The last couple of months have been anything but “dull” for the digital asset industry – enforcement actions, regulatory proposals, the first ever SPBD approval and, of course, the landmark Ripple decision, the team at tZERO recently noted.
tZERO Group, Inc., which claims to be a leader in blockchain innovation and liquidity for digital assets, says they have been working on their vision “for reform in this space that provides a function-oriented and evergreen framework for future growth.”
According to tZERO, the proposal protects innovators, investors and the marketplace without creating baroque results “that treat these instruments differently depending on hindsight autopsy of the facts and circumstances of their issuance or secondary trading under threat of enforcement or litigation.”
The tZERO team explains that this only “punishes the innovator, the user and the investor and does not lend itself to prudent capital allocation or an industry well prepared for the future.”
Likewise, tZERO thinks we “should not hinge proposals on technology or market driven events such as sufficient decentralization – tests like these vest the regulators with authority over technical milestones that should not be second-guessed or overseen by them (and may lead to market participants gaming the results).”
Reform should not only “address perceptions or realities of speculative activities in the markets but, critically, support and unleash blockchain technology use cases across the spectrum within and beyond financial services – and none of that can happen if we do not anchor native blockchain network assets well.”
Here’s tZERO‘s 10-point plan for reform:
- Native digital assets are intended to be technical inputs for a distributed blockchain network. They are novel products which straddle the worlds of financial instruments and industrial inputs with technical utility/functionality. They are complex, have retail appeal and need to be regulated. The regulatory regime needs to be clear, consistent and uniform at the national level. It also needs to support the entire lifecycle of the asset. Many of these assets have an important existing retail footprint, which cannot be unscrambled without significant harm to investors — consequently, the regulatory framework and regulator must be experienced with retail products. Lastly, we need a solution now – not a completely new construct that takes years to negotiate and deploy. Given these considerations, and out of necessity and not its recent track record in the digital space, the SEC is likely the right federal agency, versus others, to regulate the issuance and trading of native digital assets – but with a focused positive mandate, perspective and change in direction from Congress that apply offering, disclosure and other rules to these assets in a way that drives innovation, investor protection and confidence, and a well-functioning marketplace.
- When a native digital asset is issued in a fundraising campaign (with appropriate carve outs for issuances that are part of defined technical processes, such as mining and staking rewards or gas/transaction fees), the promoters of the campaign should be subject to a disclosure regime tailored for this asset class, as well as registration requirements or defined exemptions from registration. Broker-dealers would be the natural, and most experienced, permitted intermediaries to assist in these fundraising efforts.
- The registration process and the upfront and periodic disclosure regime tailored for native digital assets should enable them to be immediately available for trading by the retail community in a regulated environment. Those with significant holdings of the native digital asset would also be subject to ongoing disclosure requirements. In order to provide the retail community with the appropriate protections that investors in the securities markets benefit from today, broker-dealer operated alternative trading systems should be the initial permitted trading venues for these assets (with reforms to the national market system to follow so these assets may be traded on national securities exchanges as well, if necessary). Defi environments should be regulated but not in a way that shuts down that potential pool of innovation – a decentralized marketplace cannot become a national securities exchange, but that does not mean that it cannot be properly regulated. Secondary trading activity would thus occur in a fully-regulated and transparent environment.
- In other cases, when the blockchain network is used as an industrial input to build other tokenized products or services and the native digital asset is the means of such products or services in and of itself, it should be subject to applicable rules of the relevant industry and not subject to the SEC’s jurisdiction. If blockchain technology is used as an industrial input to build other tokenized products or services and the native digital asset itself is not used as the means of such products or services in and of itself, then the native digital asset itself remains subject to the SEC’s jurisdiction (with appropriate carve outs for defined technical processes, such as mining or staking rewards or gas/transaction fees).
- When a native digital asset (such as a stablecoin) is used to enable US domestic and/or cross-border payments or remittances or creates a tokenized payments system, and is the means of payments or remittances in and of itself or is the resultant payments product, it should be subject to existing US federal and state regulation that applies to money services and banking activities (and/or a new custodial/other regime that sits alongside existing banking and money transmission laws) and not subject to the SEC’s jurisdiction. If blockchain technology is used to create a tokenized payments system and the native digital asset itself is not used as the means of payments or remittances in and of itself, then the native digital asset itself remains subject to the SEC’s jurisdiction (with appropriate carve outs for defined technical processes, such as mining or staking rewards or gas/transaction fees).
- When the blockchain technology is used to tokenize, issue and trade equity or debt, the resultant digital asset is a security for purposes of federal and state securities laws. The network asset itself would remain subject to the SEC’s jurisdiction.
- If a broker-dealer is licensed to engage in securities activities, such approval should immediately extend to native digital assets and digital asset securities – no distinctions/separate approvals or statuses should be created based on technology rails – subject to providing guidance for such intermediaries to ensure safe and secure custody, wallet/key management and management of digital assets.
- Broker-dealers and other financial intermediaries should be able to accept digital assets as a form for payment for transactions. Real-time settlement is a critical benchmark and benefit of the digital asset securities ecosystem. It cannot be meaningfully achieved if traditional fiat currency and banking systems (even with the recent adoption of faster wholesale inter-bank settlement rails) are still driving the settlement of the cash leg of securities transactions.
- For existing legacy digital assets, there should be a cleansing process from historical securities and commodities laws violations, so that broker-dealers, alternative trading systems and, if permitted, exchanges, can transact in and custody such assets and offer them to their clients in compliant and registered form. This is KEY – no broker-dealer (even a digital-only special-purpose broker dealer) will be able to touch the majority of digital assets without this reform. Likewise, for all entities that have been engaging in digital asset activities under various different models and regulatory regimes, there should be a grace period for these companies to come into compliance/transition to permitted broker-dealer intermediaries.
- This is just the beginning – additional work needs to be done to harmonize other important areas, including: UCC/commercial law; modernization of the national market system so exchanges can support digital assets; NFTs; tax treatment, reporting and other rules; and decentralized finance.