February 27, 2018
by Larry E. Bergmann

The SEC’s Division of Trading and Markets held panel and workshop presentations on Saturday, February 24, 2018 at the PLI SEC Speaks 2018 conference.  Blockchain, distributed ledger technology (DLT), and cryptocurrency were recurrent topics in the presentations.  As with other presentations at SEC Speaks, the “gating” question was: are the instruments being traded “securities” as defined in the Securities Exchange Act of 1934?  As many speakers noted, if the instruments are securities, then many Exchange Act issues are raised, including broker-dealer, exchange, clearing agency, and transfer agent registration.

An equally important theme that pervaded the discussions is: does the use of blockchain and related technology in the Exchange Act space represent a novel (and beneficial) application of technology to existing market structures and processes, or does it present a “paradigm shift” in the operation of the US securities markets?  The very fact that this question is so prominent in the minds of the Staff reveals how fundamental this question is and that the Staff is in the early stages of reaching an answer.

Former SEC Commissioner Dan Gallagher, seconded by former SEC Commissioner Paul Atkins, who were commentators on the Trading and Markets panel, recommended that the Division publish a letter emulating the guidance issued by the SEC Division of Investment Management, “Engaging on Fund Innovation and Cryptocurrency-related Holdings” (January 18, 2018), https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm, to identify the Staff’s core questions to facilitate a dialogue on Trading and Markets issues.  Mr. Atkins noted in particular that guidance is needed on “initial coin offerings.”

Comment:  A focused identification of the key issues in the Trading and Markets space would be welcome.  However, the type of document issued by Investment Management frequently takes considerable time to develop.  The use of DLT in the securities markets, however, is growing apace and issuance of “tokenized” securities is increasing.  Investors will want to trade those securities and likely will want to use efficient and transparent means to do so.  Blockchain has the potential to meet those objectives.  Although Trading and Markets has a plethora of important issues on its plate, an active and cooperative approach that is open to innovation regarding DLT is essential to allow investors to realize its benefits while maintaining investor protection and market integrity.


About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.