As we gather here today, the world of crypto trading is at a crossroads, with the need for clear and effective regulation becoming increasingly pressing. The history of market regulation, from the early days of securities trading under a buttonwood tree in New York City to the present, offers valuable insights into the challenges and opportunities that lie ahead.
Early Days of Securities Trading
Over 200 years ago, a group of stockbrokers gathered under a buttonwood tree to establish basic rules for the trading of securities on an organized market in New York City.[1] These early markets developed organically in response to supply and demand for the emerging asset class, with the first crypto markets operating entirely outside of the regulatory perimeter.
State Regulation and Licensing Regimes
- State agencies have exercised regulatory authority over crypto markets, viewing them as akin to currency exchanges and subject to money transmitter licensing laws.[2]
- The lack of a unified federal regulatory framework raises concerns about a patchwork of state licensing regimes, which could lead to confusion and inefficiencies.
Challenges of Federal Securities Laws
Under an accommodating federal regulatory framework, some market participants would likely prefer to offer trading in both tokenized securities and non-security crypto assets under a single SEC license rather than offer trading solely in non-security crypto assets under fifty different state licenses.
However, the federal securities laws and regulations may present challenges for broker-dealers and national securities exchanges seeking to offer trading in tokenized securities. For example:
- National securities exchanges can only list registered securities, and most tokenized securities in the market today are unregistered.[4]
- Compliance with Rule 611 (the “order protection rule”) may not be possible with respect to customer orders for securities that trade in both tokenized and non-tokenized formats in on- and off-chain markets.[5]
Incumbent crypto asset trading platforms seeking to offer trading in tokenized securities also face unique obstacles, including their vertically integrated business models with custody, execution, and clearing all occurring on the same platform.[6]
Blockchain Technology and Its Potential
Blockchain technology offers the potential to execute and clear securities transactions in ways that may be more efficient and reliable than current processes. For example:
- Blockchains can be used to manage and mobilize collateral in tokenized form to increase capital efficiency and liquidity.[7]
- Decentralized finance software protocols allow users to transact on a 24/7 basis via smart contracts.[8]
The drafters of the federal securities laws did not contemplate the use of blockchains or smart contracts to perform the functions of a transfer agent, facilitate the exchange of securities, or clear securities transactions. However, a conditional exemptive relief framework could allow for greater innovation with blockchain technology within the United States in the near term.
Addressing the Challenges
A time-limited, conditional exemptive relief framework for registrants and non-registrants could provide a solution to the challenges facing market participants. This framework would allow for greater innovation with blockchain technology and facilitate the development of new trading platforms.
I encourage market participants that are developing new ways to trade securities using blockchain technology to provide input on where exemptive relief may be appropriate.
Conclusion
As we move forward, it is clear that a more effective regulatory framework is needed to support the growth of the crypto trading industry.