SEC - The United States Securities and Exchange Commission

11/01/2024 | Press release | Archived content

Hobs and Hobbes: Wharton FinTech Lecture

Thank you for including me in the Wharton Fintech Series. It is an honor to be here. I must begin with my disclaimer: My views are my own as a Commissioner and not necessarily those of the SEC or my fellow Commissioners.

Before I address financial technology, I want to talk about a very basic technology-a potholder that I bought recently. Much to my surprise, it was accompanied by a document more fitting for a complex piece of technology: attached to the potholder was a twenty-plus-page disclosure pamphlet, prepared in accordance with European Union regulation. To be fair, the length of the document was primarily attributable to the many languages in which the disclosures were presented, but does an ordinary potholder even need a one-pager? A quick read suggests that using a potholder is not as straightforward as you might think. The disclosure explains that it is "designed to be used for protection against thermal risks (contact heat) associated with removing hot items off the hobs[1] of the types usually used in [a] domestic environment." It is only to be used in a "dry condition," "offer[s] palm protection only," must be "inspected prior to each use," "is not specifically designed to offer protection for . . . large quantities of molten metal," and should be kept "away from naked flame and fire." Oh, and "[t]he acceptable number of cleaning cycles" is five. I might take a walk on the wild side and see what happens after wash number six. If the disclosure hanging off the potholder is not enough, you can go to the manufacturer's EU Declaration of Conformity on the retailer's website for assurance that the product complies with European regulatory requirements.[2] That is a lot of regulation for a humble potholder.

A well-functioning government creates an environment within which people feel secure enough to invest in long-term creative endeavors. The seventeenth-century philosopher Thomas Hobbes, in a frequently quoted passage, described a government-free world as one in which:

there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continual fear, and danger of violent death; And the life of man, solitary, poor, nasty, brutish, and short.[3]

Hobbes is right that without government, people would suffer from instability, uncertainty, and fear. In such a void, economist Mancur Olson's roving bandits would come in and steal anything people built.[4] People would not be willing to take the risks and make the investments necessary to create new things that would enrich their lives and the lives of others.

While government can create an environment in which people are willing to take the risks necessary for innovation and investment, it also can create an environment that hamstrings innovation and investment. Government itself can produce the same conditions of fear in which "there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture . . . no commodious Building"[5] that Hobbes worried about in government's absence. To go back to Mancur Olson, a society that wants people to invest for the long-term has to respect the rule of law and individuals' "rights to free speech and to security for their property and contracts."[6] If taken too far, regulators' efforts to protect society can stifle the creativity, experimentation, risk-taking, and ingenuity that are human distinctives and form the basis for human flourishing. Excessive regulation, unclear regulation, or regulation that is enforced capriciously deprives people of the certainty that they will benefit from their creative efforts.

Some consumers might chuckle about the potholder disclaimer as they toss it in the trash, but, regulatory nerd that I am, I kept mine as a reminder of the importance of government getting the balance right. If government sets up too many regulatory hurdles, people stop trying to build new things. We will still have potholders, but the smaller, more innovative potholder makers-the ones without the lawyers to file the Declarations of Conformity-may not even try to compete, and so we will never see the potholder that you can send through ten wash cycles instead of five.

The SEC has a mixed record when it comes to getting the balance right in regulating the securities markets. Financial markets have brought tremendous benefits to people's lives. Keeping these markets dynamic requires an open door to new and disruptive ideas and new market participants. But our door is unpredictable: Sometimes it is open wide; at other times we keep that door open only a crack; and at still other times it is shut tight.

The mutual fund celebrated its centennial this year.[7] This investment product, which predates the SEC, was the fintech of its day-it democratized sound investing by giving retail investors efficient access to a professionally managed, diversified portfolio.[8] In 1940, Congress enacted a statute specifically designed for mutual funds, the Investment Company Act. Within this framework, the industry has competed to create a wide range of funds, which are often low-cost. One of the most consequential innovations under this act has come to be the exchange-traded fund, which, unlike the mutual fund, investors buy and sell on stock exchanges at market prices.[9] During the twenty-five years before the SEC adopted an ETF rule, fund sponsors needed a permission slip to launch ETFs.[10] Now that a rule is in place, the door is propped open and launching ETFs is easier, although ETFs outside of the rule's parameters still require an exemptive order.

The most exciting fintech innovation today still often centers on funds registered under the Investment Company Act, as sponsors develop products to meet investors' diverse needs and interests. Yet the Commission, wary of letting investors and their advisers weigh the merits of these products for their specific needs, inhibits innovation by taking an unduly long time to approve them or by imposing conditions not grounded in statute.[11] Product sponsors nonetheless have persisted, often at great expense, and the range of funds offered under the Investment Company Act is astonishing.[12]

Recent public attention has focused on a set of exchange-traded products ("ETPs") that give retail investors access to crypto assets. These products are not regulated under the Investment Company Act, but the exchanges seeking to list them must first obtain Commission approval. We routinely approve the listing of similar ETPs. However, before a 2023 court determination that its "unlike regulatory treatment of like products [was] unlawful,"[13] the Commission repeatedly refused to approve these product listings. Its hand forced, the Commission allowed exchanges to list spot bitcoin ETPs in January 2024 and spot ether ETPs in July 2024, albeit both with conditions that arguably prevent the products from functioning optimally.[14] Even with these limitations, since their introduction, these product categories have been extremely popular with the public.[15] As I said at the time we approved the spot bitcoin ETPs: "Our unreasonable approach to these applications has signaled that regulatory prejudice against new products and services can lead us to sidestep the law and unreasonably delay product launches."[16] Applications for other crypto-based ETPs already have begun to trickle in. We must consider each on its own facts and circumstances, but we should not bolt the door shut.

