SIFMA to SEC on Digital Assets: Ensure Investor Protection; Apply Existing Principles

SIFMA and the SIFMA Asset Management Group ("SIFMA") urged the SEC to "apply existing and well-understood securities regulatory principles to digital assets, rather than creating a distinct architecture for this class of assets and transactions."

In a comment letter responding to SEC Commissioner Hester Peirce's call for feedback on digital asset regulation (see related coverage), SIFMA identified four core principles that should guide regulators in this area: (i) robust investor protection, (ii) alignment with established securities law, (iii) regulatory neutrality toward technology and (iv) a focus on avoiding arbitrage between traditional and digital markets. 

SIFMA focused on three issues: (i) "securities status and scoping;" (ii) custody and the safekeeping of digital assets; and (iii) adjustments to the regulatory framework where "needed to support the development of tokenized securities markets and related derivatives markets." 

On a security's status, SIFMA backed the Global Markets Advisory Committee's taxonomy and classification approaches, adopted by the CFTC subcommittee, as a baseline for categorizing digital assets. SIFMA said this taxonomy could help market participants understand whether a digital asset is a security, a payment token, or something else entirely. SIFMA also warned that the SEC's use of inconsistent terminology—like "crypto asset securities" and "covered stablecoins"—was confusing.

On safeguarding digital assets, SIFMA rejected the SEC's 2023 custody proposal as unworkable and urged the agency to abandon its Special Purpose Broker-Dealer framework. SIFMA said that the SEC should enable traditional broker-dealers and custodians to handle digital asset securities without being forced into siloed entities. The group also called on the SEC to resist requiring specific technologies (like cold vs. hot wallets) or moving to instant "atomic" settlement, saying these would impose unrealistic costs.

On tokenization, SIFMA recommended "targeted clarifications ... to help tokenized asset markets develop." SIFMA's recommendations include: (i) "clarifying how existing requirements apply to tokenized securities in areas such as recordkeeping, possession and control, and clearing and settlement;" (ii) modernizing transfer agent regulations for tokenized assets; and (iii) not moving toward a "T+0 settlement cycle on an industry-wide, mandatory basis, given the significant risks, costs, and additional complexity it would create for traditional markets." SIFMA maintained that requiring redundant off-chain records or paper processes contradicts the goals of digital transformation.

In addition, SIFMA delved into the impact of tokenization on the voting and custodial rules that apply to investment advisers, the grant of security interests under the Uniform Commercial Code as applicable in the various states, audit procedures, and recordkeeping by investment advisers. SIFMA also pressed the SEC to coordinate with other regulators, including the CFTC, FDIC and state legislatures and flagged open questions under the Uniform Commercial Code and the Federal Deposit Insurance Act, noting that the legal status of tokenized securities and deposits remains unsettled at the state and banking levels.