files are easy to transmit, modify, and store, bringing revolutionary innovation to the music industry. Audio content is free from the constraints of fixed formats, is compatible and interoperable across devices and applications, and can be reassembled, segmented, and programmed to create entirely new products. This change has also led to the development of new hardware devices and streaming business models that will greatly benefit consumers and the U.S. economy as a whole.

Just as digital audio has completely reshaped the music industry, the migration of on-chain securities has the potential to fundamentally change every aspect of the securities market, bringing about entirely new ways of publishing, trading, holding, and using. For example, on-chain securities can achieve regular, transparent shareholder dividends through smart contracts. Tokenization also facilitates capital formation by converting less liquid assets into liquid investment opportunities. Blockchain technology is expected to bring a wide range of innovative applications to securities, giving rise to many new types of market activity that are not yet considered by existing regulatory frameworks.

In order to realize the vision of the United States becoming the “Capital of Crypto on Earth,” regulators 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 traditional off-chain securities may be incompatible or unnecessary for on-chain assets, and may hinder the development of blockchain technology.

As the chairman of the regulatory agency, a key task of mine is to develop a reasonable regulatory framework for the Crypto Assets market, establish clear rules for the issuance, custody, and trading of Crypto Assets, and resolutely combat illegal activities. Clear rules are crucial for protecting investors from fraud, especially in helping them identify illegal scams.

Regulatory authorities have now entered a new era. Policy making no longer relies on ad hoc enforcement actions. Instead, we will utilize existing rule-making, interpretation, and exemption powers to establish practical standards for market participants. Enforcement methods will return to the original legislative intent, which is to regulate violations of defined obligations, especially fraudulent and market manipulation behaviors.

This work requires coordination among multiple departments within the regulatory agency, so I am pleased to see that the committee has cooperated to establish a special working group on Crypto Assets. For a long time, regulatory agencies have been troubled by the disjointed approach of policy-making. This special working group demonstrates how we can work together to quickly provide the clarity and certainty that the American public has long awaited.

Now, I will focus on three key areas of crypto assets policy - issuance, custody, and trading.

Issuance

First of all, I hope to establish clear and reasonable guidelines for the issuance of Crypto Assets that are subject to securities or investment contract constraints. Currently, only four Crypto Asset issuers have completed registration and issuance under Regulation A. Most issuers avoid such offerings, partly because it is difficult to meet the relevant disclosure requirements. If an issuer does not intend to issue common securities ( such as stocks, bonds, or notes ), it is difficult to determine whether their Crypto Assets constitute “securities” or are bound by investment contracts.

Over the past few years, regulators have initially adopted what I call an “ostrich mentality” – seemingly hoping that cryptocurrencies will disappear naturally. This was followed by a strategy of “law enforcement first, then inquiry”. While officials claim to be willing to communicate with potential registrants, in practice this claim is often misleading, as regulators have not made the necessary adjustments to the registration form for this new technology. For example, the S-1 form still requires details of executive compensation and the use of funds, which may not be material to cryptoasset investment decisions. While regulators have previously adjusted the tables for asset-backed securities and REITs, they have failed to do so in the face of growing interest in cryptoasset investments. We can’t encourage innovation through a “square chisel” approach.

I am committed to pushing for a new approach. Regulatory staff recently issued a statement regarding certain registration and offering disclosure obligations and clarified that certain offerings and cryptoassets are not subject to federal securities laws. I hope that staff will continue to clarify other types of issuances and assets as instructed. However, the existing registration exemptions and safe harbors may not be fully suitable for certain types of cryptoasset offerings. I believe that these staff statements are only temporary measures – more in-depth regulatory action is essential and necessary. At the same time, I have asked staff to consider whether additional guidance, registration waivers, and safe harbors are needed to open a pathway for cryptoasset issuance in the United States. Under securities law, regulators have broad discretion to accommodate the development of the crypto industry, and I intend to make the most of this authority.

Custody

Second, I support giving registries more autonomy to decide for themselves how they want to custody crypto assets. Staff recently revoked Employee Accounting Bulletin No. 121, removing a significant hurdle for companies seeking to provide cryptoasset custody services. This original statement was a grave mistake. Staff do not have the authority to take such extensive action in the absence of a formal notification and comment rule-making process. The action has caused unnecessary confusion and its repercussions go far beyond regulation. However, we can do much more than repeal SAB 121 and increase competition in the market for compliant managed services.

It is necessary to clarify which types of custodians meet the qualifications of “qualified custodians” as stipulated in the Investment Advisers Act and the Investment Company Act, and to specify reasonable exceptions to accommodate common practices in the Crypto Assets market. Many advisers and funds can utilize self-custody solutions, which may employ more advanced technology than some market custodians to protect assets. Therefore, custody rules may need to be updated to allow for self-custody in specific situations.

In addition, it may be necessary to abolish the “special purpose broker-dealer” framework and replace it with a more rational regime. There are currently only two SPV broker-dealers in operation, apparently due to the significant restrictions imposed on these entities. Broker-dealers have never been restricted from acting as custodians of non-security crypto-assets or crypto-asset securities, but may be required to take action to clarify the applicability of customer protection and net capital rules to such activities.

Trading

Third, I support allowing registries to trade a wider variety of products on their platforms and to respond to market demand for activities that were previously prohibited. For example, some broker-dealers are trying to access the market through “super apps” that offer integrated trading in securities, non-securities and other financial services. The federal securities laws do not prohibit registered broker-dealers with alternative trading systems from facilitating non-securities trading, including through “paired trading” between securities and non-securities. I have asked staff to assist in designing a modern ATS regulatory regime to better accommodate cryptoassets. In addition, I asked to explore the need for further guidance or rulemaking to facilitate the listing and trading of cryptoassets on national stock exchanges.

While regulatory agencies are working to establish a comprehensive regulatory framework for Crypto Assets, participants in the securities market should not be forced to go overseas for blockchain technology innovation. I will explore whether conditional exemptions are appropriate for market participants seeking to launch new products and services that may be incompatible with existing rules.

I look forward to coordinating and collaborating with the government and congressional colleagues to make the United States the best place for Crypto Assets market participation in the world.