As illustrated by the ETP episode, the SEC generally has not had an open mind when it comes to crypto. Instead, the Commission has used its enforcement powers to make crypto innovation a perilous occupation. Registration has proved impossible for all but a handful of crypto companies. Rather than working with crypto market intermediaries and token issuers to facilitate registration, we have brought enforcement actions for failure to do the impossible: register with a Commission that has failed willfully to articulate a viable path to registration. Settled enforcement actions almost always entail severe harm to the crypto project,[17] stripping away key functionalities,[18] or forcing an end to doing all or most business in the United States.[19]

Focused on enforcement, the Commission has neither clarified its jurisdictional boundaries nor set out commercially feasible compliance pathways. It has allowed legal uncertainty to fester to the point that it is now "a major deterrent to operating in the digital assets space in the United States."[20] Crypto-asset skeptics and enthusiasts alike can understand that a regulatory environment that is characterized by instability, uncertainty, and fear inevitably renders entrepreneurial prospects "nasty, brutish, and short."[21] People will not build many new things if regulators pick and choose, based on their lay assessment of a proposed innovation, whether regulations will be predictable and evenly applied across new projects. Incentives to build crypto-native businesses diminish when the Commission arbitrarily shuts down or forces overseas successful companies that have operated publicly in good faith for years.

Remarkably, even in the current hostile regulatory environment, a lot of people are investing their time and money in the crypto sector. Why? The United States, with its history of welcoming innovators, has a large reserve of good will. In a country that ever aspires to improve with time, people are hopeful that bad policy approaches can change. This hope is not misplaced. Particularly as more people see potential for crypto technology to solve problems across society,[22] interest in improving how it is regulated is likely to grow.

The experimentation with and application of crypto technology-much of which Wall Street and its regulators dismissed-has produced tools that could be integrated into the traditional financial system. These tools include cryptographically secured ledgers distributed across a decentralized network of computers;[23] peer-to-peer value transfer that avoids the double-spend problem, cuts out intermediaries, and allows for cheap cross-border payments;[24] the ability to pair the transmission of value with communication of "expressive content";[25] smart contracts, which automate ex ante the execution of actions, such as payments, collateral provision, and regulatory requirements;[26] and the elimination of intermediaries.[27] My early crypto meetings were often with financial industry outsiders devising fresh solutions for addressing perennial industry problems. Future crypto meetings likely often will be with financial industry insiders looking to apply the solutions designed by those outsiders.[28]

To see decentralized finance complement traditional finance, regulators must stop blanching at the mere mention of crypto and must welcome experimentation by both crypto natives and traditional financial firms. A hostile, hard-to-navigate regulatory environment discourages traditional financial firms from trying things in the United States. Regulatory pressure to stay away from crypto and distributed ledger technology can come through a subtle supervisory signal or the imposition of costly barriers. The now-infamous Staff Accounting Bulletin 121 is an example of the SEC dissuading traditional financial firms from serving crypto clients.[29] That staff guidance document-which the Government Accountability Office determined had the effect of a rule[30]-made it prohibitively costly for most banks and broker-dealers to act as crypto custodians.[31] As another example of the Commission potentially pouring cold water on companies looking to serve crypto-interested clients, for the past four years, the SEC Division of Examinations has identified a variation of "registrants offering crypto-related services" as an exam priority.[32] Focusing on crypto, which has been plagued by fraud, is not inherently problematic. However, a firm that knows the price of crypto exposure is an examination may decide to find other things to do. The Commission could curb the fear of examination by empowering our examination staff to work with broker-dealers and investment advisers on best practices that are both commercially viable and consistent with the law. Knowledge from these exams could help the Commission think through how to tailor custody rules, disclosure requirements, and other regulations for crypto.

Asset tokenization-"the process of generating and recording a digital representation of traditional assets on a programmable platform"[33]-is one area in which experimentation has begun in earnest. Much of this experimentation is happening outside the United States because of the fear of an unpredictable and adverse response by American regulators.[34] The jurisdiction that brought that potholder disclosure to you has shown a greater openness to tokenization than we have.[35] Tokenization is attractive for a number of reasons: to name a handful, it allows different types of assets to travel on the same rails;[36] it streamlines trading and settlement processes;[37] it makes intraday transactions feasible;[38] it synchronizes multiple legs of a transaction;[39] it uses software code instead of intermediaries;[40] it generates reliable ownership and transfer records;[41] it automates performance of contractual terms;[42] and it facilitates compliance with regulatory requirements and limitations.[43] A recent industry report on tokenization styled them as "digital financial containers" that "move easier [than] their real financial companions" and "can be made 'smart' - the logical steps of a process can be automated by programming them into the code of a token."[44].

