The Onchain Capital Markets Era Starts in DC | Taylor Lindman (SEC) Salman Banaei (Plume) at ETHConf

Good morning everyone. Good morning, Taylor Good morning, Taylor . So I'll get straight to the point. So, Taylor, um, the cryptocurrency task force was created by Chairman Atkins, um, one of his first steps. Um, for those who may not know your specific role, um, you are the lead counsel, and unlike many of the other members of the task force, you joined the task force from task force from outside the SEC.

I believe you were the second person with DeFi experience person with DeFi experience , er, to join the SEC, I was the first. Um, um, can you explain what the working group does on a daily basis, what your goals are, um, and how it interacts with the broader commission? Yes, of course. Um, so before I start, um, the typical, um, disclaimer I have to make is that I'm here officially as the chief counsel for the SEC's cryptocurrency task force, and these are my views, not necessarily the views of the commission. Um, so I joined the task force about 5 months ago, and the task force exists to serve as a coordinating function within the SEC.

Essentially , whenever something is related to cryptocurrencies, the working group helps advance any initiatives by the chairman or staff related to that issue, uh. And it takes a lot of different, uh, paths. It appears to be a regulatory assistance as staff formulates regulations and considers bringing bringing , er, recommendations to market . The working group is directly involved in working on projects, working on complex issues, and performing a translation function, essentially trying to ensure that, uh, everyone speaks the same language, especially when it comes to new technologies. Uh, other areas include significant public outreach.

We spend a tremendous amount of time talking to industry participants, meeting with them, um, you know, we've had probably over 200 industry meetings and talking to virtually every area of ​​the cryptocurrency market to understand what challenges they face, with respect to securities laws , and what they're focused on so that we can be best informed for our, um, policy function. And besides, I would also say that the working group is here to try, I think, what we have is what we have. We have a political side. We have, um, meetings with all the industry participants. And then, I would say the final stage is trying to institutionalize institutionalize , um, this new market, um, and this new way of conducting transactions within the SEC itself.

Um, and that includes training staff, training different departments, and trying to ensure the long-term sustainability and sustainability of these issues, um, so that, um, we can have really positive rulemaking in the future. This is a pretty ambitious agenda. Um, and this agenda was also outlined in more detail by Chairman Atkins, as well as the commissioners...and you guys are thinking about achieving your goals, what are your key performance indicators between now and, say, the end of 2028? Yes, there are two main areas that we focused on as a working group.

The first focuses on questions regarding when something falls under the SEC's jurisdiction and when it does n't? And a lot of it was about when a token falls under an investment contract, and therefore a securities transaction . And a lot of that focused on the commission's report that came out earlier this year. And the commission's report really tries to sort through these issues to explain how the commission thinks about investment contracts and tokens to provide better clarity for the market. And then another important area, another area where we measure ourselves, is how well we take into account and expand the way securities laws work today to capture the different things that market participants are trying to do with securities.

This is the tokenization of securities, their use in, uh, new ways of transacting, their use for new ways of clearing and settlement. Uh, basically, just trying to meet with both existing market participants who work in cryptocurrency and existing market participants who work in our traditional securities markets and find areas for facilitation or clarification that can lead them to blockchain and, uh, compliance. Uh, during this period of time that we have. Very cool. Uh, continuing with that question, uh, we're here today at ETHCON.

Uh, I spent time at Uniswap, which is one of the most Ethereum-focused projects. Uh, the main goal of Ethereum is to serve as a global permissionless computer, a globally accessible, uh, decentralized computing layer, where anyone can deploy or interact, uh, with the blockchain in a censorship-resistant way without asking, uh, permission from permission from any intermediary or government. Chairman Atkins spoke about the importance of an open public blockchain public blockchain infrastructure as fundamental to any viable U.S. digital asset market.

Does the TA working group have a clear view on whether the regulatory framework should favor open public blockchains, given that Ethereum is one of the most open, permissioned, alternatives? Is the SEC philosophically agnostic, treating them as equivalent provided they operate safely and securely? I will give my perspective on this, and it is, I think, a view widely shared by key SEC professionals, which is that blockchains really work best when they are a neutral infrastructure. This is one of the things that makes them truly special. They have the ability to create a level playing field and ensure transactions with a high level of transparency.

