Crypto Task Force Written Input

• Cryptocurrencies, despite lacking traditional security characteristics, should be subject to disclosure and protection standards akin to those under the Securities Act of 1933 and the Investment Company Act of 1940 due to their accessibility to unsophisticated investors.
• The absence of intrinsic value, backing, or cash flow in cryptocurrencies makes them particularly risky and difficult to value using conventional corporate finance methods, necessitating enhanced regulatory scrutiny.
• The SEC is urged to initiate a formal notice-and-comment rulemaking process to ensure inclusive public participation and to establish clear regulatory frameworks that promote responsible innovation and market integrity.
   

• Ava Labs proposes a new regulatory category—“Protocol Tokens”—defined as intangible, commercially fungible assets integral to the functioning of a protocol. These tokens should not be classified as securities, regardless of whether they are in a pre-functionality or functional state.
• The SEC should adopt a rulemaking framework that presumes offers and sales of Pre-Functionality Protocol Tokens are investment contracts, but allows for rebuttal and provides a new exemption (“Regulation PT”) with tailored disclosure, AML/KYC, and filing requirements.
• SEC-registered intermediaries (e.g., broker-dealers, ATSs, NSEs) should be permitted to support Protocol Token activities under existing frameworks, with targeted amendments and interpretive guidance. A transitional grace period should allow such activities pending final rulemaking.
   

• Proposes a tailored safe harbor under Category 3 of Regulation S for token offerings, addressing challenges like continuous token distributions and flowback restrictions.
• Suggests updates to Category 1 of Regulation S to make it workable for FPIs of crypto assets, including adjustments to the "substantial U.S. market interest" test and Exchange Act registration thresholds.
• Recommends digital-native compliance methods such as geoblocking, on-chain controls, and electronic purchaser certifications to satisfy Regulation S requirements for crypto assets.

• Regulatory frameworks for tokenized securities must preserve core investor protections—such as best execution, custody safeguards, and conflict-of-interest disclosures—by adapting existing securities laws rather than bypassing them.
• Any innovation exemption or regulatory sandbox must include public input, clear disclosure requirements, and structural guardrails (e.g., transaction caps, duration limits, and exit criteria) to prevent regulatory arbitrage and protect market integrity.
• Tokenization does not alter the legal nature of an asset; thus, tokenized securities and derivatives must remain subject to existing securities and derivatives laws, with regulatory treatment based on economic substance rather than technological form.

• FIA PTG urges the SEC to formally recognize that the Howey test must be applied on a transaction-by-transaction basis, and that most secondary-market crypto transactions do not constitute securities transactions unless under exceptional circumstances.
• The group supports a safe harbor framework, as proposed by Commissioner Peirce, to provide legal certainty for crypto projects during their development phase, emphasizing decentralization based on control rather than ownership thresholds.
• FIA PTG recommends that tokenized assets and stablecoins be explicitly recognized as eligible collateral under SEC rules, provided appropriate risk management policies are in place.

• The SEC should not create a new registration category for platforms trading tokenized securities; instead, it should adapt existing frameworks (e.g., NSE, ATS) to accommodate blockchain-based trading infrastructure.
• The SEC should clarify or amend rules to permit side-by-side and pairs trading of securities and non-securities (e.g., stablecoins, bitcoin) on a single platform, treating such transactions as securities trades when appropriate.
• A principles-based approach to best execution should be adopted for both offchain and onchain environments, emphasizing transparency, operational integrity, and flexibility in execution standards.

Suggests that the SEC develop a “fit for purpose” regulatory framework that is flexible, adaptive, and principles-based, and that is technologically neutral while accounting for the unique nature of blockchain technology.