Tokenized representations of currencies-known as stablecoins-are the most common tokenized assets. As of May, the stablecoin market capitalization was estimated to be $160 billion.[45] Dollar stablecoins are particularly prominent in this market.[46] Not only crypto traders use stablecoins, but also other individuals use them to make cross-border payments, as a savings instrument, or even as a currency in emerging markets.[47] Yet regulatory uncertainty has throttled adoption of stablecoins in the United States.[48]

The SEC has allowed some small-scale experiments with a close relative of the stablecoin-tokenized money-market funds. Staff in the SEC's Division of Investment Management have been working with several fund sponsors on developing these funds.[49] So far, steps have not been revolutionary; the funds operate much as traditional money-market funds do. Adoption may speed up as people experiment with the utility and flexibility of tokenized representations of money market fund shares.[50] For example, even if tokenized money market funds are not used as a peer-to-peer payment mechanism, they could serve as an efficient way to post collateral or as a convenient savings vehicle for crypto-native firms.[51] The Commission should invite more experimentation with money market funds and other funds under the Investment Company Act.[52]

Private fund sponsors also are trying tokenization. Again, much of this activity is happening outside of the United States because the regulatory environment here is too uncertain. US regulators should be more open to a technology that could make these funds more accessible and cheaper for investors.

Market participants will run their crypto experiments in jurisdictions that get the regulatory balance right. Other jurisdictions accommodate and welcome experimentation in tokenization.[53] To create an environment of certainty for people experimenting with tokenization, the Commission could provide guidance about whether and how the securities laws are implicated. The need for guidance will grow as tokenization expands, but there are some areas where we could provide guidance right away. For instance, we could provide clarity to artists and musicians who want to tokenize their work without running afoul of the securities laws and to organizations that want to tokenize tickets or memberships. We also could identify features that might bring a token within the securities laws. For example, a tokenized asset that generates a yield for its owner may be a security, or some tokenized assets may be security-based swaps. Moreover, if any asset is tokenized and then fractionalized, the fractional units may be securities. We also can provide guidance about the application of the existing securities laws to tokenized stocks and bonds.

Tokenization will only succeed if firms can experiment and regulators are willing to accommodate the innovators. These experiments-by failing or succeeding or doing a little of both-will provide answers to thorny questions: Which assets are easiest to tokenize? Which tokenized assets would find willing buyers? How will tokenized assets integrate with the existing financial and legal system? How will tokenization affect existing markets and market participants?[54] How will tokenization affect systemic stability?[55] How will anti-money laundering and know-your-customer rules be implemented in connection with tokenization? Can the many technical, legal, and operational challenges be worked out, and how do the challenges and solutions differ across different types of assets?[56]

In addition to providing guidance where it is needed, one way to assuage the instability, uncertainty, and fear that chills innovation is an experimental space of the sort I proposed earlier this year. I proposed that firms, after making a notice filing with the SEC, could perform certain activities under a self-selected set of regulatory conditions and consistent with statutory fraud prohibitions and pre-specified activity ceilings.[57] The activity ceilings, which the Commission would set after notice-and-comment, would be high enough to encourage firms to participate and to generate useful data for regulators, but not so high as to raise concerns about investor or market harm. To improve their chances of obtaining more permanent relief, participants would have to select a set of regulatory conditions that they believe protect investors and markets. During the two-year duration of the experiment (which the staff could extend to three years), participants would work with the Commission staff to craft a no-action letter or exemptive order to enable the project to continue. The SEC's financial technology office (FinHub) would shepherd firms through the process. Its success would be measured in part by the degree to which firms participated in and graduated from the program. Of course, the SEC's antifraud rules would apply. The goal would be to allow people to operate in good faith within the SEC's jurisdiction without seeking the Commission's blessing or fearing a Commission enforcement action.

The flexibility afforded participants in designing their conditions makes the micro-innovation sandbox conducive to cross-border experimentation. I first proposed it as a potential companion to the United Kingdom's Digital Securities Sandbox.[58] A firm operating a pilot abroad could run the same experiment here on the same terms. Because most of the experimentation in tokenization is happening outside the United States, creating room for cross-border experimentation could be especially important for tokenization.[59] Piggybacking on these foreign experiments would help to open the SEC's door.

But pilot projects should not be limited to tokenization or other crypto and blockchain projects. To take us back to where we started, more experimentation would be welcome in the mutual fund and ETF space. As an example, the micro-innovation proposal would allow asset managers eager to explore new ways of communicating with investors to experiment with different methods. To date, the SEC has clung to paper disclosures with a tenacity that limits firms' ability to try more effective approaches of giving investors information in a way they can absorb and critically assess it. Firms are thinking about ways to employ new technologies, including the metaverse, to enhance investor understanding.[60] The SEC should be open to such disclosure innovations, and formalized pilots may give firms the security they need to demonstrate how useful such innovations could be for investors. I welcome criticisms, refinements, or alternative ways that experimentation can occur safely and legally in our securities markets.

An unclear regulatory framework creates unnecessary angst for innovators who do not know whether and when their work might fall into regulatory disfavor. It also harms the public by keeping from them the innovations they would otherwise enjoy. When you next use a potholder to pull a pan off the hob, as our potholder disclosure writers call the burner, remember that your life is richer because a lot of other people took risks to build the things you are using to prepare your dinner. Government can either aid their work by creating a legal environment rooted in respect for due process and individual rights, or undermine it by creating regulatory traps for the well-intentioned. Let us work together to create a balanced regulatory environment in which innovators, whether in cook-tech or fin-tech, have the certainty they need to make our lives better.

[1] A hob is the British word for burner. See, e.g., Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/hob (defining "hob" as "the top part or surface of a stove on which pans can be heated").

[2] See Technical documentation and EU declaration of conformity, Your Europe, https://europa.eu/youreurope/business/product-requirements/compliance/technical-documentation-conformity/index_en.htm#inline-nav-3 ("An EU declaration of conformity (DoC) is a mandatory document that you as a manufacturer or your authorised representative need to sign to declare that your products comply with the EU requirements.").

[3] Thomas Hobbes, Leviathan, Chapter XIII, available at https://www.gutenberg.org/files/3207/3207-0.txt.

