Overview
SEC Chairman Paul Atkins announced the launch of "Project Crypto" – an SEC initiative that would modernize securities regulations to enable financial markets to move on chain. The Chairman delivered the speech at the America First Policy Institute one day after the President’s Working Group on Digital Asset Markets released the 166-page report Strengthening American Leadership in Digital Financial Technology. Project Crypto will implement the PWG Report’s recommendations for the SEC and will be led by SEC Commissioner Hester Peirce and the Crypto Task Force.
Project Crypto is an ambitious initiative with a clear sense of urgency that is rarely seen in Washington's regulatory agencies. Chairman Atkins boldly declared that under his leadership "the SEC will not stand idly by and watch innovations develop overseas while our capital markets remain stagnant." In lockstep with the Presidents’ directive to make America the crypto capital of the world, the new SEC Chairman highlighted the five priorities of Project Crypto, which are summarized below.
Steptoe’s Blockchain and Cryptocurrency practice stands ready to assist clients in navigating the rapidly evolving landscape at the SEC and we welcome the opportunity to help you strategize for regulatory engagement, business planning, and obtaining the necessary registrations, exemptions, or other relief to build your projects.
1. Encouraging Crypto Capital Formation in the US
First, the SEC seeks to establish legal certainty and an accommodating regulatory environment that will enable crypto asset distributions to occur in the US. Chairman Atkins declared that "[d]espite what the SEC has said in the past, most crypto assets are not securities." To bring an end to the regulatory confusion, Chairman Atkins is directing the staff to work to develop clear guidelines that market participants can use to determine whether a crypto asset is a security under the federal securities laws. He envisions clear guidelines that will allow "market participants to slot crypto assets into categories, such as digital collectibles, digital commodities, or stablecoins, and assess the economic realities of a transaction."
To the extent the crypto asset is deemed to be a security, the Chairman has directed SEC staff to "propose purpose-fit disclosures, exemptions, and safe harbors, including for [ICOs], airdrops, and network rewards."
Further, SEC staff have been directed to work with market participants that seek to distribute tokenized securities in the US and to provide relief where appropriate. The Chairman is concerned about the US losing its competitive edge to offshore innovation in tokenized securities.
2. Maximizing Choice Among Custodians
Chairman Atkins declared that a priority of his chairmanship is to modernize the SE’s custody requirements for registered investment advisers and broker-dealers. SEC staff are exploring how to adapt the existing custody regimes to facilitate the custody of digital assets. We expect that the efforts will result in rule changes and/or exemptive or interpretive relief.
For entities that have multiple registrations with the SEC, the Chairman signaled that further relief may be on the way by emphasizing a line from the PWG Report that market participants “should be permitted to engage in multiple business lines under the most efficient licensing structure possible.”
3. Facilitating Super-Apps
Chairman Atkins wants to encourage "super-apps," where securities intermediaries can offer a broad range of products and services under one roof with a single license. For example, he envisions a broker-dealer with an alternative trading system that could offer non-security crypto assets, crypto asset securities, traditional securities, staking, and crypto lending with just one license, with state licensing preempted.
In addition to directing SEC staff to develop a framework to allow "super-apps," Chairman Atkins has asked the staff to evaluate the use of SEC authority to permit non-security crypto assets that are the subject of an investment contract to trade on trading venues that are not registered with the SEC. The Chairman believes this approach will allow state-licensed crypto asset platforms and CFTC-regulated platforms that are not registered with the SEC to list certain assets, without the need for any additional authority from Congress.
4. Embracing On-Chain Software Systems
Chairman Atkins wants to permit "on-chain software" to be used in securities markets, defining the term as covering software with an operator and decentralized software. Focusing on DeFi protocols, he declared that just because federal securities laws assume the involvement of intermediaries does not mean that the SEC will interpose intermediaries for the sake of forcing intermediation where markets can function without them.
SEC staff are actively considering whether amendments to Reg NMS are needed both to accommodate trading of tokenized securities and more generally outside of the crypto context.
5. An Innovation Exemption
Finally, Chairman Atkins announced an "innovation exemption" – a bold initiative at the SEC enabling new technologies and business models without having to comply with incompatible or burdensome regulatory requirements, but instead would comply with principles-based conditions designed to achieve the core policy aims of the federal securities laws. As examples of potential conditions, he cited "a commitment to make periodic reports to the [SEC], incorporate whitelisting or "verified pool" functionality, and restrict tokenized securities that do not adhere to a token standard that incorporates compliance features, such as ERC-3643."
