A potential exemption order is currently being evaluated by the U.S. Securities and Exchange Commission (SEC), which would permit companies to issue and trade securities through the use of distributed ledger technology (DLT).
This initiative was disclosed by SEC Commissioner Hester Peirce during her address on May 8 at the agency’s International Institute for Securities Market Growth and Development.
SEC’s Draft Framework for Crypto Regulation
A conditional order aimed at reducing regulatory burdens for platforms dealing in tokenized securities is currently being explored by the SEC’s Crypto Task Force, according to statements made by Peirce.
The proposed measure would permit eligible firms to utilize distributed ledger technology (DLT) for the trading, clearing, and settlement of securities without being required to register under conventional SEC regulatory frameworks.
It was acknowledged by Peirce that existing regulations, including those established under the Regulation National Market System, present significant challenges for firms pursuing automated market-making models. These companies may be obligated to register as broker-dealers, clearing agencies, or exchanges, thereby subjecting them to extensive and expensive compliance procedures.
The existing obstacles, combined with the scarce presence of tokenized securities and suitable trading platforms, have led many firms to be deterred from participating in the sector.
It is believed by Peirce that a customized exemption could reduce these challenges and provide the SEC with an opportunity to develop revised regulations that are compatible with blockchain technologies.
Exemptive relief could help resolve this chicken-and-egg problem. It also would afford the SEC time to develop and adopt durable adaptations to its existing rules to accommodate DLT.
She said:
At the same time, the proposed exemption would be accompanied by necessary safeguards. It was emphasized by Peirce that any firm receiving such regulatory relief would be required to adhere to stringent standards aimed at maintaining transparency, financial accountability, and investor protection.
In addition, firms would be obligated to disclose operational mechanisms of their platforms, offer specifics regarding wallet and custody structures, and identify any risks unique to blockchain technology. These entities would be placed under the supervision of the SEC and required to sustain sufficient capital to support their operational responsibilities.
Peirce also noted that the agency is evaluating the implementation of measures aimed at preventing fraud and market manipulation. These would include compulsory disclosures to customers and the establishment of comprehensive monitoring procedures.
This sketch of a potential exemption is a work-in-progress. The goal is to formulate a commercially feasible approach that protects investors, including by ensuring that they have the benefit of cutting-edge technologies for trading, clearing, and settling securities. I welcome feedback from market participants and other interested parties.
She concluded:
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