[4] See Mancur Olson, Dictatorship, Democracy, and Development, 87 Am. Pol. Sci. Rev. 567, 568 (Sept. 1993), https://edisciplinas.usp.br/pluginfile.php/4276329/mod_resource/content/1/Olson_DictatorshipDemocracyandDevelopment.pdf ("In a world of roving banditry there is little or no incentive for anyone to produce or accumulate any- thing that may be stolen and, thus, little for bandits to steal.").

[5] Leviathan, Chapter XIII.

[6] See Mancur Olson, Dictatorship, Democracy, and Development, 87 Am. Pol. Sci. Rev. at 572 (Sept. 1993).

[7] See, e.g., Kevin Coroneos, A Century of Growth: 100 Years of the Mutual Fund, Inv. Co. Inst. (May 21, 2024), https://www.ici.org/viewpoints/24-view-century-mutual-fund.

[8] See Mutual Funds, U.S. Sec. & Exch. Comm'n, https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1; see also Russel Kinnel & Ivanna Hampton, Mutual Funds Turn 100. Can Investors Still Count on Them?, Morningstar (Aug. 23, 2024), https://www.morningstar.com/funds/mutual-funds-turn-100-can-investors-still-count-them-2.

[9] See Exchange Traded Funds (ETFs), U.S. Sec. & Exch. Comm'n, https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-2.

[10] For a discussion of these issues, see Comm'r Hester Peirce, A Quarter Century of Exchange-Traded Fun!, U.S. Sec. & Exch. Comm'n (May 21, 2021), https://www.sec.gov/newsroom/speeches-statements/speech-peirce-052119.

[11] Id. ("Our failure or prolonged delay in approving orders sometimes carries with it a tinge of merit regulation. Are we substituting our own judgment for that of the market? It seems that in at least some cases the Commission is overly concerned about the potential worthiness of the investment, which contributes, at the very least, to significant delays in the issuance of exemptive orders. It is extremely difficult for a fund sponsor to plan the launch of a new product with the great unknown of Commission timing lurking in the background.").

[12] As of the end of 2023, there were 12,596 registered funds, of which 8,750 were mutual funds, 3,201 were ETFs, and 645 were closed-end funds. See Registered Fund Statistics, Div. of Inv. Analytics Off. of the SEC at 4 (May 17, 2024), https://www.sec.gov/files/im-registered-fund-statistics-20240517.pdf.

[13] Grayscale Invs., LLC v. Sec. & Exch. Comm'n, 82 F. 4th 1239 at 1252 (D.C. Cir. Aug. 29, 2023).

[14] See Alexander Osipovich, Here's How the New Bitcoin ETFs Work, Jan. 11, 2024, https://www.wsj.com/finance/currencies/heres-how-the-new-bitcoin-etfs-will-work-9504ed25

("By December, all the asset managers seeking to launch bitcoin ETFs switched to a cash model, in which authorized participants don't need to touch bitcoin, regulatory filings show. One winner from that decision: tightly regulated Wall Street firms such as banks, which are now more likely to act as authorized participants for the new breed of bitcoin ETFs."); see also, Comment Letter from James J. Angel to the Commission, dated December 12, 2023 at 2, https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-310539-807962.pdf ("In-kind creation/redemption eliminates trading costs and execution risks for the ETF. With cash creation/redemption, the ETF (and thus the shareholders) suffers the transaction costs of buying and selling bitcoin."); David Krause, Unlocking Ethereum's Potential: The Rise of Spot ETFs in Cryptocurrency Investment (June 06, 2024), http://dx.doi.org/10.2139/ssrn.4856380. ("As a result, the SEC approved spot Ethereum ETF filings only after prohibiting staking within these ETFs. Since staking ether can yield annual rewards of approximately 2-4%, direct Ether holders who stake their cryptocurrency could earn better returns than spot Ethereum ETF investors, who do not benefit from staking.").

[15] See Jack Pitcher, Bitcoin Funds Pull In Money at Record Pace: BlackRock's bitcoin ETF is fastest ever to reach $10 billion in assets (Mar. 5, 2024), https://www.wsj.com/finance/currencies/bitcoin-etf-investing-blackrock-715f1bd9 ("Investors have piled into the funds at a historic clip since their Jan. 11 launch, with total assets in the 10 U.S. spot bitcoin funds on the market swelling to nearly $50 billion."); Cryptocurrency ETP Weekly Inflows Total $936.8 Million, Bloomberg Law (Oct. 28, 2024) https://news.bloomberglaw.com/crypto/cryptocurrency-etp-weekly-inflows-total-936-8-million, ("Investors added $3.51 billion to crypto-focused exchange-traded products during the past month and $26.6 billion in the past year, according to data compiled by Bloomberg. Crypto ETP assets totaled $93.3 billion.").

[16] Comm'r Hester Peirce, Out, Damned Spot! Out, I Say!: Statement on Omnibus Approval Order for List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units, U.S. Sec. & Exch. Comm'n (Jan. 10, 2024), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-spot-bitcoin-011023.

