SEC Chair charts course for Wall Street to go on-chain

The Securities and Exchanges Commission chair Paul Atkins today announced "Project Crypto" which is said to be the SEC's "North Star" in seeking to make the US the crypto capital of the world. This will be a SEC-wide initiative to modernize securities which Chair Atkins says will:

enable America's financial markets to move on-chain

Tokenisation of stocks and real world assets has been moving forward, but changes such as this would dramatically increase the speed with which blockchain technology integrates into or replaces the traditional financial sector's rails. Chair Atkin went on to say:

I have directed the Commission staff to draft clear and simple rules of the road for crypto asset distributions, custody, and trading for public notice and comment. While the Commission staff works to finalize these regulations, the Commission and its staff will in the coming months consider using interpretative, exemptive, and other authorities to make sure that archaic rules and regulations do not smother innovation and entrepreneurship in America. Many of the Commission’s legacy rules and regulations do not make sense in the twenty-first century—let alone for on-chain markets.

The speech then went on to talk about "onshoring" to "bring crypto asset distributions back to America" with "confusion over security status" was over. This is well needed clarity from the SEC, and for projects which avoided the US due to securities law concerns, this will be welcome news indeed.

Choosing to structure offshore is a more nuanced consideration, and one used by most global companies, so increased certainty in securities laws in the US will help unlock the value of proper structuring.

The speech also sought to mark the end of regulation-by-enforcement:

Despite what the SEC has said in the past, most crypto assets are not securities. But confusion over the application of the “Howey test” has led some innovators to prophylactically treat all crypto assets as such.

He went on to say that "it should not be a scarlet letter to be deemed a security" and that he had asked staff to "propose purpose-fit disclosures, exemptions and safe harbors, including for so-called 'initial coin offerings,' 'airdrops' and network rewards, where crypto asset transactions were subject to securities laws. This might mean that SAFTs and other early stage fund-raising mechanisms become much simpler for projects to deploy.

On the topic of tokenised stocks, which are currently only really tokenised via a synthetic derivative offering, Chair Atkins said he had asked:

the Commission staff to work with firms seeking to distribute tokenized securities within the United States and to provide relief where appropriate to assure that Americans are not left behind. 

and

I have directed the Commission staff to update antiquated agency rules and regulations to unleash the potential of on-chain software systems in our securities markets.

An innovation exemption was floated to let businesses quickly go to market where their model does not fit the existing law neatly. This will be music to the ears of many entrepreneurs seeking to start up a businesses quickly and raise funds swiftly, so long as they are raising debt or securities.

A point not addressed in the speech is that non-security crypto-assets are likely treated as assets or trading stock for tax purposes, meaning great care is needed in considering how they should be offered in an overall corporate structure. It is unlikely that structures wholly within the US will be able to offer effective tax treatment for non-US buyers of tokens, and the "Cambrian explosion" of activity which Chair Atkins predicts will no doubt lead to many businesses looking for suitable locations to structure their projects, including offshore.

By Michael Bacina