The Securities Industry and Financial Markets Association (SIFMA) has responded to a call for feedback in a statement by Hester Peirce titled “There must be some way out of here”. Peirce, who is a commissioner at the US’ Securities and Exchange Commission (SEC) and the chair of the regulator’s Crypto Task Force, had invited stakeholders to share opinions on digital asset regulation.
SIFMA’s response focused on three topics raised in Peirce’s statement: securities status and scoping; issues related to the safekeeping of digital assets; and the modernisation of the regulatory framework.
Definitions are important
Regarding securities status and scoping, SIFMA believes that adopting “clear, consistent and consensus-driven taxonomies and classification approaches” is “a crucial first step in the development of effective digital assets regulation”. In determining whether a digital asset is a security, the “intrinsic economic characteristics of an asset or transaction” should be the defining factor, not “mutable factors extrinsic to the asset or transaction” such as those that might be identified through a technology-driven approach.
SIFMA expresses support for SEC’s effort to provide guidance for scoping out non-securities digital assets, but emphasises that the guidance should be “based on a technology-neutral approach and avoid adopting classifications that may create conflicts with terminology in potential future legislation on payment stablecoins and digital assets market structure”.
Stay safe
When it comes to the safekeeping of digital assets, SIFMA recommends that “traditional regulatory principles around custody and the role of the custodian, including the separation of financial activities, segregation of client assets, and ensuring proper control of assets, should be applied to the custody of digital assets”.
It describes SEC’s 2023 Safeguarding Proposal as “unworkable”, but does not believe that the answer lies in developing a new custody framework solely for digital assets. Instead, it writes, “The SEC should ensure that existing regulatory perimeters with respect the regulation of custodial activity do not expand to include asset types beyond securities and funds, and that where clarification regarding how these regulations will apply to digital asset securities and funds may be appropriate, the SEC should engage in an iterative dialogue with industry participants to develop updated guidance on specific topics.”
Furthermore, custody requirements should be technology neutral and should “adopt flexible frameworks that accommodate evolving technologies and avoid favouring specific technological characteristics, including the network type”.
Welcome to the now
As for modernsing the regulatory framework, SIFMA suggests that the SEC makes “targeted policy changes to promote the development and expansion of tokenised securities markets. This includes clarifying how existing requirements apply to tokenised securities in areas such as recordkeeping, possession and control, and clearing and settlement”. In particular, the association singles out regulations for transfer agents as in need of modernising. SEC should recognise that “key features of blockchains and smart contracts can allow the transfer agent to fulfil many, if not all, of its core functions, including recordkeeping, settlement facilitation, and compliance enforcement”.
One area that should not be a part of the modernisation is the move to T+0. SIFMA believes it will create significant risks, costs, and additional complexity” for traditional markets – especially so soon after the transition to T+1 in the US and with many jurisdictions still on T+2.
