The Onchain Capital Markets Era Starts in DC

Transcript

[applause] >> Good morning, everyone. Good morning, Taylor. >> Good morning. >> So, I'll jump right into it. So, Taylor, um the crypto task force was stood up by Chairman Atkins um as one of his first acts. Um for people that may not know your specific role, um you are the chief counsel. And unlike many of the other members of the task force, you joined the task force from outside the SEC. I believe you were the second person with a DeFi background uh that joined the SEC, myself being the first. Um Uh can you explain what the task force does on a day-to-day basis, what your goals are, um and how it interfaces with the broader commission?

>> Yeah, absolutely. Uh so, before I get started, uh the typical um disclaimer that I have to give is that I'm here in my official capacity as the chief counsel of the crypto task force at the SEC, and these are my views and not necessarily the views of the commission. Uh so, I joined the task force about 5 months ago. And And the task force exists to serve a coordination function at the SEC. It's basically um anytime that anything is touching crypto, the task force is there to help try to drive whatever the the chairman's initiative or or the staff's initiatives are related to that matter um forward. And that takes a lot of different different uh paths. It looks like uh assisting with rule making where as the the staff are formulating rules

and are considering uh putting guidance out there into the market, the task force is directly engaged working on the drafts, working through the the challenging issues, and acting in a translation function. Essentially, trying to ensure that um everyone is speaking the same language uh especially as it relates to the new technology. Uh The other areas uh include a lot of public outreach. We spend a tremendous amount of our time talking with industry participants, going and meeting with them in uh you know, we have we probably had over 200 meetings with industry participants and speaking with with essentially every area of of the crypto market to understand what are the challenges that they're facing with with the securities laws and what are the things that they're building and

focused on so that we can be best informed for our policy making function. And then beyond that I'd say also that the task force is here to try to kind of I I guess we've got what what what we've got we got the policy side of it, we've got the meeting all of the industry participants and then I'd I'd say kind of the final piece is is trying to institutionalize this new market and this new way of transacting within the SEC itself and that includes education with the staff, education with the various divisions and trying to ensure that there's longevity and durability around these issues such that we can have really positive rule making moving forward.

>> That's a pretty ambitious agenda. Um and that agenda's been also spelled out in more detail by Chairman Atkins as well as Commissioners Peirce and and and and Uyeda. Um as you guys think about you know, accomplishing your goals, what are your key performance indicators between now and let's say end of 2028? >> Yeah, so there's two major buckets that we've been focused on as a task force. The first has been focusing on questions as they relate to when is something subject SEC jurisdiction when isn't it and a lot of that has related to when is a token subject to an investment contract and therefore a securities transaction. And a lot of that focus has culminated in a commission interpret

that came out earlier this year and the commission interpret is really trying to call those balls and strikes to explain how the the commission thinks about investment contracts and tokens to provide better clarity to the market. And then the other major bucket, the other area that we're measuring ourselves on is how well do we accommodate and extend the way that the securities laws work today to cover the various things that market participants are trying to do involving securities. That's tokenizing securities, utilizing them, uh, in new ways to to to transact, utilizing them for new ways to clear and settle, uh, essentially just trying to meet both existing market participants that are within crypto as well as existing market

participants that work within our traditional securities markets, and find the the areas of either relief or clarification that can bring them on chain and into a uh, it into compliance uh, during this this this period of time that we have. >> Very cool. Um, so following up on that point, um, so we're here today at EthCon. Um, I spent time at Uniswap, which is one of the more Ethereum aligned projects out there. Um, Ethereum's core goal is to serve as a permissionless, globally accessible, global, um, world computer.

A decentralized settlement layer where anyone can deploy or interact, uh, with the, uh, blockchain in a censorship resistant way without seeking, uh, permission from any intermediary or government. Um, Chairman Atkins has spoken about the importance of open public blockchain infrastructure as foundational, uh, to any viable US digital asset market. Does the task force have an explicit view, um, on whether regulatory frameworks should prefer open public blockchains, um, with Ethereum being among the most, uh, uh, open, um, over permissioned, uh, alternatives, um, or is the SEC philosophically agnostic, uh, treating them as equivalent provided that they, uh, operate in a safe and sound way?

