Navigating the Future of Crypto Regulation in the United States l KBW2024

[Music] good morning everyone my name is Jin Kong I'm the global head of legal at hush and today I'm incredibly honored and privileged to introduce you to SEC commissioner Mark UA um commissioner UA first of all welcome to Korea um I know that you're ation precedes you but um could you be kind enough to introduce yourself to the public and perhaps your first impression while in South Korea right well thank you Jen uh it's a pleasure to be back here in Korea this is actually my fourth time uh here uh in my life and uh it is just I think one of the a very terrific place to to come visit uh I'm very excited to be here at Korea blockchain week to see and hear from a lot of the participants in this uh evolving and Innovative area uh so just a a little bit about me I am one of five Commissioners who uh comprise the US Securities and Exchange Commission uh we are led by a chairman uh Gary Gensler who sets our our regulatory agenda um I have a fixed term which will uh goes through June of 2028 uh so because there are five of us uh the views I express today represent my own views as an individual commissioner and not necessarily the views of the full commission or any of the other commissioners great um so let's start with the basics um how does the SEC have mandate over digital assets and what are some of the um regulatory approach um in uh in digital Assets in general please so let's uh be clear what we have at the SEC is jurisdiction over Securities and digital assets may or may not be a security and it depends on whether it falls within the statutory definition now for those who have been at all involved in in thinking about whether or not you want to be involved in digital Assets in the United States you probably hear something called hoe howi is thrown out a lot and and ho is a reference uh to a case from many decades ago uh called uh SCC versus WJ howy and Company and within our jurisdiction we have fairly common traditional uh devices like Securities or like common stock bonds um but we also have some called the investment contract and the Supreme Court in this decision uh the US Supreme Court said uh you are a security if as an investment contract if it involves an investment of money uh in a common Enterprise with the expectation of profits from the efforts of others now the way uh what this means is if you satisfy that definition then you're going to fall within our jurisdiction and if you don't uh then you might fall under the regulatory Ambit of some other regulator but not the SEC great in the beginning you mentioned that there are five Commissioners um so could you elaborate on some of the internal Dynamics between the the Commissioners and how does the decision-making process happen in General within the SEC I should also point out that we have a staff of over 4,900 employees uh at 11 Regional Offices uh throughout the United States so what that means is a significant amount of what we do is carried out through our staff and then ultimately they come up to the five member commission for approval now what's important to note is that uh except for the very small number of individuals who report directly to me on my personal staff or to one of the other Commissioners on their personal staffs everyone else uh of those 4900 report to our chairman uh Gary Gensler uh and that's something that that by law he is uh in effect the president CEO uh of the SEC uh which means uh he decides what the commission as a five member body votes upon um he decides and has oversight over our enforcement division so what cases they bring which ultimately come up to the commission uh at the very end of the process to approve but all of that uh Falls uh strictly within the responsibilities of uh the SEC chairman so he or she uh as a case may be who who sits as as the chairman has an extremely uh enormous amount of of regulatory Power by acting through the staff uh for actions that don't require the full five member uh commission approval great so I would like to go over some of the public statements that you have made especially this year so I would like to go back to January uh when Bitcoin ETF was approved and it was a historic moment for the industry um however there were some suggestions that you did not 100% agree with the rationale for approving it could you elaborate on your logic and tell us a little bit more about it yeah so prior to uh this year we had already approved Bitcoin Futures exchange traded products uh and now we had that followed those those approvals spot Bitcoin uh exchange traded products that were coming up uh and the SEC had previously said no uh we are not going to approve those for listing and uh there was one particular uh party that was subject to denial they said uh they exercise the legal rights that when we at the SEC make a decision they can have that reviewed by our Judicial System our courts and so they appealed to the US court of appeals for the District of Columbia circuit uh and uh the district or the the court of appeals said uh we disagree with the sec's reasoning for the denial and they sent it back to the SEC uh and so that's when it came back up before before uh us uh as sitting as the five members to decide well what were we going to do uh now that we had this decision from from the DC circuit uh you know ultimately I agreed with the outcome uh that uh the spot Bitcoin uh etps should be treated uh no differently than the the the Bitcoin Futures etps especially when one of the concerns that that we always have is whether or not there can be manipulation of the under line prices and uh when one looks not only in in the Bitcoin world but uh whether it's treasuries whether it is Commodities there is a strong very high correlation between price movements in the Futures uh the Futures area versus the spot area now you know why is this important is well we have another fellow regulator called the commod Futures Trading commission uh and they have regulatory oversight over the futures