[17] See, e.g., Comm'r Hester Peirce, Overdue: Statement of Dissent on LBRY, U.S. Sec. & Exch. Comm'n (Oct. 27, 2023), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-lbry-102723 (Instead of appealing the federal district court's decision that the sale of LBRY tokens was an unregistered securities offering, "the company will shut down and its assets will be placed in receivership and used to satisfy its debts, including the civil money penalty owed to the Commission."); Comm'r Hester Peirce & Comm'r Mark Uyeda, Collecting Enforcement Actions: Statement on Stoner Cats 2, LLC, U.S. Sec. & Exch. Comm'n (Sept. 13, 2023), https://www.sec.gov/newsroom/speeches-statements/peirce-uyeda-statement-stonercats-091323 (questioning the wisdom of shutting down an NFT project where NFT purchasers received a "unique still image of one of the characters in the Stoner Cats [TV] series and exclusive access to the series and an online community, as well as access to unspecified, future entertainment content"); Press Release, SEC Charges Entities Operating Crypto Asset Trading Platform Mango Markets for Unregistered Offers and Sales of the Platform's "MNGO" Governance Tokens, U.S. Sec. & Exch. Comm'n (Sept. 27 2024), https://www.sec.gov/newsroom/press-releases/2024-154 (conditioning settlement on requiring the associated decentralized autonomous organization ("DAO") to destroy its tokens, request that the tokens be removed from trading platforms, and refrain from soliciting any other trading platform).

[18] See, e.g., Press Release, Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges, U.S. Sec. & Exch. Comm'n (Feb. 9, 2023) (requiring Kraken to immediately stop offering crypto asset staking services or staking programs).

[19] See, e.g., Press Release, eToro, U.S. Sec. & Exch. Comm'n (Sept. 12, 2024), https://www.sec.gov/newsroom/press-releases/2024-125. ("[T]he only crypto assets that U.S. customers can trade on the company's platform will be Bitcoin, Bitcoin Cash, and Ether."); Shapeshift AG, Release No. 99676, U.S. Sec. & Exch. Comm'n (March 5, 2024), https://www.sec.gov/files/litigation/admin/2024/34-99676.pdf; Justin Wise, Ex-Shearman Lawyer Closing Crypto Exchange Sees Rosy Days Ahead, Bloomberg Law (Nov. 27, 2023) https://news.bloomberglaw.com/business-and-practice/ex-shearman-lawyer-closing-crypto-exchange-sees-rosy-days-ahead ("Bittrex Global announced Nov. 20 that it's winding down, a decision that comes six months after its US arm, Bittrex Inc., said it was closing because of the regulatory challenges.") (For more information on the SEC's enforcement action against Bittrex, see SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency, U.S. Sec. & Exch. Comm'n (Apr. 17, 2023), https://www.sec.gov/newsroom/press-releases/2023-78.).

[20] Jennifer J. Schulp, Dazed and Confused: Breaking Down the SEC's Politicized Approach to Digital Assets, Cato Institute (Sept. 17, 2024), https://www.cato.org/testimony/dazed-confused-breaking-down-secs-politicized-approach-digital-assets#secs-jurisdiction-unclear.

[21] Leviathan, Chapter XIII.

[22] See, e.g., TheValueProp https://thevalueprop.io/database (last accessed, Nov. 4, 2024), (compiling crypto projects). Citation to this list is not an endorsement of any of the projects listed, but the list gives an idea of the types of things people are doing with or in crypto.

[23] See, e.g., Peter Van Valkenburgh, What's a blockchain, anyway?, Coin Ctr. (April 15, 2017), https://www.coincenter.org/education/blockchain-101/whats-a-blockchain/.

[24] See, e.g., How does Blockchain make cross-border payments better?, Crypto Couns. for Innovation (July 26, 2023), https://cryptoforinnovation.org/what-are-cross-border-payments-and-how-do-they-work/ ("Removal of intermediaries and better scaling solutions have allowed for transaction costs [for cross-border payments] to be drastically reduced on blockchain transfers.").

[25] See Ross Stevens, Bitcoin's Protection Under the First Amendment, NYDIG 3-4 (Sept. 25, 2024), https://cdn.prod.website-files.com/614e11536f66309636c98688/66f41c9c55e13361ed5d3dce_BitcoinProtectionFirstAmendment-Sept-25.pdf ("Bitcoin is also a medium for communicating expressive content. From its inception, bitcoin has been used to permanently inscribe a wide range of messages on the blockchain, including political, religious, and artistic content. As noted, the first block recorded on bitcoin (often called the 'genesis block') inscribed a British newspaper headline: 'The Times 03/Jan/2009 Chancellor on brink of second bailout for banks'-a commentary on fiscal policy during the Great Recession").

[26] See, e.g., Nick Szabo, Smart Contracts (1994), https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart.contracts.html ("A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.") (reference omitted); Dan Puterbaugh, The Future of Contracts-Automation, Blockchain, and Smart Contracts, The Australian Corporate Lawyer (Autumn 2017) at 25, https://www.acc.com/sites/default/files/resources/upload/The%20future%20of%20contracts%20-%20automation%2C%20blockchain%20and%20smart%20contracts.pdf ("The smart contract software will interact with other enterprise systems to conduct or enforce transactions without human involvement."); Jenny Cieplak & Simon Leefatt, "Smart Contracts": A Smart Way to Automate Performance, 1 Geo L. Tech. Rev. 414 (Apr. 2017), https://georgetownlawtechreview.org/smart-contracts-a-smart-way-to-automate-performance/GLTR-04-2017/ ("Instead, a smart contract could be used to encode the terms of the swap, important information from a rates provider, and automate payments from the parties' accounts.").