They are a tool that can be censorship-resistant and very resilient from a cybersecurity perspective. And many of these properties are inherited in the strongest way through permissionless systems like Ethereum and the various, you know, EVM chains that exist. I think market participants make certain trade- offs to achieve certain outcomes related to a specific application, and I think our securities laws should be flexible enough to accommodate all the different types of transactions that people want to transact on blockchain. But these trade-offs, I think, have significant differences in terms of the potential regulatory regime and how they are viewed, you know, from an investor protection or market integrity perspective. So when I look at blockchains and think about what principles of this technology make it great, a lot of the things that make it great make it great are public information and permissionlessness.

So one of the areas So one of the areas where we see the most friction between Ethereum or the open, uh Ethereum or the open, uh , public vision of blockchain, uh, and outdated rules and laws is the application of anti- fraud requirements and KYC or customer information programs under the Bank Secrecy Act. Uh, many people may not appreciate the SEC's role in interpreting the Bank Secrecy Act for the securities markets . Hmm, can you explain the role of the SEC compared to the role of the US Treasury regarding BSA, KYC, AML requirements? Absolutely. And then, um Absolutely.

And then, um , yeah, before you do that, well, including that, um, can you explain some of the reasons related to non-bank secrecy, um, why KYC might be considered mandatory by many in the U.S. securities markets? Of course. Good.

So, this is a big question. So there are a few different parts here. Hmm, I think the first part is that yes, there is a component of the BSA that applies to intermediaries in the securities markets . And the two big intermediaries big intermediaries are, um, mutual funds, and the other big intermediary is the broker-dealers in the market. And they have these BSA requirements that are very similar to the BSA requirements for other financial institutions under the BSA.

And these are, you know, anti- money laundering programs and know-your- customer requirements and having information to, you know, deter money laundering fraud and prevent sanctions evasion and so on. But this area of securities laws is relatively limited to these intermediaries, these specific areas of the market where intermediaries exist. But that doesn't necessarily mean that this is the only reason for collecting identifying information, whether it's through a KYC process or not. There are reasons for this under our securities laws . And a lot of that has to do with market integrity and understanding who the participants are.

But there are many new ways to do it. I think what we're seeing in the marketplace today is that there's just been a proliferation of many different ways of managing, whether it's through whitelists, whether it's through network checks, whether it's through different types of tools. And again, this is to comply with regulatory requirements for intermediaries. This is intermediary financing. Often when we talk about a broker, we are talking about clearinghouses and funds transfer agents, regulated entities that are responsible for ensuring compliance with these requirements even when making transactions on the blockchain.

So, I would say that the best mental model is the BSA (Market Services Agreement), and the AML ( Services Agreement), and the AML ( Anti- Money Laundering) requirements are an overhead for certain organizations. But another part of this is thinking about how the SEC ( Securities and Exchange Commission) looks at market integrity and investor protection, which often includes things like customer identification. This is why brokers collect information about their investors and clients. But the general picture is that the same rules apply in the on-chain environment . The question is whether there are new technologies that can be implemented across the four objectives that will enable compliance in different ways or more seamlessly.

And ultimately, do they serve the same purposes? Uh, when you have a very transparent system or a system that is able to provide a huge amount of information and disclosure to investors, it can give law enforcement and regulators the ability to understand the behavior that's happening on the blockchain with a higher level of granularity than they might have when looking at a broker or an internal, uh, trading system, which would require much, much more reporting. So, I think the point of TLDDR is that there are many different ways, I guess, to " ways, I guess, to " skin the cat" when it comes to on-chain, because of how, uh on-chain, because of how, uh , technology can be used for transparency. There's a lot that I just... Yeah.

Well, let me expand on this a little . Uh, you know, you had, as you said you had, as you said , 200 meetings with different participants from across the industry. Uh, I imagine that in many of these meetings you will learn about alternative ways to comply with KYC or KYC-like requirements. Uh, how do you guys interact with the Treasury, which is ultimately the administrator? Yes.

Um, the bank secrecy law. So, I would say, looking at it as a whole, I think all agencies, including the Treasury Department, have a role to play when it comes to this new technology. And I would say that there are often meetings with us or with the Ministry of Finance where they cover similar technological aspects technological aspects , and that's because innovation is happening. Um, it's things like how VPNs work, how they're used by interfaces and frontends, all the way to new screening tools in blockchain and things like that. Um, and I think both the Treasury Department and the SEC have a role to play in understanding these technologies and how they can be used, particularly by regulated players.

So, uh, protocols like Unis swap, uh, other, uh, protocols built on top of Ethereum, uh, get their value because they are non- storable and composable, meaning permissionless compatible . Uh, . Uh, any contract can call any other contract without asking for permission. Um, by contrast, the US securities laws, um, were written for intermediary markets, um, where, as you know, different, um, black box databases interact with each other in a very permissive, um, way. Um, and you have identified custodians, you have identified transfer agents, you have identified broker-dealers, and so on.