world and so that is one of the factors that we think about is is their Market surveillance uh I think in this case it's the CME that was doing it and they're going to be subject to to cftc oversight so we had a reasoning which uh you for the sake of time I I'll say I found it a bit convoluted there's a lot of detail uh in there uh but ultimately I agreed with the outcome you know one of the things uh that though that that did trouble me there was the the lack of uh the ability to do an in-kind uh Redemption uh in purchase mechanism which is what we have for all of the other commodity uh etps out there um and so uh you know the good news is we continue to evolve uh as a as an organization with our rules and our policymaking and so I hope at some point in the future we go back and revisit that aspect uh and and rethink whether or not uh we can allow for that in-kind purchase and Redemption feature uh for these types of etps and from the industry perspective I think that kind of consistent principled approach is very much appreciated as we seek further Clarity within the industry going forward okay um so now moving slightly forward into your statement in July um it was a very unrelated statement but there was a tiny little footnote in which you argue that the current S1 disclosure regime may need to customized for digital assets so this is a little bit of a loaded question so feel free to take as much time as you need to answer it and maybe give a little bit more background for the audience um could you elaborate what you mean by um customizing that for digital assets so we'll goes back to First principles about why we even have a Securities Law one of the reasons is to provide the necessary information important information that whoever buys a security and you know let me be clear this this is once you're in that bucket that you are a security and and that comes after you've done your how analysis and maybe you have concluded uh that this is ought to be treated as a security within within uh the federal Securities laws so the law says you need to come in and either file a registration statement to register the offer or sale of that security or find an exemption uh now one of the important uh things uh in our laws is if you offer this generally to the public um using uh what we call General solicitation you need to have it registered uh with the SEC as as a general rule um assuming that they're not uh accredited investors um so throughout the course of how the SEC is historically operated we want to make sure that what you put in that registration is relevant but nonetheless we have specific requirements in there for other products and my my statement came in the context of something called uh registered index linked annuities which I will assume that none of you are that familiar with because this doesn't quite look like the annuity purchasing crowd out there this is an insurance product and it might appeal to certain types of purchasers but when we have our general registration statement because we don't have a specialized registration statement available for it we have this General set of requirements tell us about the company tell us about uh its financial statements tell us about uh risks of the company and and uh managements discussion analysis now a lot of that is not particularly relevant to a purchaser of an annuity what they want to know is what is this annuity do what are its features what are its costs those are all things that are not part of our general registration form so what do we at the uh through our acting through our staff do is we have discussions with the sponsor of that annuity product and they make a customized set of disclosures that are relevant and important to a purchaser of that product well why shouldn't we be doing the same thing with crypto digital assets that are securities um we have the flexibility to do that um and that was in part expressing my frustration that we've not done more of that to accommodate uh sponsors of these types of digital assets that they have included our Securities what we cannot do is create a catch22 situation such as to say well thank you for concluding it to security you need to register with us but we now have you now have to register and provide disclosures uh that are not relevant uh and in some cases you may not even be able to uh effectively provide like Gap financial statements thank you for that note um when I think about new emerging technology I think of three phases in terms of Le legal strategies in dealing with um technological adoption first is avoidance strategy and that was probably best exampled by um slet um and there is the compliance strategy which in which you try to comply to the best of your abilities and third you have transformative strategy and perhaps this is best exemplified by eu's um Mika and given that we've been discussing some of the disclosure principles also enshrined in S1 um have you had a chance to consider some of the white paper disclosures uh requirements in EU and how would you evaluate and assess its framework well not only the EU but certainly at from my perspective it's we should be looking at a lot of jurisdictions around the world uh as a think about well how should we be handling uh digital assets um in some ways uh the US uh I think we've had uh a more challenging time to establish a regulatory policy uh in part we've got multiple Regulators who are responsible it's not just us and the cftc we also have certain aspects might be over seen by U banking Regulators including the state banking Regulators um so as we try to navigate what we should be doing on a policy perspective one important uh activity that we should be doing is well looking what has been going on with the rest of the world including in the EU with respect M but also what's going on here in Korea what's going on in Japan what is Singapore doing uh on this uh to a certain extent there are almost um natural experiments so to speak uh but one of the important things is to try to determine whether or