[27] See, e.g., Carla Reyes, Law's Detrimental Reliance on Intermediaries, SMU Dedman School of Law Legal Studies Research Paper No. 630 (Jan. 12, 2024), https://ssrn.com/abstract=4692755 ("Since 2009, blockchain technology has promised to disrupt centralized financial intermediaries-institutions acting as middlemen between parties to facilitate financial transactions. As the blockchain technology industry grows, such disruptions become more and more apparent. . . . [C]ycles of boom and bust in the cryptocurrency and blockchain industries reveal deep flaws in regulatory structures that depend on the compliance of centralized intermediaries.").

[28] See, e.g., Gov. Christopher J. Waller, Centralized and Decentralized Finance: Substitutes or Compliments?, Fed. Rsrv. (Oct. 18, 2024), https://www.federalreserve.gov/newsevents/speech/waller20241018a.htm ("While there are certain services emerging through defi that cannot be provided by centralized finance, the technological innovations stemming from defi are largely complementary to centralized finance. They have the potential to improve centralized finance, thereby increasing the significant value that financial intermediaries and centralized financial markets deliver."); Frank LaSalla, Why standards and controls are essential to the future of digital financial markets, World Econ. F. (Jan. 16, 2024) https://www.weforum.org/stories/2024/01/digital-financial-markets-developing-standards-controls-davos24/ ("[N]early 40% of financial market participants are using some form of DLT or digital assets.").

[29] SEC Staff Accounting Bulletin No. 121, U.S. Sec. & Exch. Comm'n (March 31, 2022), https://www.sec.gov/regulation/staff-interpretations/accounting-bulletins/old/staff-accounting-bulletin-121.

[30] See Applicability of the Congressional Review Act to Staff Accounting Bulletin 121, B-334540 U.S. GAO (Oct. 31 2023), https://www.gao.gov/assets/870/862501.pdf.

[31] See Zach Wong, A comprehensive explanation of SAB 121 and how it prevents safe crypto custody (Aug. 7, 2023), https://zachrwong.info/a-comprehensive-explanation-of-sab-121-and-how-it-prevents-safe-crypto-custody/#sec3 ("For banks . . . SAB 121 has a significant constraining effect because they face regulatory obligations that are based on their balance sheets. By requiring cryptoassets held in custody to be recorded on their balance sheets, SAB 121 increases the amount of regulatory capital that banks must hold. . . . The effect of the interaction between SAB 121's special prescribed accounting treatment and bank capital rules is that it's financially unviable for any publicly reporting bank to provide cryptoasset custody."); Letter from SIFMA et. al, Re: Staff Accounting Bulletin No. 121 Issued by the Staff of the Office of the Chief Accountant of the Securities and Exchange Commission (Jun. 23, 2022), https://www.sifma.org/wp-content/uploads/2022/06/ABA-BPI-and-SIFMA-SAB-121-Letter-6.23.22.pdf ("Applying the on-balance sheet recognition requirements of SAB 121 (without modification or clarification) to banking organizations . . . would result in prudential knock-on effects that would make it economically impractical for banking organizations to provide crypto-asset safeguarding activities.").

[32] Examination Priorities, SEC Div. of Examinations at 14 (Fiscal Year 2025), https://www.sec.gov/files/2025-exam-priorities.pdf; see also Examination Priorities, SEC Division of Examinations at 20 (Fiscal Year 2024), https://www.sec.gov/files/2024-exam-priorities.pdf ("Given the continued volatility of, and activity around, the crypto asset markets, the Division will continue to monitor and, when appropriate, conduct examinations of registrants"); Examination Priorities, SEC Division of Examinations at 15 (Fiscal Year 2023), https://www.sec.gov/files/2023-exam-priorities.pdf ("Given the disruptions caused by recent financial distress among crypto asset market participants, the Division will continue to monitor and, when appropriate, conduct examinations of potentially impacted or affected registrants."); Examination Priorities, SEC Division of Examinations at 16 (Fiscal Year 2022), https://www.sec.gov/files/2022-exam-priorities.pdf ("Examinations of market participants engaged with crypto-assets will continue to review the custody arrangements for such assets and will assess the offer, sale, recommendation, advice, and trading of crypto-assets. . . . In addition, the Division will conduct examinations of mutual funds and ETFs offering exposure to crypto-assets . . . .").

[33] Bank for International Settlements, Tokenization in the context of money and other assets: concepts and implications for central banks: Report to the G20 at 6 (Oct. 2024), https://www.bis.org/cpmi/publ/d225.pdf ("BIS Report").

[34] See, e.g., Mapping the Leading Jurisdictions for Tokenization of Assets Today, Superstate (May 21, 2024), https://superstate.co/blog/mapping-leading-jurisdictions-for-asset-tokenization-today (arguing that while the U.S. has had successful tokenization efforts, regulatory challenges "continue to mount . . . ." and that "[r]egulatory clarity is essential for incumbents to interface with tokenization confidently," and noting examples of tokenization outside the United States).

[35] See, e.g., Fintechnews Switzerland, EU "Tokenise Europe 2025" Initiative Aims to Boosts Asset Tokenization (Feb. 7, 2023), https://fintechnews.ch/blockchain_bitcoin/eu-tokenise-europe-2025-initiative-aims-to-boosts-asset-tokenization/58183/#:~:text=Tokenise%20Europe%202025 (discussing Tokenise Europe 2025 initiative from the European Commission and the German Banking Association that aims to "tap into the potential of asset tokenization and distributed ledger technology (DLT) to strengthen the bloc's competitiveness and build long-term economic resilience" and has support from "more than 20 member organizations from different countries and industries including banking trade groups and paytech firms . . . .").

