SEC’s Proposed Rule Regulation Crypto Assets

Summary

SIFMA ¹ and SIFMA AMG ² provided comments to the U.S. Securities and Exchange Commission (SEC) to highlight our recommendations and questions in response to the SEC’s Proposed Rule “Regulation Crypto Assets.”³ We provide below both process and substantive recommendations as the Commission continues its important work in this area.

Excerpt

The Securities Industry and Financial Markets Association1 and its Asset Management Group2 (collectively, “SIFMA”) appreciate the opportunity to submit this letter to highlight our recommendations and questions in response to the SEC’s Proposed Rule “Regulation Crypto Assets.”3 We provide below both process and substantive recommendations as the Commission continues its important work in this area.

SIFMA appreciates the Commission’s work to integrate assets associated with fundraising for on-chain platform development within securities regulatory frameworks. As the Commission and other regulators work to incorporate the taxonomy of digital assets broadly – digital securities, digital cash, non-security crypto, and ancillary products – within the appropriate regulatory regimes, the Proposal is a valuable component to these efforts. We also are encouraged to see the Commission approaching this element of regulatory modernization through notice-and-comment rulemaking, which will result in the durable, robust rulemaking necessary for the creation of a new product category.

In our response, we would like to outline a number of open questions which the Proposal does not address or leaves uncertain, yet which are essential if covered investment contracts are to be adopted by market participants. These include clarifying the “delinking” process and its implications for regulated institutions, addressing secondary trading, taxonomy and definitions, and investor protection. We also identify a number of concrete recommendations which will facilitate greater regulated entity participation in the market for covered investment contracts.

Executive Summary

• SIFMA is encouraged to see the SEC approaching the regulation of this novel product category through notice-and-comment rulemaking. However, the covered investment contract model created by the Proposal will need to be integrated more broadly within securities regulatory frameworks. The final rule should be accompanied by additional implementation detail and coordinated guidance from the Division of Trading and Markets, developed in consultation with FINRA and other self-regulatory organizations, SIPC, and designated examining authorities, and in coordination with the CFTC and the federal banking agencies.
• The process under which covered investment contracts would become “delinked” from associated crypto assets and transition out of the scope of SEC oversight creates substantial uncertainty for regulated entities working with these assets, including operational and market challenges, definitional ambiguities, and regulatory gaps. SIFMA recommends that the Commission address this through an authoritative, machine-readable source of asset status, an intermediary reliance safe harbor, and an implementation delay before delinking takes effect for intermediaries.