SIFMA argues lax tokenisation rules could ‘undermine supremacy’ of US capital markets
A version of this story appeared in The Guidance newsletter on December 1. Sign up here.Hi all, Liam here. A leading trade group for high finance has a few notes for the Securities and Exchange Commission on its ambitious crypto plans. The Securities Industry and Financial Markets Association issued a letter last week, cautioning the SEC about its approach to tokenisation. The letter was a response to the watchdog’s plans — also known as Project Crypto — for developing a “tailored” exemption regime for crypto projects to build their ideas without “navigating a maze of regulatory uncertainty.” The problem, cautioned SIFMA, is that the regulatory maze is part of what makes American capital markets the deepest and most trusted in the world. “The Commission should exercise great caution to ensure that innovation supports rather than undermines the regulatory architecture that tens of millions of American families rely on,” it wrote.SIFMA is a US lobbying organisation that represents the interests of broker-dealers and securities firms, among other groups. In the past, the organisation has advocated for faster settlement times and campaigned against what it perceives as burdensome capital requirements for banks.Tokenisation is the process of bringing traditional financial instruments, such as stocks and bonds, onto a blockchain. Proponents argue that the technology allows faster settlement times and greater transparency among market participants. The total tokenisation market is worth roughly $36 billion, according to data from RWA.xyz. Standard Chartered estimates the sector, excluding stablecoins, could grow to as large as $2 trillion by 2028.Now, SIFMA is pushing the SEC to tread lightly as it moves to absorb blockchain-based technologies into mainstream financial markets. That revolves around two key components. First, SIFMA suggests that existing securities laws around asset issuance and intermediation are likely sufficient to regulate crypto versions of the same — echoing an argument often voiced by former SEC Chair and anti-crypto firebrand Gary Gensler. The names may be different, and when, for instance, examining a platform that matches buyers and sellers — be it in crypto or stocks — there’s no reason that laws regulating brokers shouldn’t apply in the same way. “It would be inconsistent with fundamental principles of US securities regulation — and with decades of Commission precedent — to allow functionally identical activities to operate outside the federal securities laws simply because they are facilitated through elements of distributed ledger technology,” the letter reads. Second, SIFMA raised concerns about exemptions the SEC may grant to crypto projects operating in the tokenisation space. The bar should be extremely high, especially for upstarts in the tokenisation space, SIFMA argued. When a project alleges that its technology excludes it from securities laws, projects would need to explain how that’s possible, and the SEC should publish each proposal for a notice-and-comment period. Without uniform rules governing both tokenised stocks and traditional stocks, argues SIFMA, the SEC could end up creating two markets, thin liquidity, and material price differences between the token and its underlying asset.That certainly isn’t the ideal outcome. And as SIFMA highlights, unwieldy markets can also have a much more noxious effect on the broader market.This “could potentially further disincentivise companies from going and remaining public, undermining the supremacy of the US capital markets.”Liam Kelly is DL News’ Berlin-based DeFi correspondent. Have a tip? Get in touch at liam@dlnews.com.
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