[36] Organisation for Economic Co-operation and Development, The Tokenisation of Assets and Potential Implications for Financial Markets, OECD

Blockchain Policy Series at 27 (2020), https://www.oecd-ilibrary.org/docserver/83493d34-en.pdf?expires=1730751817&id=id&accname=guest&checksum=A1B73FF27708CE69DB74F68A93976755 ("OECD Report") ("In a scenario of proliferation of asset tokenisation, the number and diversity of assets that would trade in public markets and gain liquidity could increase, given that in theory, any asset can be tokenised. DLT infrastructure providers already allow for the white-labelled tokenisation of different types of tangible and intangible assets using the same infrastructure and protocols . . . .").

[37] See, e.g., BIS Report at 11 ("Tokenisation initiatives launched by the private and public sectors largely aim to address current frictions by attempting to streamline the various aspects of financial market transactions or, in some cases, the entire end-to-end transaction."); Andras Gal & Chris Brown, Asset tokenization: the next revolution in securities?, ION (Apr. 24 2024) ("By digitizing assets and using blockchain technology for transactions, it streamlines processes like issuance, trading, and settlement, whilst cutting expenses and reducing the need for paperwork."), https://iongroup.com/blog/markets/asset-tokenization-the-next-revolution-in-securities/; David Chan et al., Tokenized Funds, BCG Whitepaper at 4, 10 (Oct. 2024), https://web-assets.bcg.com/81/71/6ff0849641a58706581b5a77113f/tokenized-funds-the-third-revolution-in-asset-management-decoded.pdf (estimating that if all global mutual funds were tokenized, mutual fund investors would save $100 billion annually through instant settlement, lower transaction fees, and new opportunities for interest income).

[38] See, e.g., Elliot Hentov & Vladimir Gorshkov, Asset Tokenization in Capital Markets, State Street Global Advisors at 14 (Oct. 2024), https://www.ssga.com/library-content/assets/pdf/global/digital-assets/2024/asset-tokenization-in-capital-markets.pdf ("For example, [tokenization] makes intra-day repos and swaps possible, such that participants can lend/borrow funds just for a few hours, if not for a few minutes.").

[39] Id. at 13 (noting that distributed ledger technology allows for the "ability to merge the cash and securities legs of a transaction - on-chain bonds can settle instantaneously (T+0).").

[40] See, e.g., Dante Disparte & Gordon Liao, 'Code as Law': The tokenization of financial assets and the paradox of programmability, World Econ. F. (Oct. 28, 2024), https://www.weforum.org/stories/2024/10/tokenization-financial-assets-crypto-programmable-paradox/ ("Programmability in the context of tokenized assets refers to the ability to encode specific rules and automated actions directly into the digital tokens themselves. This means that transactions and processes involving these assets can be executed automatically based on pre-defined conditions, much like the 'if this, then that' logic used in computer programming. This feature sets tokenization apart from simply representing assets digitally, as it introduces a layer of automation and removes the need for manual intervention or traditional intermediaries.").

[41] See, e.g., Jagjit Singh, How blockchain technology revolutionizes digital ownership?, Cointelegraph Mar. 12, 2023, https://cointelegraph.com/explained/how-blockchain-technology-revolutionizes-digital-ownership ("Digital technologies like blockchain, smart contracts and digital signatures generate and manage a record of digital assets and when they are transferred. Blockchain technology is beneficial for digital ownership because it provides a secure and decentralized ledger of transactions that can be used to record ownership and transfer of Web3 digital assets.").

[42] See What is blockchain?, McKinsey & Co. (July 25, 2024), https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-blockchain (noting that blockchain can enable "automated and secure contract fulfilment . . . .").

[43] See, e.g., Patrick Laurent et al., The Tokenization of Assets is Disrupting the Financial Industry. Are You Ready? Inside Magazine, Issue 2, at 2 (Oct. 2018), https://www.wyoleg.gov/InterimCommittee/2019/S3-20190506TokenizationArticle.pdf

("A security token is capable of having the token holder's rights and legal responsibilities embedded directly onto the token, along with an immutable record of ownership.").

[44] Elliot Hentov and Vladimir Gorshkov, Asset Tokenization in Capital Markets: A Primer, State Street Global Advisors at 5 (Oct. 2024), https://www.ssga.com/library-content/assets/pdf/global/digital-assets/2024/asset-tokenization-in-capital-markets.pdf.

[45] See, e.g., Nic Carter et al., Stablecoins: The Emerging Market Story at 5 (Sept. 2024), https://castleisland.vc/wp-content/uploads/2024/09/stablecoins_the_emerging_market_story_091224.pdf ("There are over $160 billion worth of stablecoins in circulation today, up from single digit billions as recently as 2020. Over 20 million addresses make a stablecoin transaction on public blockchains every month. And in the first half of 2024, stablecoins settled (according to our adjusted estimates) over $2.6 trillion dollars worth of value."); Paul Tierno, Tokenized Assets, Congressional Research Service at 1 (May 20, 2024), https://crsreports.congress.gov/product/pdf/IF/IF12670.

[46] See Gov. Christopher J. Waller, The Dollar's International Role, Fed. Rsrv (Feb. 15, 2024), https://www.federalreserve.gov/newsevents/speech/waller20240215a.htm ("About 99 percent of stablecoin market capitalization is linked to the U.S. dollar, meaning that crypto-assets are de facto traded in U.S. dollars.").

[47] For a discussion of how stablecoins are being used, see generally Nic Carter et al., Stablecoins: The Emerging Market Story (Sept. 2024), https://castleisland.vc/wp-content/uploads/2024/09/stablecoins_the_emerging_market_story_091224.pdf.

