Exploring the Future of On-Chain Securities: The Necessity of Establishing a Clear Regulatory Framework

I am honored to share my views with all the distinguished guests at today's tokenization roundtable.

The current topic of discussion is timely, as more and more securities are migrating from traditional ( "off-chain" ) databases to blockchain-based ( "on-chain" ) distributed ledger systems.

The transition of securities from off-chain to on-chain systems is similar to the evolution of audio recordings from analog vinyl records and tapes to digital formats decades ago. Once audio was digitized, it became easy to transmit, modify, and store, bringing revolutionary innovations to the music industry. Audio broke free from the limitations of fixed formats, enabling seamless compatibility and interoperability across various devices and applications, allowing it to be combined, split, and programmed to create entirely new products. This transition has driven the development of new hardware devices and streaming business models, greatly benefiting consumers and economic development.

Just as digital audio has fundamentally changed the music industry, the migration of securities to on-chain has the potential to reshape the entire securities market, introducing entirely new ways of issuing, trading, holding, and using. For example, on-chain securities can utilize smart contracts to distribute dividends to shareholders regularly and transparently. Tokenization can also transform low-liquidity assets into high-liquidity investment opportunities, facilitating capital formation. Blockchain technology is expected to bring a wide range of innovative use cases for securities, giving rise to new market activities that existing regulatory frameworks have yet to consider.

To make the U.S. the "crypto capital of the world," regulators must keep pace with innovation and consider adjusting the regulatory framework to accommodate on-chain securities and other crypto assets. Rules designed for traditional off-chain securities may be incompatible or unnecessary for on-chain assets, which could hinder the healthy development of blockchain technology.

One of my important tasks is to establish a reasonable regulatory framework for the cryptocurrency asset market, setting clear rules for the issuance, custody, and trading of cryptocurrency assets, while effectively preventing illegal activities. Clear rules are essential for protecting investors from fraud, especially in helping to identify illegal scams.

We are now opening a new chapter. Policy making will no longer rely on temporary enforcement actions, but will utilize existing rules for formulation, interpretation, and exemptions to provide practical standards for market participants. Enforcement methods will return to their original intent, which is to regulate conduct that violates defined obligations, particularly fraud and market manipulation.

This work requires coordination among multiple departments within regulatory agencies, so the establishment of a cryptocurrency special working group is gratifying. It reflects how policy departments can work together to provide the clarity and certainty that the public has long needed.

Next, I will focus on three key areas of cryptocurrency asset policy: issuance, custody, and trading.

Issuance

First of all, I would like to establish clear and reasonable guidelines for the issuance of crypto assets that are securities or subject to investment contracts. At present, only four crypto-asset institutions have completed the registration and issuance and Regulation A issuance. Issuers generally avoid such offerings, in part because of the difficulty of meeting the relevant disclosure requirements. If the issuer does not intend to issue ordinary securities ( such as stocks, bonds or notes ) it becomes particularly difficult to determine whether a cryptoasset constitutes a "security" or is bound by an investment contract.

Over the past few years, regulators have initially adopted an "ostrich mentality" and seem to want cryptocurrencies to disappear on their own. Subsequently, it shifted to a regulatory strategy of "enforcing the law first and then asking questions". Despite professing a willingness to communicate with potential registrants, no necessary adjustments have been made to the registration form for this new technology. For example, Form S-1 still requires details of executive compensation and the use of earnings, which may not be critical to cryptoasset investment decisions. While tables have previously been adjusted for asset-backed securities and REITs, the regulatory framework has not been adjusted accordingly in the face of growing investor interest in cryptoassets. We can't encourage innovation with a "square chisel" approach.

I am committed to promoting the development of new guidelines. Staff recently issued a statement regarding registration and disclosure obligations for offerings, clarifying that certain offerings and crypto assets do not involve federal securities laws. I hope to provide more clarity on other types of offerings and assets. However, the existing registration exemptions and safe harbors may not fully accommodate certain types of crypto asset offerings. I believe these statements are only temporary—more comprehensive actions are key. I have requested consideration of whether additional guidance, registration exemptions, and safe harbors are needed to pave the way for crypto asset offerings in the United States. Under the securities law framework, we have broad discretion to accommodate the needs of the crypto industry.

Custody

Secondly, I support providing more autonomy to registered institutions, allowing them to decide how to custody crypto assets. The recent withdrawal of Staff Accounting Bulletin No. 121 has removed significant barriers for companies looking to provide crypto asset custody services. That statement was a serious mistake, and the staff had no authority to take such broad action without going through formal procedures. Although this action caused unnecessary confusion, we can do more work to enhance competition in the compliant custody services market.

It is necessary to clarify which types of custodians meet the "qualified custodian" criteria as defined by the Investment Advisers Act and the Investment Company Act, and to provide reasonable exceptions for common practices in the cryptocurrency asset market. Many advisors and funds may use self-custody solutions, which may employ more advanced technologies to protect assets. Therefore, custody rules may need to be updated to allow for self-custody in specific circumstances.

In addition, consideration should be given to abolishing the "special purpose broker-dealer" framework in favor of a more reasonable system. Currently, only two such institutions operate, clearly due to facing significant restrictions. Broker-dealers have never been restricted from acting as custodians for non-securities crypto assets or crypto asset securities, but there may be a need to further clarify the applicability of customer protection and net capital rules to such activities.

Trading

Third, I support allowing registered entities to trade a wider variety of products on their platforms and to engage in previously restricted activities. For example, some brokerage firms wish to enter the market through a "super app" that offers integrated trading of securities, non-securities, and other financial services. Federal securities law does not prohibit registered broker-dealers from using alternative trading systems to facilitate non-securities trading, including "pairing trades" between securities and non-securities. I have asked staff to assist in designing a modernized ATS regulatory framework to better accommodate crypto assets. Additionally, I have requested an exploration of whether further guidance or rulemaking is needed to facilitate the listing and trading of crypto assets on national securities exchanges.

While developing 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 discuss whether conditional exemptions are appropriate for institutions that launch new products and services that may be incompatible with existing rules.

I look forward to coordinating with the government and Congressional colleagues to make the United States the best place in the world to participate in the crypto asset market.