SEC Chairman: Rules will be established for the issuance, custody, and trading of encryption assets.

Source: Paul S. Atkins, Chairman of the U.S. SEC, keynote speech at the Crypto Assets Working Group Tokenization Roundtable; compiled by AIMan@Jinse Finance

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

The topic of discussion this afternoon is very timely, as securities are increasingly migrating from traditional (or "off-chain") databases to blockchain-based (or "on-chain") distributed ledger systems.

The transition of securities from off-chain systems to on-chain systems is similar to the transition of audio recordings from analog vinyl records to tapes and then to digital software several decades ago. The ability to easily encode audio into digital file formats that are easy to transfer, modify, and store 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 various devices and applications. It can be combined, split, and programmed to create entirely new products. This has also driven the development of new hardware devices and streaming content business models, greatly benefiting consumers and the U.S. economy.

Just as the transformation of digital audio has fundamentally changed the music industry, the migration to on-chain securities has the potential to reshape every aspect of the securities market, as it can bring about entirely new ways of issuing, trading, holding, and using securities. For example, on-chain securities can utilize smart contracts to transparently distribute dividends to shareholders on a regular basis. Tokenization can also facilitate capital formation by converting relatively illiquid assets into liquid investment opportunities. Blockchain technology is expected to bring a wide range of new use cases for securities, giving rise to many new market activities that traditional rules and regulations have yet to consider.

In order to make the United States the "Crypto Capital of the World" envisioned by President Trump, the SEC must keep pace with innovation and consider whether regulatory reforms are needed to accommodate on-chain securities and other Crypto Assets. The rules and regulations designed for off-chain securities may be incompatible or unnecessary for on-chain assets and could stifle the development of blockchain technology.

An important task during my tenure as the Chair of the U.S. SEC was to develop a reasonable regulatory framework for the Crypto Assets market, establishing clear rules for the issuance, custody, and trading of Crypto Assets, while continuously preventing wrongdoers from violating the law. Clear rules are crucial for protecting investors from fraud, especially in helping them identify those illegal scams.

The U.S. SEC has entered a brand new day. Policy-making will no longer be based on ad hoc enforcement actions. Instead, the U.S. SEC will utilize its existing rule-making, interpretation, and exemption powers to establish practical standards for market participants. The enforcement approach of the U.S. SEC will return to the original intent of Congress, which is to regulate violations of these defined obligations, especially concerning fraud and manipulation.

This work requires coordination among multiple offices and departments within the U.S. Securities and Exchange Commission, so I am pleased to see Commissioner Uyeda and Commissioner Peirce working together to establish the Crypto Assets Special Working Group. For a long time, the U.S. Securities and Exchange Commission has been plagued by policies being developed in silos. The Crypto Assets Special Working Group exemplifies how our various policy departments can work together to quickly provide the clarity and certainty that the American public has long needed.

Now, I am focusing on three key areas of encryption asset policy - issuance, custody, and trading.

Issuance

First of all, I hope the U.S. Securities and Exchange Commission will establish clear and reasonable guidelines for the issuance of crypto assets that are considered securities or are subject to investment contracts. Currently, only four crypto asset issuers have registered for issuance and conducted offerings under Regulation A. Issuers have largely avoided such offerings, in part due to the difficulty of meeting the relevant disclosure requirements. If issuers do not intend to issue conventional securities, such as stocks, bonds, or notes, it can also be difficult for them to determine whether a crypto asset constitutes a "security" or is subject to an investment contract.

Over the past few years, the US SEC has initially adopted what I call the "ostrich mentality" – perhaps hoping that cryptocurrencies will fade away. Subsequently, it reversed course and adopted a "shoot first, ask questions" strategy of law enforcement and supervision. The U.S. SEC claims to be willing to communicate with potential registrants and "just come and visit," but this claim has proven to be short-lived and often misleading at best, as the SEC has not made the necessary adjustments to the registration form for this new technology. For example, the S-1 form still asks for details about executive compensation and the use of earnings, which may not be important for investment decisions in cryptoassets. Although the SEC has previously adjusted tables for asset-backed securities offerings and REIT offerings, the SEC has not adjusted crypto assets despite the growing investor interest in crypto assets over the past few years. We can't encourage innovation by "square and round".

I am committed to promoting the U.S. Securities and Exchange Commission to formulate new guidelines. The staff of the U.S. Securities and Exchange Commission recently issued a statement regarding certain registration and issuance disclosure obligations. The staff also clarified that certain issuances and crypto assets do not involve federal securities laws, and I hope the staff will continue to clarify other types of issuances and assets according to my instructions. However, the existing registration exemptions and safe harbors may not be entirely suitable for certain types of crypto asset issuances. I believe these statements from the staff are only temporary - actions from the U.S. Securities and Exchange Commission are critical and necessary. Meanwhile, I have asked the staff of the U.S. Securities and Exchange Commission to consider whether additional guidance, registration exemptions, and safe harbors are needed to pave the way for the issuance of crypto assets within the United States. I believe that under securities laws, the U.S. Securities and Exchange Commission has broad discretion to adapt to the crypto industry, and I intend to do so.

Custody

Secondly, I support providing registrants with more autonomy to decide how to custody their crypto assets. Recently, the staff of the U.S. SEC rescinded Staff Accounting Bulletin No. 121, removing a significant barrier for companies seeking to provide crypto asset custody services. This statement is a serious mistake. The staff does not have the authority to take such broad actions outside of the U.S. Securities Commission without notification and comment rulemaking. This action has caused unnecessary confusion, the impact of which extends far beyond the jurisdiction of the U.S. SEC. However, there is much more that the U.S. SEC can do beyond simply repealing SAB No. 121 to enhance competition in the legitimate compliant custody services market.

It is necessary to clarify which types of custodians meet the qualifications of "qualified custodians" as defined by the Investment Advisers Act and the Investment Company Act, and to specify reasonable exceptions to the qualified custodian requirements to accommodate certain common practices in the crypto assets market. Many advisors and funds can utilize self-custody solutions, which employ more advanced technology to protect crypto assets compared to some custodians in the market. Therefore, custody rules may need to be updated to allow advisors and funds to self-custody in certain situations.

Furthermore, it may be necessary to abolish the "special purpose broker-dealer" framework and replace it with a more reasonable system. Currently, there are only two special purpose broker-dealers in operation, which is clearly due to significant restrictions imposed on these entities. Broker-dealers have never been restricted from acting as custodians for non-securities Crypto Assets or Crypto Assets securities, but the U.S. Securities and Exchange Commission may need to take action to clarify the applicability 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 respond to market demands by engaging in activities previously prohibited by the U.S. Securities and Exchange Commission. For example, some broker-dealers are trying to enter the market through "super apps," which provide 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 transactions, including "pairing trades" between securities and non-securities. I have asked the staff of the U.S. Securities and Exchange Commission to assist us in designing a modernized regulatory framework for ATS to better accommodate Crypto Assets. Additionally, I have asked the staff of the U.S. Securities and Exchange Commission to explore whether further guidance or rulemaking is needed to facilitate the listing and trading of Crypto Assets on national securities exchanges.

While the U.S. Securities and Exchange Commission and its staff 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 would like to explore whether conditional exemptions are appropriate for registrants and non-registrants seeking to bring new products and services to market that may be incompatible with existing Commission rules and regulations.

I aspire to coordinate with President Trump's administration and colleagues in Congress to make the United States the best place in the world to engage in the Crypto Assets market.