>> I'll give my view on this, and this is I think a view that's broadly shared among, uh, the focus folks at the SEC and that is that um blockchains really work best when they are neutral infrastructure. It's one of the things that makes them really special. They have the ability to level playing fields and enable transactions with high levels of transparency. They are a a tool that can be censorship resistant and highly resilient from a cybersecurity perspective. And a lot of those properties are inherited um it it in in in the most strong kind of ways through permissionless systems, through blockchains like Ethereum and and and the various you know EVM chains

that are out there. I think there's certain tradeoffs that are made by market participants to achieve certain application-specific outcomes. And I think that our securities laws need to be flexible enough to accommodate kind of all of the various flavors in which people want to transact on chain. Uh they but those tradeoffs I think come with meaningful differences regarding potential regulatory treatment and and how they're thought about uh you know from a investor protection standpoint or market integrity standpoint. And so when I look at blockchains and I think about what are the principles that of the tech what makes the technology great, a lot of the things that make the technology great are public and permissionless.

>> So one of the the areas where we see the most friction between the Ethereum or open block public blockchain vision and kind of legacy regulations and laws is around the application of anti-money laundering and KYC or customer information program requirements under the Bank Secrecy Act. Um a lot of people may not [clears throat] appreciate um the SEC's role um in interpreting the Bank Secrecy Act for the securities markets. Um can you explain the SEC's role versus Treasury's role um as it relates to BSA KYC AML requirements?

>> Absolutely. >> And then um before you do that well it in included within that, um, can you explain some non-bank Secrecy Act reasons, um, why KYC may be seen by many as mandatory in the in the uh, US securities markets? >> Sure. Okay, so this is a big question. So there's a few different pieces to it. Um, I think the first part is that yeah, there's a there's a component of the BSA that's applicable to intermediaries in the securities markets. And the two big intermediaries are are um, the mutual funds and then the other one big intermediary are are the broker broker-dealers in the market. And they have these BSA requirements that are similar very similar to what the BSA requirements are for other financial institutions under the BSA. And those

are the, you know, anti-money laundering programs and the requirements to know your customer and to have information, uh, to you know, thwart money laundering and thwart sanctions evasion, etc. And but that area of of the securities laws is is relatively cabined among these intermediaries. There's specific areas within um the market where intermediaries exist. But that doesn't necessarily mean that's the only reason to collect identifying information, whether it's through a KYC process or not. There's there are reasons to do that under our securities laws. And a lot of that has to do with market integrity, uh, and understanding, uh, who the participants are. But there is a lot of novel ways to do that. I think we're seeing in the market today that there's just been a proliferation

of different ways to manage, whether it's done via allow list, it's done through on-chain checks, it's done through, uh, multiple different types of tools. Uh, and again, these are to comply with regulatory requirements for intermediaries. This is intermediated finance a lot of the time. We're talking about a broker, we're talking about clearing agencies and and transfer agents, regulated entities that are responsible for complying with these things even when transacting on chain. And so, what I would say is like the best mental model is the BSA and the AML requirements are an overlay, uh, for certain entities. But then the other piece of it is thinking about how the SEC considers market integrity and investor protection, which often includes things like customer identification. That's why brokers

collect information about their investors and their clients. But the big picture there is that in the on-chain environment, these same rules apply. The question is is just are there new technologies that can be brought to the fore that enable compliance in different ways or in more straight seamless ways? And then ultimately are they serving the same objectives? When you have a highly transparent system or a system that's able to provide a tremendous amount of information and disclosure to investors, that can give a lens for both the law enforcement agencies and for the regulators to understand conduct that's happening on a blockchain with a higher level of granularity than they may have when they're looking at a a broker or an internal

trading system that would require much more extensive reporting. So, the TLDR here I think is is that there's a lot of different ways I think to skin the cat as it relates to on-chain because of how the technology can be leveraged for transparency. That's a lot I just >> Yeah, well, let let me let me follow up a little bit on that. Um So, you know, you're you've had as you said 200 meetings with with different participants across the industry. Um you're I imagine in a lot of those meetings you're learning about alternative ways to comply with with KYC or KYC like requirements.

Um How do you guys interface with Treasury who ultimately is the administrator >> Yeah. >> um of the Bank Secrecy Act? >> So, I'd say like taking it just big picture, I think there's a role that all of the agencies have to play including Treasury when it comes to thinking about this new technology. And I'd say that there are a lot of times where there are meetings that are taking place with us or meetings taking place with Treasury where they're covering similar technology ground. And that is because there's innovation happening. Um that's things like how VPNs work and how they're utilized by interfaces and and front ends all the way to new on-chain screening tools and things like it. And I think that both Treasury and and SEC have have a role to play here in

understanding these technologies and how they can be leveraged, particularly by regulated players. >> So, protocols like Uniswap, other protocols built on top of Ethereum, derive their value because they are non-custodial and composable, permissionlessly interoperable. Any contract can call any other contract without seeking permission. In contrast, the US securities laws were written for intermediated markets where, you know, different black box databases interoperate with each other in a in a very permissioned way.