Um, what is the current view of the working group, um, on how disclosure and registration obligations are reflected on protocols that can provide a similar, um, type of function as these regulated intermediaries? Um, but at the same time, these protocols are not built to selectively block participants block participants . Um, and then more specifically, do you see a way where DeFi trading protocols can play a role in SEC-regulated markets? This is a big question. So, I think the place I would start is I would say that the SEC is really good at today, and what the SEC has been good at historically, is finding intermediaries, effectively regulating those intermediaries, and ensuring, um, you know, applying the rules to those intermediaries in a way that those intermediaries always work.

And these are our brokers, our exchanges, our clearing agents, our funds transfer agents. And these systems, as they start moving into blockchain, start raising new questions both from a policy perspective and whether they serve the same political purposes. Sometimes these political goals, um, you know, there's a higher risk when they go to blockchain, is that normal. The role of remittance agents has grown tremendously in terms of their importance to the tokenized system because they are now driving a lot of this activity on the blockchain, uh, behavior that used to happen through the intermediary system, you know, through the DTC, uh, uh, intermediary system, and that changes the dynamic. This changes the way regulators think and the way the regulator, uh, you know, tries to understand, you know, the change in market behavior as a result of these new technologies.

But the same thing can happen in the opposite direction, which is you see permissionless trading on the blockchain of all types of assets very smoothly with a lot of immediate finality around those transactions or almost instant finality. Uh, the buyer and seller can get their assets, uh, with very few intermediaries other than this smart this smart contract and the infrastructure that facilitates, you know, the dissemination of messages and so on. So then you need to look at these questions and say whether this is still the same type of behavior that we associate with a national stock exchange or a broker-dealer. And for each of these things, it's important that we as an agency be flexible and recognize the possibility of circumstances where, well, our regulatory interests are no longer affected. And I think that's where DeFi can have a lot of value, which is, okay, these are the areas of regulatory interest and risk that we see for investors and for market integrity, and there's a way that you can facilitate capital formation through blockchain and a smart blockchain and a smart contract or a trading protocol, and how do we get to a point where the participants in this system are not seen as exchange operators or broker-dealers, but rather as some kind of neutral infrastructure that, you know, facilitates interaction with smart interaction with smart contracts.

And I think there is still work to be done on this issue . I don't think there is a consensus opinion yet because I think it is still an emerging market, especially in terms of securities. There are new primitives developing in the tokenized securities market that I believe need to be translated in some way to how securities law has always worked. It's, you know, the issuer-driven model, and issuer-driven model, and , uh, there are a few others that we could talk about if you want to learn more about that. Um, but what you end up with is a pretty immature market, at least as far as securities are concerned , and only a few securities market participants are saying, “Hey saying, “Hey , I’m going to do this with securities this with securities .

” Here's how I'll do it. And is this normal? Are there any rules that should apply, or is there some kind of relief I'm looking for?" And I think it's in this industry that we'll find areas of the market that no longer require the same level of oversight or perhaps require a different level of oversight. When I think of DeFi, I think of systems that are intermediary-free intermediary-free , that inherently lack permission, control, or centralized management by any one person.

In our laws and our rules, most of them define, you know, at their core—the you know, at their core—the individual, and that makes them often complex and potentially incompatible in certain circumstances. I think clarity also plays a role in empowering agencies to think broadly, but it's also part of the question, which is: when is this person present and when isn't he? Yes. Yes. That, um, and I'll just comment on that, um, you know, confirm what I made from what you just said, which is that it's impossible to get rid of the issuer in these markets.

Hmm, now you can use protocols to provide a trading function, to provide a settlement function, to provide a lending function, hmm, but the issuer never goes away; The issuer of securities never disappears. Hmm, these are models where, hmm, more compliance functions, hmm, are delegated to, say, the issuer and its service providers, including a regulated transfer agent, hmm, is this one of the models that you one of the models that you , hmm, are you considering? And yes, this is a great opportunity to talk about some area that I love to talk about, and what you said is absolutely true. For example, in the securities world, for example, there's an identified issuer, and in models that...so the SEC published, uh, a staff article in January that covers the different tokenization models that exist in the market, uh, and I'll briefly go over some of them.

