Tokenization Will Reshape the Securities Market: US SEC Chairman Plans New Framework for Crypto Assets Regulation

I am honored to give a speech to all the distinguished guests at today's tokenization roundtable.

The current topic of discussion is very relevant to the needs of the times, as more and more securities are migrating from traditional ( "off-chain" ) databases to blockchain-based ( "on-chain" ) distributed ledger technology.

This shift from off-chain to on-chain can be likened to the evolution of audio recordings from analog vinyl records to tapes and then to digital formats decades ago. Digitization has enabled audio content to be easily encoded, transmitted, modified, and stored, bringing significant innovations to the music industry. Audio has liberated itself from the constraints of static fixed formats, becoming interoperable across various devices and applications. It can be combined, split, and programmed, creating entirely new products and driving the development of new hardware devices and streaming business models, greatly benefiting consumers and the U.S. economy.

Just as digital audio has transformed the music industry, the migration to on-chain securities has the potential to reshape the entire securities market, bringing about entirely new methods of issuance, trading, holding, and using securities. For example, on-chain securities can transparently distribute dividends to shareholders periodically through smart contracts. Tokenization can also convert illiquid assets into liquid investment opportunities, facilitating capital formation. Blockchain technology is expected to bring a wide range of new use cases for securities, giving rise to many novel market activities that existing regulatory rules have yet to consider.

In order to realize the vision of the U.S. becoming the "global encryption center," the SEC must keep pace with innovation and consider regulatory reforms to accommodate on-chain securities and other crypto assets. Rules designed for off-chain securities may be incompatible or unnecessary for on-chain assets, which could hinder the development of blockchain technology.

One of my important tasks as the Chair of the SEC is to establish a reasonable regulatory framework for the Crypto Assets market, creating clear rules for the issuance, custody, and trading of Crypto Assets while continuously combating illegal activities. Clear rules are vital for protecting investors from fraud and particularly help them identify unlawful schemes.

The SEC has entered a new era. Policy-making will no longer be based on ad hoc enforcement actions, but will instead utilize existing rulemaking, interpretation, and exemptions to establish practical standards for market participants. The SEC's enforcement approach will return to the original intent of Congress, namely to regulate violations of these defined obligations, particularly fraud and market manipulation.

This work requires coordination and collaboration among multiple departments within the SEC, so I am pleased to see that the commissioners have united to establish a special working group on Crypto Assets. For a long time, the SEC has faced issues with policymaking being fragmented. This special working group demonstrates how various policy departments can work together to provide the clarity and certainty that the public has long needed.

Now, I will focus on three key areas of Crypto Assets policy - issuance, custody, and trading.

Issuance

First, I hope the SEC will establish clear and reasonable issuance guidelines for crypto assets that are classified as securities or subject to investment contracts. Currently, only four crypto asset issuance institutions have completed registration issuance and issuance under Regulation A. Issuance institutions generally avoid such issuances, partly because it is difficult to meet the relevant disclosure requirements. If the issuance institutions do not intend to issue ordinary securities like stocks, bonds, or notes (, it is challenging to determine whether their crypto assets constitute "securities" or are bound by investment contracts.

In recent years, the SEC initially adopted an "ostrich mentality"—perhaps hoping that Crypto Assets would disappear on their own. It then shifted to a regulatory strategy of "enforcement first, questions later." The SEC claims to be willing to communicate with potential registrants, "welcoming direct visits," but this statement has proven to be fleeting and misleading, as the SEC has not made the necessary adjustments to registration forms for this new technology. For example, the S-1 form still requires detailed information on executive compensation and the use of proceeds, which may not be relevant to investment decisions in Crypto Assets. Although the SEC has previously adjusted forms for asset-backed securities and real estate investment trusts, it has not made corresponding adjustments in light of the growing interest in Crypto Assets from investors in recent years. We cannot encourage innovation through a "square peg in a round hole" approach.

I am committed to promoting the SEC to formulate new guidelines. Staff recently released a statement regarding specific registration and issuance disclosure obligations and clarified that certain issuances and Crypto Assets do not involve federal securities laws. I hope the team will continue to follow the instructions to clarify other types of issuances and assets. However, existing registration exemptions and safe harbors may not fully apply to certain types of Crypto Assets issuances. I believe these statements are only temporary measures—further action from the SEC is crucial and necessary. At the same time, I have asked staff to consider whether additional guidance, registration exemptions, and safe harbors are needed to pave the way for the issuance of Crypto Assets within the United States. I believe that under securities law, the SEC has broad discretion to adapt to the crypto industry, and I intend to fully utilize this authority.

Custody

Secondly, I support giving registrants more autonomy to decide how to custody their Crypto Assets. The SEC staff recently rescinded Staff Accounting Bulletin No. 121, removing significant barriers for companies wishing to provide Crypto Asset custody services. This statement is a serious mistake. Staff do not have the authority to take such broad action outside of SEC actions in the absence of notice and comment rulemaking. The initiative has caused unnecessary confusion, and its impact extends far beyond the SEC's jurisdiction. However, what the SEC can do is not only repeal SAB 121 but also enhance competition in the market for legitimate and compliant custody services.

It is necessary to clarify which types of custodians meet the "qualified custodian" qualifications as stipulated by the Investment Advisers Act and the Investment Company Act, and to clearly define reasonable exceptions to the qualified custodian requirements to accommodate common practices in the crypto assets market. Many advisers and funds can utilize self-custody solutions that employ more advanced technology than some custodians on the market to protect crypto assets. Therefore, custody rules may need to be updated to allow advisers and funds to self-custody in specific circumstances.

Additionally, it may be necessary to abolish the "special purpose broker-dealer" framework and replace it with a more reasonable system. Currently, only two special purpose broker-dealers are operating, clearly due to significant restrictions imposed on these entities. Broker-dealers have never been restricted from acting as custodians for non-securities crypto assets or crypto asset securities, but the SEC may need to take action to clarify how customer protection and net capital rules apply to such activities.

Trading

Thirdly, I support allowing registrants to trade a wider variety of products on their platforms and to engage in previously prohibited activities in response to market demand. For example, some brokerage firms are attempting to enter the market by offering a "super app" that integrates trading of securities, non-securities, and other financial services. Federal securities laws do not prohibit registered broker-dealers with alternative trading systems from facilitating non-securities transactions, including through "matched trades" between securities and non-securities. I have requested staff assistance in designing a modernized ATS regulatory framework to better accommodate Crypto Assets. Additionally, I have asked the team to explore whether further guidance or rulemaking is needed to facilitate the listing and trading of Crypto Assets on national securities exchanges.

While the SEC and its team are committed to establishing a comprehensive regulatory framework for Crypto Assets, participants in the securities market should not be forced to go overseas for blockchain technology innovation. I would like to discuss whether conditional exemptions would be appropriate for registrants and non-registrants seeking to bring new products and services to market if these products and services may be incompatible with existing rules.

I look forward to coordinating and collaborating with the government and my colleagues in Congress to make the United States the best place for participation in the global Crypto Assets market.