Earlier this month, the SEC’s Division of Trading and Markets and the CFTC’s Division of Market Oversight and Division of Clearing and Risk announced a project to coordinate efforts on spot crypto trading. The goal is to provide “regulatory clarity that best keeps blockchain-based innovation within the United States.” Crypto trading in the US has been going on for years, and the two agencies expressed their opinion that the current law in no way inhibits trading of digital assets and does not prohibit SEC or CFTC-registered exchanges from facilitating trading of spot crypto products.
Project Crypto-Crypto Sprint
The two agencies state they will quickly review requests to enable crypto trading from various market participants. This should allow the NYSE, Nasdaq, and Cboe Global Markets to adopt listing standards for new crypto and other spot commodity exchange-traded products.
CI recently connected with Kris Swiatek, a partner in the Investment Management and Digital Assets groups at law firm Seward & Kissel, who has stated these changes for generic listing standards for spot commodity (including crypto-based) exchange-traded products (ETPs) is a major win for the crypto ecosystem as it expands investor access by facilitating the potential listing and trading by exchanges of a greater range of crypto products.
Swiatek predicts many new crypto product filings over the coming months, giving investors who desire more regulated exposure to the crypto markets more choices that strengthen crypto’s status as a mainstream asset class.
Our discussion is shared below.
What specifically did the SEC change concerning exchanges being allowed to trade spot crypto?
Kris Swiatek: This is a joint SEC and CFTC effort, as evidenced by their joint statement, which initially started with the acting CFTC Chairman’s initiative. The significance of this joint statement, even though it only reflects staff views and does not alter existing SEC/CFTC regulatory frameworks, is that it signals to traditional exchanges regulated by the SEC and the CFTC that listing certain spot crypto asset products is permissible, and the agencies stand ready to work with regulated exchanges interested in offering such products on the issues highlighted in the joint statement to ensure market integrity and investor protection.
When will this change take effect?
Kris Swiatek: As highlighted in the joint statement, there are various considerations that need to be addressed before regulated exchanges can begin offering such products, however, the applicable SEC and CFTC divisions have clearly indicated they would like to collaborate with market participants to address such considerations to open up a pathway for them to consider offering such products under the umbrella of protections such exchanges are already subject to under current regulations. Given that there must be a desire by regulated exchanges to offer such products and collaboration with the regulators on a compliant process to do so, the timing is uncertain.
Effectively, does this mean that Crypto trading and traditional securities will trade on the same exchange?
Kris Swiatek: The joint statement applies to specific commodity products (which include certain crypto assets) in that it refers to “retail commodity transactions.”
After deliberations with market participants on the aforementioned issues highlighted in the joint statement (as well as other related matters), the agencies will likely come up with a framework that regulated exchanges can use to seek to offer exposure to such products should they choose to pursue these offerings.
How will this impact crypto exchanges? What about tokenized stocks (digital securities)?
Kris Swiatek: If regulated exchanges start listing such products, this would increase competition (particularly for traditional crypto exchanges) while simultaneously broadening access for U.S. consumers wanting exposure to the crypto ecosystem.
Tokenized stocks are a different animal, and there are various issues that need to be resolved from a U.S. regulatory perspective on tokenized stocks, though the Nasdaq has proposed introducing the trading of tokenized securities recently.
The Nasdaq proposal is similar to this effort in the sense that it would bring such products under the umbrella of regulations governing such exchanges as described above.
Do you anticipate that all traditional and newer asset classes will trade on the same exchange?
Kris Swiatek: “Retail commodity transactions” cover more than just crypto; therefore, it is possible that regulated exchanges willing to take the SEC and CFTC up on the joint statement wind up listing for trading other commodities outside of just crypto products. Whether we are referring to such products or to tokenized securities, as an example, one thing is clear: there are continuously evolving conversations and considerations taking place between market participants and U.S. regulators that are trying to bridge traditional finance with the blockchain economy, and this joint statement is a good example of that process.
And what are your expectations for novel assets, or new assets that will now be more easily issued and traded?
Kris Swiatek: Given that a gap currently exists between regulated exchanges not being “prohibited from facilitating the trading of certain spot crypto asset products” and market reality (the lack of such products on regulated exchanges) we’ll need to see how the regulators address this gap and whether regulated exchanges find there is enough market opportunity to go through the ultimate process required to offer such products.