Uh, but one of those models one of those models is the issuer-sponsored model, where you have a transfer agent that acts as the issuer, or as an agent of the issuer or as an agent of the issuer , helping them tokenize their shares on the blockchain and creating an instance of a native asset that represents, uh, shares in And with these shares, they have a whole bunch of different technological limitations imposed by these tokenizers and how they interact on the blockchain. And it's a very, uh, specific model that the issuer manages through a transfer agent, which, you know, has gained some popularity in the chain, but it's not the only one. And I think the important point here that you're making is that, you making is that, you know, when you have a security in a chain, that security has an issuer; and in the case of these issuer-driven models, it is the issuer of the underlying security. But there are also systems that have securities issued by third parties, and sometimes these are individual securities. Often these are separate securities from the underlying.

These include things like equity-linked bonds and structured notes, as well as derivatives of various types, such as swaps and securities futures. And they also have issuers, but those issuers may not be the same as the underlying asset. And an example of this is that you have someone who decides to tokenize decides to tokenize , uh, a debt instrument that contains shares of some public issuer, which this tokenizer, in the process of creating a separate security, is kind of standing in the shoes of the issuer of that separate security. And then, with respect to securities laws , when you think about securities laws, you think: OK, this is some kind of proposal. Is it tax exempt or registered?

But this is the same mental model that works in the ordinary world without tokens. And it's actually the same first-principles thinking that's useful when we think about tokenization more broadly, because it gives you the same practical lens that's been applied, you know, to every time there's been a securities issuance over time. It's just with a different, like, technology environment, you know, it's still a security, whether it's still a stock, whether it's debt, whether it's some kind of derivative, whether it meets the definitions, but the tokenization process itself can be significantly different. So one of the things that, well, you know, in previous years was a big problem for this industry was, well, some enforcement theories that led to a lot of, well, action, political action, well, against DeFi developers. So, one of these theories was potential secondary liability for transactions made by users on the D5 protocol, which they may have deployed but no longer control.

Did the working group issue internal instructions internal instructions rejecting this theory, or develop a new theory? Is there any prospect that the SEC or SEC staff will publish these guidelines so that developers can rely on them? So I'll take a step back and say that the best way I've looked at it at the moment is that we've moved on from an era where there was a huge amount of regulatory enforcement activity in cryptocurrency, and a lot of it was focused on registration. It was, uh registration. It was, uh , directed at issuers that targeted intermediaries of various types, with registration violations that essentially depended on whether the underlying asset was a security.

This, you know, is a real dive into what we were talking about earlier, this first question of when something is a security and when it's not, and such a big part of this caseload, so a lot of these cases have been focused on that very issue. And so there 's a logical, you know, reassessment point where the agency had to reevaluate this theory of the case. And I think it's this reassessment that we saw in the form of the commission interview, which really captured how the agency thinks about investment contracts today. And it moves away from everything as a security and focuses more on what the law says, which is, you know, it's a transaction-based test . It depends on the facts and circumstances, and many of those facts and circumstances are absent when you go far into the secondary market.

So what I would say is, when it comes to broader enforcement priorities, the SEC continues to be a very important and strong voice when it comes to how to enforce the rules in the United States. But I think we are in a moment of reassessment right now, as it only applies to certain market behaviors. But otherwise, the rest of the ways the SEC believes it remains unchanged. And I think the investment contract test is just a small part of the issues that may exist in the cryptocurrency space. So I really think we're going to see cryptocurrency action continue as it always has, even though there was an area of law that was overvalued given how the previous administration used the investment contract test as a weapon.

It sounds like, you don't have to agree with me on this, but it sounds like less registration violations and more, ahem, prosecution of things like manipulation and fraud. I think materiality will still be the most important thing. And I think if you think about it as a developer, that's one of the most important points here. It's not about the number of people. It's about behavior that crosses a line, leading to harm.

So, we only have 45 seconds. Last question. I'll try to be brief. So, this room is filled with Ethereum and other public blockchain developers. Um, what do you want them to know about what, uh, the SEC thinks about them and what they do?

I think we are at a perfect inflection point where there is much more clarity in the market about what role securities laws should play in the cryptocurrency and on- chain environment. And I think now is a perfect time for innovation, to ask the hard questions about how our securities laws should work, to make them work well, and to have an open ear and a voice at the SEC that wants to hear these things. So please contact us. We have a website, uh, you go to the cryptocurrency working group website , uh, and you can send, uh, a meeting request. You can write, uh, and provide written suggestions.

We read everything and try to meet as many people as possible. This is a very important priority for us, and now is the time to do it. So thank you. Yes, thank you, Taylor. Perfectly.