And you have identifiable custodians, you have identifiable transfer agents, you have identifiable broker-dealers, so on so forth. What's the task force's current thinking on how disclosure and registration obligations map onto protocols that might provide a similar type of function as these regulated intermediaries, but at the same time, these protocols are built not to selectively block participants. And then, more pointedly, do you see a pathway where DeFi trading protocols can play a role in SEC-regulated markets?

>> It's a big question. So, I think the place where I'd start here is I'd say what the SEC is really good at today. And what the SEC's been good at historically has been finding intermediaries, effectively regulating those intermediaries, and providing the you know, the application of the rules to those intermediaries in a way that is efficient for how those intermediaries have always worked. And that is our brokers, our exchanges, our clearing agents, our transfer agents. And those systems, as they start to move on chain, start raising new questions both from a policy perspective as to, you know, are they still serving the same policy objectives? Sometimes those policy objectives are you know, there's higher risk when they go on chain, whether that's okay, the

transfer agent's role has increased tremendously regarding how important they are to a tokenized system because they are now managing a lot of this on-chain conduct that used to happen through an intermediated system, you know, through the DTC intermediated system. And that changes the dynamic. It changes the way that regulators think and the way that the regulator you know, tries to understand you know, the the the the shift in market conduct as a result of these new technologies. But the same thing can happen in the opposite direction, which is you see permissionless trading happening on chain in all types of assets really smoothly with a lot of immediate finality around those transactions or

nearly instantaneous finality. A buyer and a seller can end up with their their their assets with very few intermediaries in the mix beyond that smart contract and that infrastructure that's facilitating you know, the the propagation of the messages etc. And so then you have to look at those questions there and say, okay, are is this still the same type of conduct that we associate with national securities exchange or broker dealer? And for each of those things it's it's important that us as an agency we're flexible to acknowledge the possibility of circumstances where our regulatory interests are no longer implicated. And I think that's really where DeFi could potentially have a lot of value, which is saying that okay,

these are the areas of of regulatory interest and and risk that we see for investors and for market integrity and there's a way in which capital formation can be facilitated through this through the use of of a blockchain and a smart contract or a trading protocol. And how do we get to a stage where the participants in that system are not being viewed as an operator of an exchange or broker-dealer, but more as some neutral infrastructure that's, you know, facilitating that smart contract interaction. And I think that there's still work to be done on that topic. I don't think that there's a consensus view yet entirely because I think this is still an emerging market, especially as it relates to securities.

There's new primitives in the tokenized securities market that are developing that I think are having to be kind of translated into the way that the securities laws have always worked. That's, you know, like the issuer-led model and um there's few others that we could get into if you want to hear more about that. Uh but what you end up with is you have a market that's that's fairly immature, at least as it relates to securities, and with only a few securities market participants that are affirmatively saying, "Hey, I'm going to do this with securities. This is how I'm going to do it. And is this okay? Are there regulations that should apply? Or here's some relief that I'm looking for." And I think in in that area specifically is is where we will find areas of the market that no longer, you

know, require the same level of oversight or maybe require a different level of oversight. Um so when I think about DeFi, I think about systems that lack intermediaries, that inherently lack the permissioning or the control or the centralized operation of of some person. And our laws and our regulations, most of them define, you know, at the heart of them, a person. And so that makes it, you know, often challenging and and potentially compatible in some circumstances. I think clarity has a role there, too, in terms of empowering agencies to think broadly. But that is a component of of the of the question as well, which is when when is that person there and when isn't it?

>> Yep. Yeah, the one um and I'll just comment on that one, um you know, confirm kind of uh what I drew from what you just said, which is um you can't really get rid of the issuer, you know, in these markets. Um Now, you can uh use protocols to provide a trading functionality, to provide a settlement functionality, to provide a lending functionality, but the issue never goes away. The securities issue never goes away. Um are models where more of the compliance features are uh delegated, let's say, to the issuer and their service providers, particularly the regulated transfer agent. Um is that one of the models that you're you guys are considering and >> Yeah, this is a great tee up for some

area that I'd love to talk about, which is like and what you said is exactly right. Like in the securities world, like there's there's an identifiable issuer. And in the models that so the SEC put out a piece in in January from the staff that kind of covers the different tokenization models that are out there in the market. Um and I'll briefly highlight a few of them. Uh but one of those models is this issuer-sponsored model where you've got a transfer agent acting as the issuer or acting as the agent of the issuer helping them tokenize their shares on chain and instantiating like a native asset that represents the uh uh the the the shares in in a in in some some type of security, often, you know, an equity. And with those shares, they've got a bunch of different

