Today marks the annual Security Token Summit – a gathering of some of the brightest minds involved in digital assets
Talks on the potential-laden sector of digital securities saw an impressive lineup of speakers. Two of those leading the way were Anthony Woolley, Head of Business Development at Ownera, and Commissioner Hester Peirce of the Securities and Exchange Commission.
The following is a brief breakdown on the status of digital securities, and a look forward from each guest speaker.
Where are Digital Securities Now, and How Do They Move Forward?
As he kicked off the Summit, Woolley began by highlighting major trends affecting digital assets as a whole.
- Decentralized Finance (DeFi)
He noted that despite the potential of digital securities, the sector has not yet captured the attention of the masses such as those listed. With a total marketcap of only $641M, it has yet to reach its ‘take-off’ moment.
Bitcoin is continually testing new all-time-highs, stablecoins worth $60B alone are currently in circulation, and a single NFT was recently sold for almost $70M. When comparing these successes to those of digital securities, it is clear that the latter has barely scratched the surface of its potential.
With potential just waiting to be realized, Woolley noted that he believes it is institutions that will do so.
‘2020 was a landmark year for tokenization. 2021 will see digital securities go institutional’
In order for ‘take-off’ to occur through institutional growth, he broke down what is needed in to 4 key steps.
Supply and Demand
On the supply side, he notes that we already have 530 Unicorns with troves of backers all ‘sitting on life-changing illiquid assets’.
On the demand side SPACs are rising in popularity, along with usage of secondary markets, providing the liquidity required to satiate the supply of assets.
Regulatory and Technological Clarity
Right now, just about every country seems to be developing a CBDC. Until these become a reality, digital securities are reliant upon the use of Stablecoins as transaction conduits. This pending technological transition, along with constantly improved regulations are required moving forward.
This step has already begun. As the sector has made progress on steps 1 and 2, early adopters of digital assets are already being noted, as seen in the following chart. Of note are 3 main areas in which this is occurring – treasury reserves, payment processors, and custodians.
Finally, the last major step needed to catapult digital securities forward is interoperability. For the time being, many have noted this as a major hurdle. As such, over 70 companies have begun to work together to develop standards such as FinP2P – an effort which will culminate in a global standard for the distribution of digital securities.
Regulatory Landscapes Surrounding Digital Securities
Headlining the discussion on regulations at this year’s Summit was none other than the Commissioner Hester Peirce of the SEC. Commissioner Peirce has long been an advocate for digital assets, and long ago recognized a need for regulatory clarity surrounding their uses.
While Commissioner Peirce indicates that she identifies as a ‘deregulatory’ person, clear frameworks have the potential to help the sector mature.
Frameworks and Howey
During her time speaking at the Summit, Commissioner Peirce was asked a simple question – Is the Howey Test broken?
Commissioner Peirce noted that ‘we need something like howey that can capture events surrounding the distribution of securities.
One possible missing piece of the puzzle is a previously floated idea dubbed the ‘safe-harbour proposal’. This would see companies provided with a grace period, in which they could essentially build their product, without fear of repercussions for a certain period of time. The goal of which is to encourage the building of networks, while still providing safeguards for investors.
Whether it comes in the form of the safe-harbour proposal, or otherwise, Commissioner Peirce acknowledges the progressive work being done in other jurisdictions. More specifically, Commissioner Peirce was asked if the United States should emulate regions like Switzerland, and their approach towards digital assets. In response, Commissioner Peirce indicated that sometimes it is best to adopt an existing framework, and tweak it for your own needs.
It was noted that the SEC has already begun testing the waters with tweaking its regulations, as made evident last year when it broadened the capabilities of broker/dealers when dealing with digital assets. Commissioner Peirce recognized that while this move was somewhat limited, it was only a first step.
With regards to the United States, both Wyoming and Miami were noted as hotspots for innovation regarding each approach to digital assets, and the manner in which they are regulated. Outside of the United States, both Asia and the Caribbean were highlighted as regions which have demonstrated a more ‘forward-looking’ approach than the United States towards digital securities. Does safe harbour have a chance of succeeding?
Thought on NFTs
With non-fungible-tokens (NFTs) being such a hot topic right now, it was inevitable that Commissioner Peirce would be probed on her stance towards these assets. When asked, ‘When do NFTs become securities?’, Commissioner Peirce provided the following insights.
In general, these types of assets are not securities. However, she noted that the definition of a security can be broad, and it is how NFTs are utilized which may make them a security.
She elaborated on this, using fractionalized interest in pricey NFTs as an example. If such an asset saw its ownership divvied up between investors, and treated/viewed as an investment contract, this could very well make the underlying asset a security.
Coinbase and its IPO?
While unable to comment on any specific IPO, when asked about Coinbase and its upcoming event, Commissioner Peirce had a positive outlook on such trends.
She indicated that the move is symbolic of traditional finance meeting digital assets, and institutions entering the sector. She likens this to traditional legacy institutions saying ‘we want to get involved in this in some way’. Overall, Commissioner Peirce indicated that it ‘will be an interesting 2021’.
Regulation by enforcement?
Over the past few years, many have criticized the SEC for its perceived overreliance on regulation through enforcement.
Commissioner Peirce commented on this, stating that enforcement is simply one tool to ensure regulatory compliance. She believes however that it should not be the first tool reached for, as above all, the SEC is a regulatory agency.
Moving forward, Commissioner Peirce believes that there is a need for clear rules with regards to compliance, and that only non-adherence to those rules should result in the use of enforcement.
The Powers That Be
We’ve been provided with insight in to how Commissioner Peirce views digital assets, but what about the SEC itself moving forward?
It would appear as though the regulatory body is in good hands, as new Chairman, Gary Gensler, is already well-versed in digital assets. The following were a few Commissioner Peirce’s thoughts as to why Chairmen Gensler will make be a great fit.
- Appreciates the talent within FinTech
- Appreciates regulatory framework
- Willing to learn from other jurisdictions
- Will not need to be educated on blockchain due to his past history, and will hit the ground running
Overall, Commissioner Peirce stated that she was enthusiastic for his arrival, and that it is a positive step for the industry and innovation at large.
For those looking to learn more about the topics discussed at the 2021 Security Token Summit, the event in its entirety can be found HERE.