Welcome to Crypto in America Live, the only show bringing you candid conversations on the biggest news stories, legal issues, and policy developments shaping the crypto world every Friday at 12:00 p.m. Eastern. It's great to be back, guys. What a week to return.
I know. It's kind of crazy. It's been a minute and it's been a lifetime. Living this week for sure.
Yes, we have so much to talk about. We've got crypto's landmark market structure bill that failed its first test on the Senate floor on Tuesday. 50 senators voted against advancing the Clarity Act, but regulators wasted no time moving ahead. The SEC rolled out its highly anticipated innovation exemption on Thursday morning, opening a compliant pathway for tokenized US equities to trade on chain. The CFTC also issued new action for a no relief for certain passive software providers. And we're going to break all this down with some amazing guests today. We have SEC Commissioner Hester Peirce back with us today. She will be joined by the SEC crypto task force chief counsel Taylor Lynman. We're going to break down the innovation exemption, the round table that they had yesterday to talk 24/7 trading, plus former House Financial Services Committee Chairman Patrick McHenry and Brooke Ibara. She is the senior vice president of innovation and strategy at the American Bankers Association. So, looking forward to getting to everybody today for our first show back in a couple weeks. But before we start that, let's do a little of a breakdown about what happened on Tuesday. I can't, I don't even know what day it is anymore. It's Friday, but the vote happened Tuesday, as you guys know.
Yes.
Yeah. It feels like a long time ago, but I mean, you guys know I was on Capitol Hill. I was watching the vote from one of the Senate buildings, and I don't know about you guys, but I think pretty much right off the bat, maybe a few minutes into that vote, it became pretty clear that there was going to be a notable block of Democrats voting no. And it was a shame to see it was the pro-crypto Democrats who had been negotiating this bill for the better part of a year alongside the Republican counterparts. You know, it was Kirsten Gillibrand, Mark Warner, Cory Booker, Raphael Warnock, Ruben Gallego, Angela Alsobrooks, and Catherine Cortez Masto among some others. But basically the vote ended up going to 49 to 50. So it didn't even get to 50 votes and Thom Tillis ended up obviously changing his vote in order to bring up the vote again as a possibility in the future if they want to bring it back. It's a procedural move that he did and I think he got some flak about that actually for people who don't necessarily understand Senate procedure which is difficult. He actually just changed his vote in order to kind of align with those that Senate procedure so they could bring the bill back up. But yeah, it was an interesting day on Tuesday. And I know we streamed it live on Crypto in America's Twitter feed. We got a lot of people tuning in for that live feed. So, it was an exciting day.
Even though followers as well, we're hearing from some Senate Democrats that there's still interest in continuing those negotiations and there's at least some appetite on the Republican side as well, although I don't know if there's any actual plan in place for how that might look. A lot of people are talking about the lame duck session and what can be done there. There's some varied opinions. We've had people come on the show and say, you know, that that could be a possibility. Others say, you know, it's just going to be too tight of a schedule and too many priorities at that point to try and get done before the end of the Congress. But to your point, Jackie, I think the industry is skeptical about the bill's future. Now, I've spoken to some people who said they would love to see a deal come together, but that they really are kind of just looking to regulators at this point. I mean the SEC and the CFTC have done a tremendous job at rolling out some guidelines, rule making, an innovation exemption and I think after years of just waiting on Congress and this past year in the Senate especially I think they're just ready for a fresh start. So that seems to be the vibe that I'm getting. But I wouldn't say people are opposed to clarity being passed. Obviously it's a bit of a sore spot right now for a lot of folks. But definitely looking ahead to what's going to be coming out of the SEC. I think we should tee that up a little bit just because we have Commissioner Peirce, we have Taylor Lynman coming on in just a few minutes. But for those of you who missed it, and I don't know who could miss it if you live on crypto Twitter like we do, but the SEC rolled out its innovation exemption yesterday that will create a sandbox for platforms to trade tokenized securities in a regulated environment on chain. Some of the highlights here, it's a five-year conditional exemption from the statutory definitions of an exchange and a dealer. It limits both the number of stocks a venue can offer and how much of each stock can be traded. SEC Chair Paul Atkins said that the point is really to relieve the market participants from sort of these regulatory roadblocks that they might be facing, you know, when they try and come on chain and they're facing these old traditional rules for what would be traditional markets and there's really no sort of pathway for these innovative technologies. And that's a concern we've heard from industry going years back, you know, to the prior administration under Gary Gensler. This seems to be the goal here but I don't know what you guys are hearing, it seems to be overwhelmingly positive from what I'm seeing.
Yes, I have heard the same from people. I was at the Avalanche summit yesterday and everyone seems very optimistic about it and happy about it especially in the midst of the Robin Hood stock tokens versus the rest of tokenized equities and all these things. So I think it's an interesting time. And not to name any specific companies but some of the issuer-led tokenization platforms are very pleased I would say.