technological restrictions that are being imposed by these tokenizers and how they interact on chain. And it's a very uh specifically led, you know, by the issuer, by the transfer agent model that has, you know, gained some steam on chain. But it's not the only one. And I think the important piece here which you're highlighting is that, you know, when you have a security on chain, that security has an issuer. And in the case of these issuer-led models, it's the issuer of the underlying security. But there are also systems that have third-party issued securities. And sometimes these are separate securities. Often they're separate securities from the underlying. This is things like equity-linked notes and structured notes, as well as derivative instruments of various types like swaps and and securities futures. And those also have

issuers. But those issuers are maybe not the same as the underlying. And And example of that is you've got somebody who's decided to tokenize um a a debt instrument that is holding the shares of of some, you know, public issuer. That that tokenizer in in the process of creating the separate security is kind of standing in the shoes of the issuer of that separate security. And then with the securities laws, when you think about the securities laws, you're thinking, okay, this is an offering of some kind. Is it is it exempt or is it is it registered? But that is that mental model is kind of the same mental model that that works in the in the regular world without tokens. And it really it's it's the same first principles thinking that is helpful when we're thinking about tokenization more

broadly because it gives you the same practical lens that has been applied for, you know, for for whenever a securities issuance has taken place throughout time. It's just with a different like technological setting, whether it, you know, it's still a security. It's still either, you know, it's equity, it's debt, it's some derivative. It meets the definitions, but the actual tokenization process can vary, you know, broadly. >> So one of the things, you know, in previous years was a big concern for this industry was something enforcement theories that drove a lot of the the action, the policy action relating to DeFi developers.

So one of these theories was the potential of secondary liability for trades executed by users on a DeFi protocol that they may have deployed but no longer exert control over. Has the task force issued internal guidance that walks back that theory or have developed a new theory? Um is there any prospect that the SEC or SEC staff might make that guidance public so that developers can rely on it?

>> So I'll step back and say the best way that I've thought about kind of the the current moment is that we went from an era where there was a tremendous amount of enforcement activity happening in crypto and a lot of it was registration focused activity. This was targeting, you know, issuers, targeting intermediaries of various types with registration violations essentially predicated on whether or not the underlying asset was a security. That's, you know, really getting into that what we were talking about before, that first bucket of when is something a security and when is it not? And so much of that case load, so many of those cases were really focused on that question. And so there's a logical, you know, reset point where that theory of the

case had to be re-evaluated by the agency. And I think that re-evaluation is what we saw in the form of the inter the the commission interpretation that really covered how the agency thinks about investment contracts today and it and it steps back from everything is a security and focuses more rooted in what the law says, uh which is, you know, it's a transaction-based test. It It's dependent on facts and circumstances and a lot of those facts and circumstances aren't present when you're moving far out into the secondary market. And so what I would say when it comes to, you know, like the broader enforcement priorities, the SEC continues to be a very, very important and strong voice when it comes to thinking about how to comply with the rules in the United

States. But I think we are currently in a moment of re-evaluation as it relate related to just some specific market conduct, but otherwise the rest of the the ways in which the the the SEC thinks are, you know, remain. And I think that the investment contract test is is just a small component of the the the case load that could, you know, that that exists related to crypto. So I do think that we will see, you know, actions in crypto continuing just the same as they always have, despite the fact that there was, you know, an area of of the law that was, you know, re-evaluated in light of how the the previous administration was weaponizing the investment contract test.

>> Sounds like you don't you don't have to agree with me on this one, but sounds like less registration violations and more going after things like manipulation and scams. >> I think materiality is still going to be the most important thing and I think when you think as a developer, that is one of the most important pieces here. It's this isn't about foot faults. This is about you know, conduct that crosses a line that results in you know, harm. >> So, we only have 45 seconds. Last question and I'll try to be brief. Uh So, this room is filled with builders on Ethereum and other public blockchains.

What do you want them to know about what the how the SEC is thinking about them and what they're doing? >> I think we are at this perfect inflection point where there's been a lot more clarity brought into the market on what the role the securities laws have to play in in crypto and in in on-chain environments. And I think right now is is the perfect time for innovation to be asking challenging questions about how our securities laws should work to make them work well and that you have an open ear and a voice at the SEC that wants to hear those things. So, reach out. We have a website. You go to the crypto task force website and you can submit a meeting request. You can write and submit written input. We read

everything and we try to meet with as many people as we can. It's a very important priority for us still and this is the time to do it. So, thank you. >> Thanks, Taylor. >> Great. >> [applause]