At the beginning of July, SEC Chair Paul Atkins painted a picture: tokenization was the “next step” in the evolution of securities. Generally, tokenization entails creating a digital representation of a real-world asset — like currency, real estate, or art — on a blockchain. Tokenized assets are a form of “crypto asset,” i.e., assets issued or transferred on a distributed ledger or blockchain. On the last day of July, Atkins primed the canvas for tokenized securities by launching “Project Crypto” with Commissioner Hester Peirce and her Crypto Task Force. Project Crypto is an SEC initiative to modify securities rules and regulations to facilitate the U.S. financial markets to “move on-chain.”
Project Crypto will use the recent report from the President’s Working Group on Digital Asset Markets as a reference. The report recommends that the SEC create a regulatory framework to “maintain U.S. dominance in crypto asset markets” and facilitate the distribution of crypto assets in the United States. To do so, Atkins sketched out several changes to the SEC’s rules and regulations, which include:
- Creating clear guidelines for which crypto assets are securities.
- Creating clear and simple “rules of the road” to permit crypto asset distributions, custody, and trading.
- Revising the SEC’s custody requirements for registered intermediaries to facilitate the custody of crypto assets.
- Creating a framework that will allow nonsecurity crypto assets and crypto asset securities to be traded side by side on SEC-regulated platforms.
- Revising SEC rules to facilitate the use of on-chain software systems in U.S. securities markets.
Atkins also wants the SEC staff to work with firms proposing to market tokenized securities to identify the appropriate relief needed to facilitate the tokenization process.
Tokenization has faced a creative block in the past several years due to regulatory uncertainty around the application of securities laws to crypto assets. When a tokenized asset is deemed to be a security, securities laws apply fully because, as Peirce framed nicely in her own speech in July, “[t]okenized securities are still securities.” Nevertheless, numerous types of tokenized securities may be developed, and securities laws — as well as any regulatory relief provided by the SEC — doubtless will sometimes depend on the type. It is to be hoped that Project Crypto will touch up the regulatory landscape in ways that sensibly accommodate such products.