Yeah. Absolutely. And we should just make the point too that the CFTC also weighed in. It's not just the SEC but Chairman Behnam did tweet on Wednesday that CFTC is quote unquote locked in and ready to ship rules for the new frontier of finance. And then on the same day the innovation exemption came out, the CFTC released an order extending no action relief to software providers for registering as brokers. And essentially it just means that no enforcement actions will be brought when software developers connect users to the futures exchanges that are already being used. Friend of the show Cody Carbone, saw a tweet from him. He said it's basically removed regulatory uncertainty that's chilled innovation in derivatives markets. So big steps this week on the regulatory and policy front in cryptocurrency. Let's bring in two people who played a big role in crafting the SEC's innovation exemption. SEC Commissioner Hester Peirce and SEC crypto task force chief counsel Taylor Lynman. And you've both been on the show before. So welcome back to Crypto in America.
It's great to be back. We've got to start with our disclaimer, which is that our views are our own in our official capacities, not necessarily those of the SEC or any other commissioners.
Great. Got it. First, Commissioner, I want to get your reaction to the Clarity Act's failure to advance. You've called the legislation the ultimate tool because it really does provide a degree of certainty and permanence that agency rulemaking just doesn't do. Having watched the crypto policy swings dramatically from one administration to the next, how concerned are you that much of what the SEC is building now could ultimately be unwound by a future commission?
It's obviously disappointing that Clarity didn't pass and a lot of people had put a lot of time and thought into that bill and so I'm hoping that that work will continue and we can get to legislation at some point because I think it is helpful just to have the framework within which the rules are built. But we do have a lot of authority now and we're using that authority as is the CFTC. And you know this is a chance for me to give my constant theme which is that if you build good things later administrations will want to keep them too.
Yeah. I want to ask Taylor specifically too before you guys jumped on. We were talking about how there was a lot of excitement around the innovation exemption and conversations I was having yesterday at the conference. But how much interest has the SEC already received from firms that want to use it? And like how soon could we actually see the first tokenized securities venue go live?
Well, I think from just yesterday, just in the first few hours of the day, I would remind you know, yesterday we also had a 24/7 panel round table going on. And so I think it was definitely in the air among the speakers that were there and people that were in attendance. And we have been hearing just anecdotally from folks that they are very interested in it and obviously seeing the social media excitement as well. And then in terms of like timing, I think there will be a bit of a lag time between when it came out and when we'll see the first firms filing their notices. The notice will be kind of the official kind of making the agency aware and making the public aware that they intend to operate as what are called these tokenized securities venues, the TSVs, and I think that will probably be at some point probably in the next quarter.
And I think too we've obviously been working on this for a long time and we've been talking with folks who we think would be able to use something like this so I hope that there will be interest. Truly decentralized finance is like peer-to-peer and so when we think of regulation we think of it attaching to an intermediary and so if you and I want to trade a stock I can give you, can do that now in a physical stock certificate and I could do that through some kind of decentralized trading mechanism as well. There are still questions that will be, you know, if everyone were to start doing that there would be a lot of questions that would have to be answered around that as well but certainly the mechanisms are there and can be used.
Taylor, you mentioned or actually I'm sorry, Commissioner Peirce, you did just mention that the, you know, you were seeing a lot of interest. I'm sure you both have said that at some point but from the 24/7 round table, trading round table that you guys had yesterday, you know this is clearly a big, you know, there's interest in the market but with the exemption specifically, you know there is sort of a, I guess a circuit breaker if you will where the issuers themselves can actually object to a third party asking to tokenize their stock. Do you foresee enough issuers saying no on this to the point where like maybe the model just would not be successful off the bat or do you think that it's actually, you know, there's sufficient interest and they will say yes to third parties tokenizing their stock?
I mean, the issuers that I've spoken with, a lot of them are really excited about something like this. But you know there may be folks who say no, that's why we built it in so that people could, but I expect pretty broad excitement. Taylor did you want to add something on who might be using this?
Yeah I was just thinking, you know, just piggyback on that last question which is this is about like kind of reintermediating some of these on-chain venues. So we do expect there to be somebody who kind of steps into that role as the operator of these TSVs, the person who's kind of going to be orchestrating the things complying with the exemptions. And those people could be doing this using just a variety of on-chain tools. So a lot of it laid out in the form of AMMs but types of price discovery mechanisms that can be attached to that AMM I think will be, you know, there'll be a lot of variation there. So, I guess just to boil it down, what's happening is it's kind of, it's more on-chain finance than it is DeFi, I think is probably the answer.
Yeah. I mean, there's also been some comments that the exemption can only go so far because of the caps and the number of stocks and how much each stock can be traded. Do you think these limits kind of give platforms enough room to still build something commercially valuable or viable, I should say, or is this really more of a test run right now?
