SEC Chairman Paul S. Atkins: Building a Clear Regulatory Framework for Encryption Assets

At the tokenization roundtable, I am honored to share my views with all the guests.

The current discussion is timely because securities are accelerating their shift from traditional databases “off-chain” ( to blockchain-based distributed ledger systems “on-chain” ).

This transformation can be likened to the evolution of audio recording from vinyl records to tapes and then to digital formats. Digitization has made audio files easy to transmit, edit, and store, bringing revolutionary innovations to the music industry. Audio has been liberated from the constraints of fixed formats, becoming interoperable across various devices, allowing for reorganization, segmentation, and programming, creating entirely new products. This has driven the development of hardware devices and streaming business models, benefiting both consumers and the economy significantly.

Similarly, the migration of securities to the blockchain is expected to reshape the entire securities market landscape. On-chain securities can utilize smart contracts to distribute dividends periodically and transparently. Tokenization can also transform low-liquidity assets into high-liquidity investment opportunities, promoting capital formation. Blockchain technology brings a wide range of innovative applications to securities, with many new market activities exceeding the scope of existing regulatory considerations.

To realize the vision of the United States becoming a “global encryption center”, regulators must keep pace with innovation, considering necessary regulatory reforms to accommodate on-chain securities. Rules designed for off-chain securities may be incompatible with on-chain assets, which could hinder technological development.

My important mission during my tenure is to build a reasonable regulatory framework for the encryption asset market, establish clear rules for asset issuance, custody, and trading, while combating illegal activities. Clear rules are crucial for protecting investors from fraud and especially help identify illegal scams.

The U.S. securities regulation is ushering in a new era. Policy-making will no longer rely on ad hoc enforcement actions, but will fully utilize existing rule-making authority to provide practical standards for market participants. Enforcement will return to the original intent of Congress, focusing on behaviors that violate established regulatory duties, particularly fraud and market manipulation.

This work requires cross-departmental collaboration, so I am pleased to see that the committee has established a special working group for cryptocurrency. This reflects how various policy departments can work together to provide the certainty that the public has long needed.

Now, I will focus on three key areas of encryption asset policy: issuance, custody, and trading.

Issuance

First, I hope to establish clear and reasonable issuance guidelines for encrypted assets that are subject to securities or investment contract constraints. Currently, only four institutions have completed registered issuance and issuance under Regulation A. Issuers generally avoid such paths, partly because it is difficult to meet disclosure requirements. If they do not intend to issue traditional securities, it is hard for issuers to determine whether encrypted assets constitute “securities.”

In recent years, regulatory agencies initially adopted an “ostrich mentality”, seemingly hoping that cryptocurrencies would disappear on their own. They then shifted to a strategy of “enforcement first, questions later”. Although they claim to be willing to communicate with potential registrants, they have not made the necessary adjustments to registration forms to accommodate new technologies. For example, the S-1 form still requires details on executive compensation and use of funds that may be unrelated to encryption asset investment decisions. While regulatory agencies have adjusted forms for asset-backed securities and real estate investment trusts, they have not made similar adjustments for encryption assets. We cannot promote innovation with a “square peg in a round hole” approach.

I am committed to promoting the development of new guidelines. The staff recently issued a statement regarding registration and disclosure obligations, clarifying that certain offerings and assets do not involve federal securities laws. I hope they continue to provide clarification on other types of offerings and assets. However, the existing registration exemptions and safe harbors may not be entirely suitable for certain encryption asset offerings. I believe these statements are only temporary measures, and more comprehensive actions are crucial. I have asked the staff to consider whether additional guidance, registration exemptions, and safe harbors are needed to pave the way for encryption asset offerings within the United States.

Custody

Secondly, I support giving registrants more autonomy to decide how to custody their encryption assets. The staff recently withdrew Accounting Announcement No. 121, eliminating a major obstacle to encryption asset custody services. The statement itself was a mistake, and the staff had no authority to take such broad action without notification and assessment. This caused unnecessary confusion, with impacts far beyond the regulatory scope. However, what regulators can do goes far beyond just abolishing the announcement; they should also enhance competition in the legitimate custody services market.

It is necessary to clarify which custodians meet the qualifications of “qualified custodians” as defined by the Investment Advisers Act and the Investment Company Act, and to establish reasonable exceptions. Many advisors and funds can utilize self-custody solutions, which may employ more advanced protective technologies. Therefore, custodial rules may need to be updated to allow for self-custody in specific circumstances.

In addition, it may be necessary to abolish the “special purpose broker-dealer” framework and replace it with a more reasonable system. Currently, there are only two such institutions operating, which is clearly due to significant restrictions. Broker-dealers have never been prohibited from acting as custodians for non-securities type encryption assets, but regulators may need to clarify the applicability of customer protection and net capital rules to such activities.

Trading

Third, I support allowing registrants to trade more types of products on the platform and engage in activities that respond to market demand. For example, some brokerage firms are trying to enter the market with “super apps” that offer integrated trading of securities, non-securities, and other financial services. The federal securities laws do not prohibit registered broker-dealers from facilitating non-securities transactions, including “paired trades” between securities and non-securities. I have asked staff to assist in designing a modernized ATS regulatory framework that better accommodates encryption assets. In addition, I have also requested to explore whether further guidance or rulemaking is needed to facilitate the listing and trading of encryption assets on national securities exchanges.

While regulators are working to build a comprehensive regulatory framework, participants in the securities market should not be forced to go overseas to innovate in blockchain technology. I would like to explore whether it is appropriate to grant conditional exemptions to institutions seeking to launch new products and services that may be incompatible with existing rules.

I look forward to coordinating and collaborating with the government and congressional colleagues to make the United States the best participant in the global encryption asset market.