Lawyer's Perspective: Interpretation of the US SEC Chairman's Details on On-chain Issuance, Custody and Transaction

Authors: Liu Honglin, Shao Jiayi

If you say that the US SEC has a good relationship with the crypto industry in the past two years, it basically means that tigers believe in Buddhism and love vegetarian food. Most of the time, the SEC's attitude is either "don't do it first" or "if you dare to do it, I dare to sue it." But now the style seems to have changed a little.

On May 12, the U.S. Securities and Exchange Commission Chairman Paul S. Atkins gave a highly content-intensive speech at the Crypto Assets Roundtable. At first glance, it is an industry exchange, but it is actually a systematic reflection on the SEC encryption regulatory model in the past few years. More importantly, he spent nearly an hour re-explaining the regulatory logic of "on-chain securities".

If we summarize the tone of his speech in one sentence, it is: the rules should be written clearly, and it should not be scary by law enforcement.

This is the first time in recent years that the SEC has clearly proposed to establish a "special regulatory framework" for issuance, custody and transaction of crypto assets, and acknowledges that the current rules do not apply to on-chain assets. This is a signal that cannot be ignored for the entire Web3 industry.

Issuance: It’s not that you don’t allow it to be sent, it’s that “you

can’t fill in this form”

In recent years, the SEC's strategy on Token issuance has almost been "illegal by default", but it does not give a legal path. As long as most projects dare to touch American investors, they must be prepared to respond. Even if you want to comply with the rules, you will often get stuck in the form itself and not applicable.

S-1 is a standard registration document filled in during an IPO in the United States, requiring detailed disclosure of executive compensation, capital use, corporate governance structure and other contents; Reg A (Regulation A) is a lightweight registration exemption mechanism designed for small and medium-sized issuers. However, for most Web3 projects, both tools seem too bulky or even incompatible. For example, the Token project does not have a traditional corporate structure, and the purpose of funds is often automatically executed on the chain, and many core content cannot be "pre-written".

Chairman Atkins said it bluntly this time: the current disclosure requirements for securities issuance should not be forced to be placed on-chain assets. "The square nail should not be forced into the round hole," he said this sentence directly in his speech. He proposed to promote registration exemptions, disclosure templates and safe harbor clauses specifically applicable to crypto assets, and explore more realistic regulatory paths.

He also specifically pointed out the SEC's past "ostrich-style management": at first it was pretending to be invisible, hoping that the industry would perish itself, and then dived into law enforcement and used individual cases to create deterrence, but there was never a unified rule. Now he made it clear that the rules should be passed by the committee and no longer rely on "improvised law enforcement."

Hosting: Technology is not a problem, the problem is that the system is

stuck in technology

The issue of custody of crypto assets has actually been a question of "who will manage it" in recent years. Traditional financial institutions were frightened by SAB 121, and had no legal status in self-custody. As a result, many funds and institutions wanted to participate in on-chain asset allocation and were eventually stuck in the custody process.

SAB 121 is an accounting announcement issued by SEC staff in 2022, requiring companies to include custodial client crypto assets in their balance sheets, resulting in a sharp increase in regulatory risks. The original intention is to protect user assets, but the actual effect is to allow most banks and securities companies to withdraw from the crypto custody market.

Now that SAB 121 has been revoked, the Chairman has made it clear that this document is "illegal, unauthorized, and has a bad impact." But more importantly, he began to talk about how to repair the next step.

He pointed out: As long as the security is sufficient, technical capabilities can replace traditional custody qualifications. Under certain conditions, self-hosting can also be a compliance option. This actually opens up compliance possibilities for DeFi platforms, wallet manufacturers, and even on-chain asset management projects.

In addition, he also criticized the failure of the "Special Purpose Broker-Dealer" system design, and only two companies were approved, and the results were not good. He hinted that this mechanism needs to be reconstructed, that is, the compliance paths for custody and transactions in the future may be reintegrated and the threshold will be lowered.

Trading: From "Trading is Touching the Law" to "Limited Waiver Pilot"

The SEC has long held a strong regulatory stance on on-chain asset trading, especially on the hurdle of "whether it belongs to securities", which has put most Token projects in a vicious cycle of "not implementing, not complying with regulations, and not daring to go online".

In this speech, Chairman Atkins' statement was clearly loosened. He proposed to make the ATS (Alternative Trading Systems) platform support mixed transactions between securities and non-securities.

ATS is a classification of securities trading platforms under the US regulatory system. It can be understood as "non-listed exchanges". Many digital asset platforms have tried to register as ATS to provide compliant trading capabilities. However, the ATS system currently does not clearly define crypto assets, which has led to the dissuasion of most platforms.

The Chairman also emphasized in particular the need for an “immunity mechanism”. That is to say, if a project cannot meet all compliance requirements due to technological innovation or special structure, the SEC may provide testing space under certain conditions. This is not a laissez-faire, but a compliance channel with conditions, supervision, trial and error.

Industry impact: regulatory boundaries are no longer based on guessing,

compliance space begins to emerge

The greatest significance of this speech is that it is not a case description of a certain project or a member’s personal opinion, but the SEC Chairman, under the authorization of the committee, fully expressed the logic of crypto asset supervision for the first time.

The policy background behind this is also clear: the Trump administration hopes that the United States will become the "global crypto capital", and the SEC, as the core financial regulator, can no longer pretend to be a crypto asset as a corner business.

In the next few years, on-chain securities, stablecoins, RWA, and Token payment platforms may become pilot windows under the new SEC rules. Entrepreneurs and project parties must also move from the original "regulation" model to the "design endogenous compliance" state.

As a Web3 lawyer’s advice: It’s not “can do it”, but “do it according to

law”

From a practical point of view, we would recommend:

First, pay attention to the structural adjustment of issuance paths such as S-1 and Reg A. If the SEC promotes crypto-exclusive disclosure rules, the project party can reasonably choose the registration exemption method without having to start evading from issuing coins outside the United States every time.

Second, pay attention to the preparation of custody compliance. Whether it is an on-chain wallet, self-hosting system, or relying on third-party service providers, they need to evaluate their compliance boundaries under the new rules as soon as possible.

Third, pay attention to policy adjustments to ATS and related trading platforms. If you are a project that is engaged in exchanges and matches products, it may be the window period for structural design to be re-launched.

Fourth, carefully evaluate whether the project is applicable to the "conditional exemption" mechanism. Some early projects may not be suitable for full registration, but landing paths can be obtained through rule exemptions. This is a compliance route, not a gray channel.

This speech is not announcing that the crypto industry is "can do it", but provides ways to talk about it.