not uh they are similar or different to what goes on in the United States um and this is something that I think not only we're looking at but you know are there are members of of Congress who are very interested in this issue um we at the SEC we are limited to uh implementing what the laws Congress passes and so certainly uh I know members of Congress are are are looking also abroad for ideas and thinking about possible legislation and to the extent that would occur that's something that we would have to follow through and Implement essentially what you're articulating is that as an enforcement agency there needs to be legislative Clarity first and so in that way I think a lot of the industry has to do a better job of communicating and collaborating with the enforcement agencies and um government agencies so to this end um you've also recently um rejected the uh dissented um against the coin bases petition for rulemaking process could you elaborate a little bit more about the rulemaking process that you have with the SEC and how you also interact with the industry at large so the way that regulatory uh at least the regulatory agenda is set we publish that twice a year in something called the Federal Register and list every project that we have ongoing now we also have something else which is uh what every other uh administrative agency in the United States I believe has which is uh this the ability to petition the government and put forth ideas um one of the things uh that uh one way to look at that is it's almost an official suggestion box from the public uh that agencies generally we can take that in and we can think about whether or not uh we want to act on that specific uh agenda item or not um I think one of the big advantages when someone files that to us is uh it's made public um I know there are other ways especially uh in in the current ERA where people can put together ideas and and and get input from others in the public uh when we get that um it's really up to the the chairman is to whether or not he wants he or she wants to decide to put that on our regulatory agenda uh you under the current uh chairman uh Gensler uh I know he had about 50 plus I think items that he added to the regulatory agenda at the start of his term everything relating from uh settlement of equity Securities to how we treat private funds to climate change share repurchases uh but we didn't include anything on on on digital uh assets and again that is the discretion of the chair that is the the chair's uh agenda to put forth um you know personally I hope at some point uh whoever sits in uh whether it's Cher genser or any of his successors will think about we've now had a fair amount of time existing with regulatory uncertainty uh on digital assets maybe we ought to move forward uh with some policym or some rule Mak to try and clarify the boundaries of what is is in the security and if it is well what does that mean what does it mean uh if you are a broker dealer in your responsibilities what does it mean if you want to uh be an exchange or or somewhere platform uh that that has to deal with this what does it mean uh for um if you have to custody it and and Safeguard those so there are all those other issues and and uh at some point it would be good to get some rules out there as opposed to trying to infer what the thinking is of the SEC through enforcement actions which tend to be very retroactive in nature and not uh uh prospective and um I can't believe we're running out of time already but I think looking forward I think what can you envision and perhaps what can we anticipate as a industry at large in terms of what the future role of SEC may be over the entire digital assets economy well there are a number of of different I I think factors one of the most important ones is you know I know there are numerous pieces of legislation uh that are being circulated in Congress so if Congress acts that would definitely affect uh what we do um again with respect to uh our own regulatory agenda I certainly have been been vocal as has uh one of my colleagues commissioner Hester Pur about the need to spell out uh some uh guidance or or or potentially rules about this um you know what I've said before is uh there's no reason why we can't do for instance an interpretive release as to how how we apply the hoe test all right no pun intended there um but you know this is something that we've had to do in the past you know I'll give you an example just five years ago we did an inter release of what it meant to be a fiduciary if you're an investment advisor because that was something that the Supreme Court had said investment advisers have iary duty but it wasn't clear what the Contours of that Duty meant so we engaged in a process where we put out here's how we view that applying and we then subjected it to public notice and comment on that and came up with a final interpretation I said that the Supreme Court's ruled in this hoe opinion but then Howie the hoe opinion has to get interpreted by all of the different courts within the United United States and as a result uh you know different facts and different circumstances can can have uh differing uh um results in particular courts and and so that's one of the things that we can do at the secs right now that we have this incredible body of law out there we can go out propose some interpretive guidance what it means to be a security as an investment contract and what it what is not we can solicit public comment on that and come out with a rule that would be helpful not only for Market participants but also helpful for others who are trying to interpret this law with their courts or other Regulators uh and and provide that guidance so again everybody here will know where exactly that line is thank you um I think what we need to do better as the industry is also kind of giving you more data and feedback so thank you for your contribution so far and we look forward to many more achievements coming your way so thank you very much for [Applause] today thank you