With the passage of the Genius Act and the 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, proactively engaged with investors, traditional and decentralized financial companies, and potential innovators to address issues surrounding the burgeoning $4.3 billion digital asset market.
A longtime proponent of a clearer, more constructive approach to regulating digital assets, Peirce has finally found the wind in his sails.
With the end of the previous administration’s Operation Choke Point 2.0 and the aggressive enforcement approach of the past four years, the SEC has relied on industry and investor input, in collaboration with other agencies and Capitol Hill, to help define and implement a regulatory framework for digital assets. The goal is to continue to emphasize investor protection while finding solutions that enable innovation in U.S. markets rather than confining it overseas.
Although the Genius Act was a crucial first step in providing a regulatory framework for stablecoins, many areas still lack clear guidelines. The SEC is working to resolve this issue and Peirce joined an industry discussion hosted by OMFIF to share an update and views on some of these issues.
Work on the details
Details are currently being clarified on what falls under the SEC’s jurisdiction, how cryptocurrency spot markets will be regulated, and the definition of when a cryptoasset is a security. Staff statements are being released to provide additional guidance on non-yielding stablecoins, staking, and mining. Custody rules are being considered, which could allow both self-custody and a broader group of companies to serve as custodians of digital assets, while conflicts of interest and fiduciary responsibilities are also addressed.
With the change in administration, interest in offering all kinds of tokenization has increased, leading to ensuring that investors clearly understand what they are buying, for example when the return is discretionary on a new financial instrument.
In addition to addressing specific issues, the SEC Working Group is paying particular attention to the perception of “regulation as an inhibitor.” These are consequences of the previous regulatory approach, which effectively excluded many normal financial market participants, such as banks, custodians or auditors whose expertise is essential to help identify problems and engage in solutions as the ecosystem evolves, as well as innovators who choose to move abroad.
Attract talent and encourage innovation
Perhaps most strikingly, in a country where innovation is central to its economic growth and global technology leadership, a “palpable fear of engaging with government” emerged during task force meetings with small teams and technology students who had seen smart young friends and others starting businesses being pursued. This fear has been identified as one of the main problems facing small businesses.
Overturning this perception is one of the reasons the Task Force is so concerned with “getting it right.” It focuses on a clear regulatory framework, not only to protect investors, but also to enable innovation and the potential of technologies such as blockchain to improve the financial system and access to it. Peirce observed that it is “really the next generation who will shape the financial system in the future” and that it is important that they feel comfortable participating rather than accepting secure employment with a company elsewhere.
The ability to attract smart talent, particularly those savvy with new technologies, is particularly important given other trends affecting financial services. The tokenization of real-world assets, which is expected to be between $3 trillion and $16 trillion by 2030, will, according to BlackRock CEO Larry Fink, require a solution to digital ID. The acceleration of artificial intelligence and quantum computing will also bring new challenges as well as benefits, further amplifying recent advances.
For the United States to build a cutting-edge digital economy infrastructure, including a regulatory framework, it must have the best expertise and brightest minds at home. The SEC Task Force’s approach to addressing these issues is not only a step in the right direction, but also a breath of fresh air.
Patricia Haas Cleveland is the US President of OMFIF.
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