The letter makes the following specific recommendations and arguments:

• General enabling rule- blockchain in and of itself does not violate the law.
• Allow blockchain ledgers to serve as record of ownership.
• Confirm that B-Ds holding tokenized securities can serve as qualified custodians.
• Confirm that transfer agents can comply with requirements by keeping records on-chain.
• Determine that tokenized book entries by custodians are not separate securities.
• Consider where modifications are necessary to permit use of blockchain within existing national market structure framework.
• Allow shareholder self-custody of tokenized securities.
• Appy securities laws at the application level, not the layer 1 network level.
• Interpret the GENIUS act to mean that yield-bearing stablecoins are under the jurisdiction of the SEC.
• Take steps that allow for exploration of atomic settlement, including a potential sandbox.

Create a sandbox for tokenized securities potentially covered by Reg NMS, and adopt a process for expedited rule changes, relief, and guidance in that area.

Proposed legislative language for an amendment to the Securities Act of 1933 that would codify an exemption for certain transactions relating to DePIN. This proposed legislative language includes a definition of DePIN and the requirements for qualifying for such an exemption.

The letter addresses two main questions:

1. How should a given crypto asset be evaluated to assess whether it is readily convertible into cash?
2. How should crypto assets be evaluated to determine the appropriate haircut to apply?

The letter provides a comprehensive framework for evaluating crypto assets and proposes the following:

• Crypto assets should be considered for the same deductions as traditional financial assets to the extent that the same liquidity concerns or operational risks exist.
• A broker-dealer should be required to establish, maintain, and enforce reasonably designed written policies, procedures, and controls to demonstrate title to and exclusive control over the crypto assets it holds in custody.
• A ready market exists for any crypto asset that has maintained market capitalization above a specified level over at least the previous six months, based on data from one or more Covered Exchanges.
• The haircut for crypto assets should be based on a balance between liquidity, simplicity, and consistency or parity across comparable asset categories.

The letter also addresses recordkeeping requirements for broker-dealers and proposes that:

• The Commission should consider clarifying that blockchains or distributed ledgers can be used as electronic recordkeeping systems for the purposes of Rule 17a-4.
• Broker-dealers who rely on a blockchain or distributed ledger for recordkeeping should be required to specify in writing the types of records enumerated under Rule 17a-3 and Rule 17a-4 for which they rely on the blockchain.
• The Commission should consider setting forth its expectations on what constitutes "easy access" or "produceability to the Commission and its staff" for the purposes of Rules 17a-4(a) and 17a-4(b).

The letter concludes by expressing appreciation for the opportunity to provide comments and looking forward to continued engagement with the Commission.

The document provides comments and recommendations on various aspects of tokenized securities, including:

1. Tokenization and its benefits: a16z explains that tokenization enables dematerialized securities to be mobilized and used in new blockchain-based transactions and applications. It highlights the potential benefits of tokenization, such as increased efficiency, reduced costs, and improved accessibility.
2. Transfer agents and blockchain technology: a16z discusses the role of transfer agents in the tokenization process and how blockchain technology can enhance their functions. The firm recommends that the SEC provide guidance on the use of blockchain technology by transfer agents and clarify the application of existing rules.
3. Tokenized securities and the Investment Company Act: a16z addresses the unique issues raised by the tokenization of redeemable registered investment company securities, such as mutual funds and money market funds. The firm recommends that the SEC provide guidance on the application of Section 22(d) and Rule 22c-1 of the Investment Company Act to secondary market transactions in tokenized mutual fund shares.
4. Tokenized securities and the National Market System (NMS) requirements: a16z argues that Regulation NMS should not be implicated in connection with peer-to-peer transactions in tokenized securities occurring through blockchain networks that are not controlled. The firm recommends that the SEC clarify the requirements and provide relief from any requirements under Regulation NMS.
5. Atomic settlement: a16z discusses the benefits of atomic settlement, which enables instant or simultaneous settlement of transactions on the same blockchain. The firm recommends that the SEC issue guidance on atomic settlement standards, launch a no-action framework for settlement innovations, and address margin and short-selling compatibility.
6. Regulatory framework for tokenized securities: a16z recommends that the SEC establish a regulatory framework for tokenized securities that is consistent with the existing securities law framework. The firm suggests that the SEC provide guidance on the treatment of tokenized securities across corporate forms and clarify the "swap" and "security-based swap" status of tokenized securities.