[48] See, e.g., Chainalysis, North America: Institutional Momentum and U.S. Bitcoin ETPs Propel Crypto Further Into the Mainstream (Oct. 17, 2024), https://www.chainalysis.com/blog/north-america-crypto-adoption-2024/ ("[R]egulatory uncertainty in the U.S. is threatening the country's leadership in the stablecoin space. [USDC issue] Circle pointed out that the absence of clear U.S. regulations has allowed other financial centers - such as the European Union (EU), the United Arab Emirates (UAE), Singapore, and Hong Kong - to attract stablecoin projects with more favorable regulatory frameworks.").

[50] See, e.g., Anutosh Banerjee et. al., From ripples to waves: The transformational power of tokenizing assets, McKinsey & Company, (Jun. 20, 2024), https://www.mckinsey.com/industries/financial-services/our-insights/from-ripples-to-waves-the-transformational-power-of-tokenizing-assets (discussing potential drivers of future demand for tokenized money market and other types of funds, "including instant 24/7 settlement and the ability to use tokenized funds as payment vehicles").

[51] See e.g., BCG Whitepaper at 13 ("[B]orrowing against [mutual] funds [which include money market funds] is complicated by operational complexities and collateralization periods of three to five business days. With tokenized funds, the process can be streamlined, reducing collateralization times to less than one day.").

[52] Several non-money market funds have tokenized their shares, and existing rules do not prevent other open-end funds from doing so. See, e.g., the Arca U.S. Treasury Fund at https://www.sec.gov/Archives/edgar/data/1758583/000158064224002458/arca_424b3.htm and the WisdomTree Digital Funds at https://www.sec.gov/Archives/edgar/data/1859001/000121465924018251/wtd1031241497.htm.

[53] See Mapping the Leading Jurisdictions for Tokenization of Assets Today ("Europe is emerging as a major tokenization contender. Germany's finalized digital asset laws and the EU's MiCA regulation provide significant regulatory clarity, while Switzerland's crypto-friendly laws have enabled cities like Zurich and Basel to issue tokenized bonds. City-states Hong Kong and Singapore lead the APAC region in tokenization experimentation and market share . . . The [UK] jurisdiction's Financial Services and Markets Act (FSMA) regulatory sandbox allows for broad participation by multilateral trading facilities and central securities depositories compared to its European Union counterpart.").

[54] See, e.g., Michael Junho Lee, Antoine Martin, Robert M. Townsend, Optimal Design of Tokenized Markets, Federal Reserve Bank of New York Staff Report No. 121 at 34 (Sept. 2024), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1121.pdf?sc_lang=en (acknowledging that "tokenization . . . can eliminate a limited commitment problem, by committing settlement actions at the time that contracts are forged," but finding that ". [c]ollapsing trade and settlement . . . comes at a cost" because it "necessitates that traders reveal[] more private information relative to the traditional environment" which "creates a hold-up problem and may [destroy] an intermediation chain necessary for efficient outcomes").

[55] See, e.g., Financial Stability Board, The Financial Stability Implications of Tokenisation at 1 (Oct. 22, 2024), https://www.fsb.org/uploads/P221024-2.pdf ("This report identifies several financial stability vulnerabilities associated with DLT-based tokenisation, which relate to liquidity and maturity mismatch; leverage; asset price and quality; interconnectedness; and operational fragilities.").

[56] See, e.g., BIS Report at 17-20 (Oct. 2024) (describing challenges including establishing the legal status of such transactions in all relevant jurisdictions, questions about settlement finality, limits on redeemability of the underlying asset, increased liquidity costs due to the need to prefund instant settlements, difficulties in establishing effective governance mechanisms, cyber and other operational risks, custody risk, and risks around integration with the traditional financial system and interoperability of different tokenization platforms); Tokenizing Securities for Decentralized Finance Applications, Owl Explains Podcast Ep. 39 (Oct. 9, 2024), https://www.owlexplains.com/en/podcast/ep-39-tokenizing-securities-for-decentralized-finance-applications/ (presenting an interesting discussion with Professor Andreas Park about the challenges and opportunities of securities tokenization); OECD Report (discussing tokenization opportunities and challenges).

[57] See Comm'r Hester Peirce, Comment on Digital Securities Sandbox Joint Bank of England and Financial Conduct Authority Consultation Paper, U.S. Sec. & Exch. Comm'n (May 29, 2024) https://www.sec.gov/newsroom/speeches-statements/peirce-boe-fca-comment-05302024.

[58] See generally Digital Securities Sandbox, Bank of England, https://www.bankofengland.co.uk/financial-stability/digital-securities-sandbox (last updated, Nov. 1, 2024).

[59] See, e.g., The Tokenization of Assets is Disrupting the Financial Industry. Are You Ready?, Inside Magazine at 3, https://www.wyoleg.gov/InterimCommittee/2019/S3-20190506TokenizationArticle.pdf ("[M]any of the advantages of tokenization are undermined if regulations prevent the free and international exchange of security tokens.").

[60] See, e.g., The Metaverse and the Implications for the Securities Industry, FINRA at 4 (Oct. 24, 2024), https://www.finra.org/sites/default/files/2024-10/2024-the-metaverse-and-the-implications-for-the-securities-industry.pdf ("Enhanced visualizations may facilitate investors' understanding of concepts such as volatility, diversification, bull and bear markets, and the prospective growth of investments. For example, market participants noted that 3D visualization techniques could potentially be used to show investment gains as a towering building and a loss as a chasm in the ground to present information in an easier to understand format for investors.").