New CSRC Chairman Discusses New Ideas for Regulating Encryption Assets

I am honored to deliver a speech at today’s Tokenization Roundtable and discuss this extremely timely topic with all the guests.

As the securities market shifts from traditional databases to blockchain-based distributed ledger systems, we are on the cusp of financial innovation. This shift can be likened to the evolution of the audio industry from vinyl to tape to digital formats. Digitalization has revolutionized the music industry by making it easy to transmit, modify, and store audio, breaking down creative constraints, enabling cross-platform compatibility, and enabling entirely new business models and hardware devices that deliver tremendous benefits to consumers and the economy.

Similarly, on-chain securities are expected to reshape the entire securities market ecosystem, bringing new ways of issuance, trading, holding and use. Through smart contracts, on-chain securities can distribute dividends to shareholders on a regular and transparent basis; Tokenization facilitates capital formation by converting illiquid assets into highly liquid investment opportunities. Blockchain technology has the potential to give rise to many new market activities that are not yet considered by current rules.

To achieve the U.S. vision of becoming a “global crypto hub,” the SFC must keep pace with innovation and consider the necessary regulatory reforms to accommodate on-chain securities and other cryptoassets. Rules designed for traditional securities may not apply to on-chain assets and may even hinder the development of blockchain technology.

My key mission as Chairman of the SFC is to develop a sound regulatory framework for the crypto-asset market, providing clear rules for the issuance, custody and trading of crypto-assets, while continuing to combat illegal activities. Clear rules are essential to protect investors and are especially helpful in identifying illegal scams.

The Securities Regulatory Commission ushers in a new era. Policy-making will no longer rely on temporary enforcement actions, but will use existing rule-making authority to provide practical standards for market participants. The enforcement approach will return to the original intention of Congress, focusing on regulating behaviors that violate established obligations, particularly fraud and market manipulation.

This work requires internal coordination within the SEC, and I am pleased to see Commissioner Uyeda and Commissioner Peirce establishing a special working group on encryption currency. For a long time, SEC policy-making has been fragmented, and this working group demonstrates how policy departments can collaborate to provide the public with the clarity and certainty they desperately need.

Now, I would like to focus on three key areas of cryptoasset policy: issuance, custody, and trading.

Issuance

First, the Securities Regulatory Commission needs to establish clear and reasonable issuance guidelines for encryption assets that fall under securities or investment contracts. Currently, only four encryption asset issuers have registered for issuance and A regulations. Issuers generally avoid such issuances, partly due to the difficulty in meeting disclosure requirements. For institutions that do not plan to issue ordinary securities, it is even more challenging to determine whether encryption assets constitute “securities” or are subject to investment contracts.

Over the past few years, the SFC has initially adopted an “ostrich mentality” – hoping that cryptocurrencies will disappear on their own. This was followed by a regulatory strategy of “law enforcement before questioning”. While the SFC claims to welcome enquiries from potential registrants, it has not in fact made the necessary changes to the registration form in light of this new technology. For example, the Form S-1 still requires details of executive compensation and the purpose of the proceeds that may not be material to the decision to invest in cryptoassets. While the SFC has previously adjusted the tables for asset-backed securities and REITs, it has not made similar adjustments to cryptoassets in recent years. We can’t encourage innovation in a “square and round” way.

I am committed to pushing the SFC to develop a new approach. Staff has recently issued a statement clarifying certain registration and offering disclosure obligations, as well as situations in which certain offerings and cryptoassets are not subject to federal securities laws. I look forward to continued clarification from staff on other types of issuances and assets. However, the existing registration exemptions and safe harbors may not be fully suitable for certain types of cryptoasset offerings. I believe that these statements are only transitional – further action by the SFC is crucial. At the same time, I have asked staff to consider whether additional guidance, registration waivers, and safe harbors are needed to pave the way for cryptoasset issuance in the United States. Under securities law, the SFC has broad discretion to adapt to the crypto industry, and I intend to make the most of this authority.

Custody

Second, I support giving registrants more autonomy to decide how to custody crypto assets. SFC staff recently revoked Employee Accounting Announcement No. 121, removing a major hurdle for cryptoasset custodian providers. The bulletin would have been a serious error and staff members were not authorized to take such extensive action without a rulemaking process. However, the SFC can do much more than revoke SAB 121 and enhance competition in the market for compliant custodian services.

There is a need to clarify which custodians qualify as “qualified custodians” under the Advisers Act and the Investment Company Act, and to make reasonable exceptions to common practices in the cryptoasset market. Many advisors and funds are able to protect crypto assets using more advanced self-custody solutions than some market custodians. As a result, escrow rules may need to be updated to allow self-hosting in specific cases.

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 SPVs in operation, apparently due to significant restrictions. Broker-dealers have never been restricted from acting as custodians of non-security crypto-assets or crypto-asset securities, but the SFC may need to take action to clarify the application of client protection and net capital rules to such activities.

Trading

Third, I support allowing registrants to offer a more diverse range of products on their platforms and conduct market-driven activities that were previously prohibited. For example, some broker-dealers are experimenting with “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 transactions, including through “paired trading” between securities and non-securities. I have asked staff to assist in designing a modern ATS regulatory regime that is better suited to cryptoassets. In addition, I asked to explore whether further guidance or rulemaking is needed to facilitate the listing and trading of crypto assets on national stock exchanges.

During the CSRC’s efforts to establish a comprehensive regulatory framework for encryption assets, participants in the securities market should not be forced to go overseas for blockchain technology innovation. I plan to explore the possibility of implementing conditional exemptions for registrants and non-registrants seeking to launch new products and services, especially when these products and services may be incompatible with existing rules.

I look forward to coordinating with the government and Congress to make the U.S. the best place to participate in the cryptoasset market globally."