Tokenization and the SEC

plus: rate expectations, South Korea, AI payments and more

“A subtle thought that is in error may yet give rise to fruitful inquiry that can establish truths of great value.” – Isaac Asimov ||

Hello everyone! In Spain, Tuesday 13th is our equivalent of the US Friday 13th and so I’m treading carefully today…

Programming note: It’s a public holiday here on Thursday, where we commemorate San Isidro who is the patron saint of Madrid and also of farmers. He was canonized because, among other miracles, an angel ploughed a field for him while he had a siesta under the tree. Very Spanish. So, this newsletter will take a short break, back on Friday!

IN THIS NEWSLETTER:

• Tokenization and the SEC

• Macro-Crypto Bits: rate expectations, South Korea, AI payments and more

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WHAT I’M WATCHING:

Tokenization and the SEC

It was quite something to watch an SEC roundtable yesterday emphasize the need to re-think capital market structures and regulation. I’ve been writing about the potential impact of blockchains on markets for years now (it’s one of the reasons I dove head-first into the space back in 2014), and to see the well-worn arguments be repeated not only by regulators but also by representatives from some of the world’s largest financial organizations, well, I confess I get goosebumps.

I also have to confess I didn’t watch the whole thing as it went on until really late at night my time – but I did catch the first panel which I will briefly summarize for you below. When the SEC uploads the video, I’ll get to the second.

Atkins: a new framework

First, some highlights from SEC Chair Paul Atkins’ opening comments:

Tokenization could impact securities distribution much like the move from cassettes to digital formats impacted music.

The Commission must keep pace with innovation, and update rules that are incompatible with digital assets and are stifling the industry’s growth.

Key mission of Chair tenure: to develop a regulatory framework to accommodate onchain securities, to develop clear rules of the road to prevent fraud, and to create fit-for-purpose standards.

The three areas of concern: Issuance, custody and trading.

Issuance: will establish clear and sensible guidelines for distribution of digital assets that are securities or subject to investment contracts.

“We cannot encourage innovation by trying to fit a square peg into a round hole.”

Additional guidance, safe harbours and registration exemptions are not necessarily fit for purpose – temporary.

Custody: support greater optionality for market service providers. SAB121 was a “grave error”. This has been removed, but “the commission can do more”, such as providing clarity on the types of custodians that qualify, and codifying common practices. For instance, custody rules may need to be updated to allow advisers and funds to engage in self-custody in some circumstances.

Trading: in favour of allowing platforms to trade a broader range of assets. Nothing in federal securities laws prohibits ATS from trading in non-securities, but may need additional Commission guidance here.

Crenshaw: identify the problem

Next, Commissioner Carolime Crenshaw – a vocal crypto sceptic – raised concerns such as:

Public blockchains are either not tested enough, not fast enough or not scalable enough.

But would private networks be much different from the system we have today?

The current settlement cycle is a design feature rather than a bug – delayed settlement allows for netting, which often means greater capital efficiency.

Also, instant settlement generally disfavours retail traders, who rely on the ability to submit payment after placing orders.

And delayed settlement offers time to spot cybercrime and other red flags.

[These are reasonable points but show that she hasn’t done her homework around blockchain-based settlement features – since the cycle is a design issue, delayed onchain settlement will be possible, offering investors greater choice.]

Panel: opportunity and questions

To open, the participants took turns laying out why they care about tokenization - I’ve added some context around what they’ve been doing in this area.