Crypto Task Force Written Input

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.

• Clarify that decentralized finance protocols do not constitute "exchanges" or "broker-dealers" under the Exchange Act if there is no meaningful human intermediation or custodial control.
• Establish a safe harbor framework for DeFi trading and lending protocols that are progressing toward decentralization, modeled on Commissioner Peirce’s proposed Rule 195.
• Exclude neutral frontend interfaces from broker-dealer rules if they merely facilitate user access to DeFi protocols without exerting control over user assets or transaction execution.
   

• The letter urges the SEC to recognize convertible digital instruments, such as SAFTs and token warrants, as "qualifying investments" under Rule 203(l)-1 of the Investment Advisers Act of 1940, arguing that these instruments are functionally and economically similar to traditional venture investments.
• It highlights the operational and compliance burdens created by the current regulatory definitions, which exclude these digital asset structures, thereby hindering capital formation and innovation within the blockchain sector.
• The letter proposes that regulatory clarity on the treatment of these digital assets would enhance U.S. competitiveness, bring more activity onshore, and prevent the exodus of innovation.

• Fidelity supports the withdrawal of the Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities and recommends identifying best practices for broker-dealers that custody digital assets.
• Fidelity urges the SEC to clarify that a broker-dealer may offer its customers a fully-paid lending program for digital assets.
• Fidelity recommends establishing a safe harbor to support secondary trading of digital assets that are not investment contracts.

• SIFMA urges the SEC to reject requests for immediate no-action or exemptive relief for tokenized equities and other digital assets, advocating for a more substantive notice and comment process instead.
• SIFMA emphasizes the importance of retaining investor protections provided under federal securities laws, particularly when considering new forms of technology and trading platforms.
• SIFMA highlights the need for public debate on policy questions related to the trading of tokenized NMS securities, including the application of Regulation NMS and the potential impact on market transparency and liquidity.

• The letter urges the SEC to clarify that tokenizing or creating a cryptographically authenticated digital representation of an asset does not convert a non-securities transaction into a securities transaction.
• TDC recommends that the SEC issue formal guidance and commence rulemaking to exempt bona fide consumer sales of goods and services (including NFTs) from securities laws where no profit or equity interest is offered and there is no contractual obligation for repayment.
• TDC suggests that the SEC provide formal guidance on the application of securities laws to stablecoins and wrapped tokens, ensuring that these digital assets are not unnecessarily classified as securities or investment contracts.

• The SEC should issue targeted relief for public offerings of investment contracts involving Tokens, including guidelines for material information disclosure.
• Investment contracts are not equity securities and require bespoke disclosures distinct from traditional equity securities.
• Tailored disclosure requirements should be developed for investment contracts involving Tokens, with disclosures made at the time of the offering and updated as necessary.

• The Blockchain Association (BA) recommends that the SEC amend the RIA Custody Rule to allow registered investment advisers (RIAs) to choose between self-custody and third-party custody of crypto assets, subject to appropriate safeguards.
• BA suggests expanding the definition of "qualified custodians" to include state-registered trust companies, state banks, and other appropriately registered crypto asset-native custodians.
• BA advocates for a principles-based approach to crypto asset custody, allowing RIAs to leverage technological advances and adopt tailored safeguards for client assets based on specific custody practices and circumstances.

• The Commission should provide guidance that state-chartered trust companies and similar institutions qualify as "banks" for purposes of Section 17(f) of the Investment Company Act of 1940.
• The definition of "custody" under the 1940 Act with respect to crypto assets should mean possession of the private keys associated with such assets.
• The Commission should propose a custody rule specifically tailored to the unique characteristics of crypto assets, including the use of multi-signature wallets and cold storage solutions.