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

Source: Paul S. Atkins, Chairman of the US SEC, Keynote Speech at the Tokenization Roundtable Conference on Cryptocurrencies; Translated by: AIMan@Jinse Finance

I am delighted to speak to the distinguished guests at today's tokenization roundtable conference.

The topic discussed 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 to on-chain systems is similar to the transformation of audio recordings from analog vinyl records to tapes and then to digital software decades ago. The ability to easily encode audio into digital file formats and easily transfer, modify, and store them brought tremendous innovation to the music industry. Audio was freed from the constraints of static, fixed-format creation. It suddenly became compatible and interoperable across various devices and applications. It could be combined, split, and programmed, forming entirely new products. This also drove the development of new hardware devices and streaming content business models, greatly benefiting consumers and the American economy.

Just as the digital audio transformation completely revolutionized the music industry, the migration to on-chain securities has the potential to reshape every aspect of the securities market by enabling entirely new ways of issuing, trading, holding, and using securities. For example, on-chain securities can use smart contracts to distribute dividends to shareholders regularly and transparently. Tokenization can also facilitate capital formation by converting relatively illiquid assets into liquid investment opportunities. Blockchain technology promises to bring broad new use cases for securities, giving rise to many new market activities that the committee's traditional rules and regulations do not yet consider.

To make the United States the "global crypto capital" envisioned by President Trump, the US Securities and Exchange Commission 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 for on-chain assets and could inhibit blockchain technology development.

During my tenure as US SEC Chairman, one important task was to develop a reasonable regulatory framework for the crypto asset market, establishing clear rules for the issuance, custody, and trading of crypto assets while continuously preventing bad actors from breaking the law. Clear rules are crucial for protecting investors from fraud, especially helping them identify illegal scams.

A new day has dawned for the US SEC. Policy-making will no longer be based on ad hoc enforcement actions. Instead, the US SEC will use its existing rule-making, interpretation, and exemption powers to establish practical standards for market participants. The SEC's enforcement approach will return to Congress's original intent of regulating violations of these established obligations, especially in fraud and manipulation.

This work requires coordination among multiple offices and departments within the US Securities and Exchange Commission, so I am pleased to see Commissioner Uyeda and Commissioner Peirce working together to establish a special cryptocurrency working group. For a long time, the US Securities and Exchange Commission has been plagued by fragmented policy-making. The cryptocurrency special working group demonstrates how our various policy departments can work together to quickly provide the clarity and certainty that the American public has long needed.

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

Issuance

First, I hope the US Securities and Exchange Commission will establish clear and reasonable guidelines for the issuance of crypto assets that are securities or bound by investment contracts. Currently, only four crypto asset issuance institutions have registered for issuance and issuance under Regulation A. Issuers largely avoid such issuances, partly due to the difficulty of meeting related disclosure requirements. If issuers do not intend to issue common securities like stocks, bonds, or notes, it is also difficult for them to determine whether crypto assets constitute "securities" or are bound by investment contracts.

In recent years, the US SEC initially adopted what I call an "ostrich mentality"—perhaps hoping cryptocurrencies would gradually disappear. Subsequently, it changed direction and adopted an "shoot first, ask questions later" enforcement regulatory strategy. The US SEC claimed to be willing to communicate with potential registrants, "just come and visit," but this proved to be at best fleeting and often misleading, as the US SEC did not make the necessary adjustments to registration forms for this new technology. For example, the S-1 form still requires detailed information about executive compensation and use of proceeds, which may not be important for crypto asset investment decisions. Although the US SEC had previously adjusted forms for asset-backed securities and real estate investment trust issuances, despite growing investor interest in crypto assets in recent years, the US SEC has not made adjustments for crypto assets. We cannot encourage innovation through "square peg, round hole" approaches.

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

Custody

Second, I support providing more autonomy to registrants to independently decide how to custody crypto assets. SEC staff recently revoked Staff Accounting Bulletin No. 121, removing a significant barrier for companies seeking to provide crypto asset custody services. This statement was a serious mistake. Staff had no right to take such broad action outside of US Securities and Exchange Commission action, without notice and comment rulemaking. The action caused unnecessary confusion with impacts far beyond the SEC's jurisdiction. However, the US SEC can do far more than abolish SAB 121 to enhance competition in the legitimate, compliant custody services market.

It is necessary to clarify which types of custodians qualify as "qualified custodians" under the Advisers Act and Investment Company Act and to clearly define reasonable exceptions to qualified custody requirements to accommodate certain common practices in the crypto asset market. Many advisers and funds can use self-custody solutions that employ more advanced technologies to protect crypto assets compared to some custodians in the market. Therefore, custody rules may need to be updated to allow advisers and funds to self-custody in certain situations.

Additionally, it may be necessary to abolish the "special purpose broker-dealer" framework and replace it with a more reasonable system. Currently, only two special purpose broker-dealers are operating, clearly due to significant restrictions imposed on these entities. Broker-dealers have never been restricted from acting as custodians for non-security crypto assets or crypto asset securities, but the US Securities and Exchange Commission 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 more types of products on their platforms and respond to market demands by conducting activities previously prohibited by the US Securities and Exchange Commission. For example, some broker-dealers are attempting to enter the market through a "super app" that provides 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-security trading, including through "matching trades" between securities and non-securities. I have asked SEC staff to assist us in designing a modernized ATS regulatory system better suited to crypto assets. Additionally, I have requested SEC staff explore whether further guidance or rulemaking is needed to facilitate the listing and trading of crypto assets on national securities exchanges.