At present, the SEC is relatively conservative in the field of encrypted digital finance. How will the next SEC chairman promote the progress of compliance in the encryption industry?
Original Title: “The Challenges Facing the Next SEC Chairman”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
According to US media reports, current SEC Chairman Jay Clayton plans to leave before the end of this year. How the next SEC chairman’s policy in the encrypted digital financial industry will immediately become a common concern in the industry. During Clayton’s tenure, the SEC held a very conservative attitude towards encrypted digital finance. During 2017, due to the rapid development of token-based financing in the market, the SEC clearly stated its views in this regard. It divides tokens into security tokens and tool tokens, and insists that if a token is a security token, it must operate within the scope of the current securities law. While expressing a clear point of view in this regard. The SEC is also continuously adopting regulatory measures to combat violations in this regard. As a result of the SEC’s measures in this regard, token-based financing in the US market has gradually begun to be carried out within the scope of the securities law. The main application is to use tokens to represent alternative assets, and use securities registration exemption methods for generation and circulation. However, due to strict regulations in this area, the development of security tokens in the US market is relatively slow.
Jay Clayton, Chairman of the US SEC
In terms of confirming the various tokens currently in the market, the SEC only indicated that Bitcoin and Ethereum are not security tokens. For other tokens, it did not express a clear attitude. Therefore, the operation of these tokens faces potential risks of regulatory measures taken by the SEC.
Regarding the supervision of Bitcoin-related products, the SEC has rejected multiple Bitcoin ETF applications in the market. The reasons it gave include market price manipulation of Bitcoin in unregulated trading venues, and the lack of a compliant custody mechanism for Bitcoin custody.
In terms of pass exchanges, Coinbase currently in the US market obtains legal operations by applying for currency transfer licenses from various states. In accordance with the requirements of this type of license, Coinbase can only provide encrypted digital currency trading services, but not securities-type token trading services. Now some institutions are beginning to apply to the SEC for a nationwide security token exchange, such as the Boston securities token exchange BSTX that I discussed earlier. However, due to BSTX’s own design issues, the SEC has never given an approval or rejection to this exchange’s application. Therefore, in the US market, it is still impossible to see a nationwide securities exchange.
Compared with the other two major financial regulators in the United States, the SEC led by Clayton is obviously in a relatively conservative position in the application of encrypted digital finance. As early as July 2017, the CFTC issued an encrypted digital currency derivative trading and settlement license to a startup company LedgerX. In December 2017, it appeared in the US market to provide bitcoin derivatives trading services in a compliant manner. Therefore, the US market is currently in a leading position in the field of providing bitcoin derivatives trading services in a compliant manner globally. In the U.S. banking industry, Brian Brooks, the current Acting Administrator of the Office of the Comptroller of the Currency, is promoting the implementation of encrypted digital finance in the banking industry. His measures include clarifying that banks can provide legal services to encrypted digital currency companies, including providing custody services for digital stable currency issuers. The more influential measure it is now advancing is the issuance of a payment service license nationwide, that is, allowing non-bank institutions to provide payment services nationwide. If such a payment permission can work, then some encrypted digital financial companies can provide payment services in the US market based on the US dollar stable currency. These companies can therefore be more deeply integrated into the US financial system. Compared with the measures taken by these two financial regulators, the SEC under Clayton’s leadership has obviously adopted a more conservative strategy.
Compared with the leading countries in this respect in the world, the application development of encrypted digital finance in the securities industry in the US market is not the most advanced. In this regard, Switzerland is in a very leading position. The Swiss Digital Asset Exchange SDX is actually a digital asset exchange jointly established by the Swiss financial industry. SDX trades digital assets based on the support of distributed accounting technology. Due to the close cooperation between this exchange and Swiss regulation, its business progress will certainly keep pace with the relevant Swiss policies. It now appears that SDX is being promoted within the scope of financial supervision, in a very planned way, and with the correct strategic direction and business strategy. Therefore, Switzerland is definitely ahead of the United States in terms of the implementation of encrypted digital finance in the securities industry.
In terms of candidates for the next SEC chairman, the media is already reporting on several possible candidates. One of them is Gary Gensler, the former chairman of the US CFTC. Gensler previously worked at Goldman Sachs for 20 years. Later, he served as the chairman of the CFTC during the Obama administration. After leaving politics and business, he has been a professor at the MIT Business School. He also serves as a consultant for the digital currency project of the MIT Media Lab. One of his main research areas is the impact of blockchain and encrypted digital finance on the financial industry. He has very in-depth research and insights on encrypted digital finance. He is now hired by Biden as a financial supervision consultant, so the media speculates that he may also serve as the next SEC chairman. If he does become the chairman of the SEC, he is expected to actively promote the implementation of encrypted digital finance in the US securities industry.
No matter who is the next chairman of the SEC, he will face a series of very big challenges in the field of encrypted digital finance during his tenure.
The first is the basic definition of securities. The current Howey Test is already very reluctant to explain token-based financing. Due to this uncertainty, various innovations in the market are at risk of being regulated. In view of the fact that the token can define various rights and interests in a more refined way, and the cost of the underlying infrastructure that supports the circulation of the token is greatly reduced, and it can reach a wider range of users, so the innovation in this area in the market will become more and more. many. Therefore, a clear regulatory framework is urgently needed in the market so that innovations in the market can operate within a clear scope. For the next chairman, how to gradually recognize and establish such a reasonable regulatory framework and how to form the necessary legislation with the legislature will be a very huge challenge.
In terms of transactions, blockchain technology supports more efficient and diversified transaction methods. It supports not only direct transactions between peers, but also centralized matching transactions. And because of the reference of stablecoins or CBDC, it can directly adopt the DVP transaction mode in terms of transactions. This transaction settlement model is far superior to the current centralized-based clearing and settlement model. In terms of the range of users that can be reached, such a trading ecosystem can reach a wider range of users. How to formulate rules to regulate the orderly development of this aspect in the market is a problem that needs to be resolved for the SEC. In this regard, the regulatory agencies can play an active role. At the beginning of the US options market in the early 1970s, several options exchanges that were applying for the establishment were planning to establish their own clearing companies. At that time, US regulation believed that such a separated clearing company was not conducive to the development of the market. So these options exchanges jointly established the American Options Clearing Company. This clearing company provides clearing services for all equity derivatives transactions in the United States. The U.S. derivatives trading market has therefore become an efficient market. Also today, the SEC can play a more active role in promoting the application of blockchain technology and encrypted digital assets in the securities industry.
The SEC’s regulatory responsibilities include protecting investors, ensuring the fair, orderly and efficient operation of the market, and promoting the formation of capital. In view of the paradigm changes brought by blockchain technology and digital currency and digital assets to the securities industry, and the scope of such changes, how the SEC performs its regulatory responsibilities and promotes orderly changes in the U.S. securities market, which is important for the next mission It is a huge challenge for the chairman of the SEC.
