The regulation by the U.S. SEC’s recent Statement on digital asset issuance and trading has had a tremendous effect on the industry worldwide. Few marketplaces, however, attempted to do anything about it. Templum, a trading platform for digital assets, did. We recently reported that Templum executives launched a petition addressed to the SEC, asking for clarity on post-trade practices in this space. Today, we talk with longstanding regulatory advocate and one of the two authors of the petition, Templum Co-founder Vincent Molinari:
Q) Most market actors moaned and groaned, when SEC has halted ICOs, however nobody did anything about it. Templum, on the other hand, issued a petition recommending a retroactive path to compliance. Why did you take such pioneering positions?
A) As regulatory advocates, our focus has been to stimulate conversation around the benefits of utilizing technology innovations to promote market efficiency, costs savings, and transparency. We have identified how the adoption of new technologies such as blockchain and digital assets can rapidly influence the evolution of financial markets. We also recognize the need for clear regulatory guidance related to digital asset issuance, trading and post-trade processing without stifling innovation or compromising investor safeguards. Our senior executive team has been focused for many years on modernizing securities laws to intersect with the most innovative technologies and effectuate change. Our strategy has been to seek regulatory approvals before launching our technology platform – not the other way around.
Q) What is your vision of an ideal regulator for digital assets?
A) Digital assets as securities should and will be regulated by the SEC while the CFTC is the regulator for instruments in the spot trading market. To the extent that new proposals or bills such as HR-7356 (the Token Taxonomy Act) co-sponsored by Congressmen Davidson and Soto are put forth, these may fall into a new regulatory regime, to be determined.
Q) What is missing now and why?
A) Digital assets as securities need greater clarity for post-trade functions such as custody, clearance and associated settlement functions that will be the driving forces to unlock institutional capital to flow into this space. We address these issues in our latest petition.
Q) Do you think digital assets need separate regulations and a separate regulator from other securities?
A) No – there is currently more than adequate securities regulation. We need to focus on modernizing aspects of our securities law to keep pace with our most innovative technologies.
Q) In your view, which country has the most favorable regulation towards digital assets now?
A) When we speak of digital assets as securities, the SEC has been very thoughtful in balancing the need for innovation within the financial services industry while safeguarding investors. This approach around the evolution of finance appears to have the US in a leadership position. If we are discussing cryptocurrencies or other instruments aside from digital assets as securities, Asian jurisdictions could be considered more progressive from a regulatory perspective.
Q) What can the industry do itself: self-regulation, best practices, industrial standards?
A) This question is less about self-regulation, which would require a true SRO, and more about trade associations creating best practices that drive standardization, which will, in turn, create greater comfort and engagement with investors. There’s great work being done by the Global Digital Finance Association, the Association for Digital Asset Markets (ADAM), the US Chamber of Commerce, Wall Street Blockchain Alliance (WSBA) and the Chamber of Digital Commerce.
Q) In your petition, you ask for clarity towards blockchain-based platforms. Let’s imagine that you are hired by the SEC as a consultant to write such clear guidance. Give me a sample.
A) In the digital asset space, we’re being asked to meet requirements that are suitable to public security markets, but not mandated for unregistered securities. Since they’re not required for unregistered securities, the infrastructure and processes do not exist. We’re attempting to use public marketplace nomenclature that generally does not apply to the private markets. We need clarification around mechanisms like custody, clearance and settlement. For instance, if there is a rule change that requires digital assets to be held with a custodian, how is that done?
Q) How will the SEC react to your petition; what do you think?
A) We’re extremely pleased with the conversations we have been having with the SEC, especially during this government shutdown, when many of these offices are operating with a reduced staff. The SEC has gone above and beyond to engage with us regarding the matters we have brought forth and appreciate the extent to which they’re always welcoming and engaging. We believe our petition has been well-received and that they are thoughtfully evaluating it.
Q) Many experts expect technology will play a central role as financial markets continue to evolve. What market structure changes do you anticipate related to digital assets in 2019?
A) In 2019, I think you will see more historically illiquid unregistered securities, such as real estate and intellectual property, being issued as digital assets than ever before. These trends lend themselves to a new evolution in finance for securities issuance and secondary trading.
Not only is this market structure model more cost effective and efficient, it enables the fractionalization of assets, which unlocks capital for issuers and asset owners in innovative ways. Additionally, it opens up opportunities to a much larger pool of investors who could not participate previously, providing a greater breadth of distribution.
Platforms like ours at Templum also enable the secondary trading of these digital assets, giving investors a pathway to potential increased liquidity. By virtue of transparent resale positions, investors can more freely enter and exit these investments, while better access to a symmetry of information drives more accurate valuations.
Q) What changes do you foresee in 2019 related to digital asset regulation?
A) We expect regulators will keep working in 2019 to provide greater clarity that enables digital assets to reach their full potential. Regulators – especially the SEC – are doing an excellent job being thoughtful in their approach to balancing the need for investor protections without stifling innovative technologies within our capital markets. At this stage of the evolution of the financial markets, it is clear that digitized securities are here to stay. By assigning the S&P CUSIP to digitized securities, we are applying pillars of our traditional regulated markets, empowering the continued growth of digitized assets. We believe creating these kinds of familiar processes, information and investor safeguards will drive further demand for these instruments in 2019.
Vincent Molinari, Templum Inc. Co-Founder and CEO Templum Markets
With more than 30 years of experience as a licensed securities professional Vincent Molinari has worked closely with regulators and other global authorities to bring transparency, efficiency and liquidity to regulated digital asset issuance and secondary trading.