I mean, the caps are high enough that people can really do something viable. I'm not concerned that they're so low that people can't even do more than just a small experiment. We'll see how things go, right? We'll see if the caps become an issue. That's something that we can talk about. But I think we also wanted to make sure that, you know, that this should be iterative, right? And we should see how things work. We have rules in place and we're trying to figure out a way within which we can operate consistent with those rules and consistent with market participants expectations. Equity markets are highly regulated and so we're really trying to respect that with the sort of iterative small-scale approach that we're taking. But I think those limits are high enough that people really will be able to do substantial experimentation.
What do you think the SEC would need to see before maybe either lifting those caps or expanding them?
Well, I think the first thing to remember is this is envisioned as being, it's a five-year trial, right? And it's leading into longer term rule making. And so as we see how things are operating, I mean if TSVs become something that are widely used and there's a lot of interest in it, we will be able to develop a regulatory regime in which case presumably at that point there would be no limits around how people do it or they'd be limits along the limits that we have on ATSs and things like that where when you hit certain thresholds new requirements apply. So that's how I'm thinking about it and you know sort of with the vision of bringing this within our regulatory perimeter and so I think that will kickstart things. I would say the technology is there for a lot of this and that we're seeing, you know, offshore and other places a lot of tokenization happening and a lot of trading in tokenized securities starting to happen. And so this is like a domestic effort to allow for the regulation to kind of meet the technological moment to the best of our ability at this stage.
Just before we let you go, I just wanted to follow up on one thing about the issuers being able to object. I know we've seen a lot of push back on different kinds of tokenized securities including synthetics which you know are not going to be included in this exemption but as far as the innovation exemption goes are there any risks for issuers to allow a third party to tokenize their stock or is this very controlled because it's in a controlled environment I guess are there any risks at all?
I mean it's very akin to what happens now with custodial securities.
Yeah, the point there is that there's actually a lot of history here around when securities start trading in the secondary market and the rights that the issuers have. Without getting into that history, the point here is we're trying to take incremental steps towards the future of on-chain trading and making sure that issuers feel confident as these markets develop.
And in my conversations with issuers over the years, not just in the context of tokenization, they're really interested when they go public in having their shares be liquid. That's the whole reason they go public. And offering new venues where things can trade, I think, is a positive. And markets are really good at interlinking different venues. And I think that's what I'm really excited about seeing with the TSVs. Seeing the tokenized markets interlink with the more traditional markets and I think that'll be positive for our markets as a whole.
Perfect. Commissioner Peirce and Taylor Lynman from the SEC, thank you guys so much for joining us.
The crypto industry pushed back hard, accusing banks of only protecting their business models and trying to derail the bill. Joining us now is Brooke Ibara, senior vice president of innovation and strategy at the American Bankers Association where she leads the office of innovation.
I want to start with probably the biggest question for the banks on the banking side. I really think this is the biggest question. The Clarity Act now stalled obviously. So, the Genius Act remains the law of the land and platforms like Coinbase can keep offering pure yield on stable coin balances, not just rewards. Where does that leave the banks?
Yeah, well, again, thanks for having me here. I think we're waiting for the OCC's final rules to come out. I think Comptroller Gould has said we should expect those maybe in the November time frame and we understand the rule is actually at OIRA now. And that'll be, we'll know a lot more I think once we see that. We of course commented on the proposal and there has been, you know, the concept is introduced about indirect payment of interest and kind of how those economics flow through from the issuer and how that might be considered a prohibited payment. And so we'll see. I think it's too soon to say exactly how the Genius Act is going to be implemented on that front. But our, I guess the bottom line is, you know, we'll keep pushing to ensure that stable coins don't become a store of value product, right, that they serve this intended purpose for payments and I hope we'll get into, you know, there's several banks that are looking to use stable coins as a payment rail as well and but when it comes to that store of value that is going to reduce the availability of deposits and have that negative impact on lending. You know, that's where our concern is.
Yeah, definitely want to get into some of the use cases you're seeing with the community banks and beyond. I do just want to get your take on, you know, with the lobbying effort that was put in here by the banking industry. You know, you did manage to convince several Republicans on the Senate side to vote, you know, against the bill. Do you think I mean that obviously was not the reason that the bill ended up failing? It was I think very much to do with the ethics side of the argument. But do you think the banking industry, you know, sort of overplayed its hand here when it ended up with less than it does now with the Genius Act?
No, not at all. In fact we feel really good about the number of senators that really understood our position that heard from their constituents both community bankers and from the small businesses, the farmers, you know, that were really stood to be impacted by a decrease in the availability of credit coming from banks. And so that's important. This conversation is going to keep going, right. Maybe for now the Clarity Act is going to struggle just given the clock and the timing with the Senate but we strongly believe, you know, this country needs regulatory framework for digital assets and so we think, you know, this is a process and we've done a lot of education and advocacy that is going to come back and be valuable when this conversation is picked up again.
Just to be clear though, you are now relying on the OCC rule making to potentially help out with that.
