SEC Chairman Paul Atkins spoke at the 9th Annual Fintech Conference held at the Philadelphia Fed this week. He shared that he expects the Commission to establish a “token taxonomy” based on existing securities law, while acknowledging that the current regime has limitations.
Atkins said he does not believe most crypto are securities. This is in contrast to the prior administration, which believed that virtually all crypto (minus Bitcoin and perhaps Ether) was regulated as securities.
He said that many people believed that if a token were subject to an investment contract, it would be deemed a security forever. Atkins said this view is flawed.
“The reality is that if the United States insists on making every on-chain innovation run the through a securities-law minefield, those innovations will migrate to jurisdictions that are more willing to distinguish among different kinds of assets, and more willing to write down the rules in advance,” said Atkins. “Instead, we are going to do what regulatory agencies are supposed to do. We are going to draw clear lines and explain them in clear terms.”
While a stock is always a stock and a bond remains a bond, both regulated as securities, a digital asset that was once part of a capital-raising transaction does not convert into the stock of an operating company.
Chairman Atkins shared his current opinion on the crypto sector.
- As contemplated in legislation currently before Congress, “digital commodities,” or “network tokens,” are, in my opinion, not securities. These crypto assets are intrinsically linked to and derive their value from a programmatic operation of a crypto system that is “functional” and “decentralized,” rather than from the expectation of profits arising from the essential managerial efforts of others.
- “Digital collectibles”, in my opinion, are not securities. These crypto assets are designed to be collected and/or used and may represent or convey rights to artwork, music, videos, trading cards, in-game items, or digital representations or references to internet memes, characters, current events, or trends. Purchasers of digital collectibles are not expecting profits from the essential managerial efforts of others.
- “Digital tools”, in my opinion, are not securities. These crypto assets perform a practical function, such as a membership, ticket, credential, title instrument, or identity badge. Purchasers of digital tools are not expecting profits from the essential managerial efforts of others.
- “Tokenized securities” are and will continue to be securities. These crypto assets represent the ownership of a financial instrument enumerated in the definition of “security” that is maintained on a crypto network.
Atkins notes that a digital asset may start its existence as an investment contract; at some point in the future, this characteristic may change.
He added that they are preparing recommendations for a digital asset tied to an investment contract to trade on a non-SEC-regulated platform.
They are seeking to facilitate capital formation and innovation while ensuring investor protection.
“… we will continue to work closely with our counterparts at the CFTC, with the banking regulators, and with Congress to ensure that non-security crypto assets have an appropriate regulatory regime. Our goal is not to expand the SEC’s jurisdiction for its own sake, but to allow capital formation to flourish while ensuring that investors remain protected.”
Atkins thanked the Crypto Task Force, led by Commissioner Hester Peirce.
The process of regulating the digital asset ecosystem is not an easy task. There are decades of established securities law that must be reviewed and perhaps updated to enable the future of financial services, capital formation, and investing. While the path is difficult, the current Administration and its pro-digital asset policy will usher in a global change as digital assets become the norm.