With the passage of the Genius Act and release of the White House interagency report on crypto in July, the Securities and Exchange Commission’s Crypto Task Force, led by Commissioner Hester Peirce, has been proactively engaging with investors, traditional and decentralised finance firms, as well as would be innovators to tackle the questions surrounding the burgeoning digital assets market, estimated at $4.3tn.
A staunch and long-time proponent of providing a clearer and more constructive approach to digital assets regulation, Peirce has finally found the wind at her back.
With the unwinding of the previous administration’s Operation Choke Point 2.0 and aggressive enforcement approach of the last four years, the SEC has been drawing on industry and investor input, working with other agencies and Capitol Hill, to help define and implement a digital assets regulatory framework. The aim is to retain a strong focus on investor protection while also finding solutions that allow for innovation in US markets versus steering it offshore.
While the Genius Act has been a critical first step by providing a regulatory framework for stablecoins, many areas still lack clear guidelines. The SEC is working to address this, and Peirce joined an OMFIF-hosted industry discussion to share an update and views on some of these issues.
Working out the details
Details are currently being clarified about what comes under the SEC’s scope, how crypto spot markets will be regulated and the definition of when a cryptoasset is a security. Staff statements are being released to provide further guidance on non-yield bearing stablecoins, staking and mining. Custody rules are being contemplated that could allow for both self-custody and a wider group of firms to serve as digital assets custodians, while conflicts of interest and fiduciary responsibilities are also being addressed.
With the change in administration, interest in offering all kinds of tokenisation has grown, resulting in much attention paid to ensuring investors clearly understand what they are buying, such as when yield is discretionary on a new financial instrument.
Aside from tackling specific issues, the SEC Task Force is paying close attention to the perception of ‘regulation as an inhibitor’. This is the fallout from the previous regulatory approach, which effectively shut out many normal financial market players, such as banks, custodians or auditors whose expertise is critical to help identify problems and engage in solutions as the ecosystem evolves, as well as innovators who choose to move offshore.
Attracting talent and encouraging innovation
Perhaps most striking, in a country where innovation has been at the heart of its economic growth and global technological leadership, a ‘palpable fear about engaging with government’ emerged in Task Force meetings with small teams and tech students who had seen smart young friends and others who were building businesses being prosecuted. This fear was identified as a top issue that small businesses face.
Turning around this perception is one reason the Task Force is so concerned with ‘getting it right’. It is focusing on a clear regulatory framework, not only for investor protection, but to allow for innovation and the potential of technologies like blockchain to improve the financial system and access to it. Peirce observed that it’s ‘really the next generation that will shape the financial system going forward’, and it’s important they feel comfortable participating rather than taking a safe job in a firm elsewhere.
The ability to attract smart talent, especially those conversant with new technologies, is particularly important given other trends impinging on financial services. Tokenisation of real-world assets, projected to range between $3tn and $16tn by 2030, will according to BlackRock Chief Executive Officer Larry Fink require solving for digital ID. The acceleration of artificial intelligence and quantum computing will also bring new challenges as well as benefits, further amplifying recent breakthroughs.
For the US to build a state-of-the-art digital economy infrastructure, including a regulatory framework, it needs to have the best expertise and brightest minds participating on its home ground. The approach of the SEC Task Force in addressing these issues is not only a step in the right direction but also a breath of fresh air.
Patricia Haas Cleveland is US President of OMFIF.
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