A Creative And Cooperative Balancing Act, SEC Commissioner Hester M. Peirce, SEC 31st International Institute For Securities Market Growth And Development, Washington D.C., May 8, 2025

Welcome to the penultimate day of the SEC’s 31st International Institute for Securities Market Growth and Development. Before I begin, as I am sure you anticipate based on what you have heard from many SEC speakers this week, my views are my own as a Commissioner and not necessarily those of the SEC or my fellow Commissioners.

The Institute’s longevity signals the importance of capital formation and the development of capital markets. These topics can get lost in regulatory conversations, which tend to focus on what government can do to protect investors, rather than what markets can do to protect investors. Efficient, flourishing capital markets do more than serve investors; their function is much grander—to serve humanity. As the lifeblood of businesses and innovation, capital markets help a nation’s economy to meet its people’s needs and generate the societal prosperity that enriches the lives of individuals and their communities. Affording investors an opportunity to share in the fruits of the economy’s growth is a welcome byproduct of well-functioning capital markets and a central element of investor protection.

The capital markets themselves are the means by which investors prosper, but carefully crafted, well-balanced regulation of markets gives investors the confidence to participate in those markets. If a nation regulates its capital markets with too heavy a hand, businesses will wither, innovators will migrate elsewhere, consumers will pay more for inferior products and services, and investors will suffer economically. If a nation establishes a clear regulatory perimeter that provides broad latitude to people to transact as they like, people will have the confidence to make choices that benefit them and their families. An important regulatory objective is ensuring that investors have sufficient, reliable information to be willing to take the risk to invest their money in innovative and growing businesses. This balancing act is not easy, and every country has its own idiosyncrasies that factor into determining the right mix. Moreover, determining the proper regulatory balance is an ongoing exercise in which all countries—no matter the stage of development of their capital markets—must engage.

The U.S. capital markets are well-developed and well-functioning, but keeping them preeminent requires continued care and creativity. Here in the United States, we are constantly asking ourselves how we can do better and watching for signs that something may be amiss in the markets or the way we regulate them. For example, we are reflecting on why the number of public companies listed on exchanges in the U.S. fell from 5,243 in 2004 to 4,862 in 2024.[1] This decline reflects positively on the robustness of our private markets, but the regulatory requirements the Commission has imposed on public companies also are partly responsible for dissuading companies from going public. We need to take a look at these requirements and ask whether some of them are extraneous, or even harmful. Much public company regulation takes the form of disclosure requirements but even disclosure requirements can be costly and distracting to management and may change the company’s practices in ways that are not good for investors. Requiring a company to disclose in detail executive compensation, including how it relates to other employees’ pay, for example, can limit the company’s ability to hire the best people to run the company. Keeping disclosure requirements principles-based and rooted in materiality of the information to investors seeking to maximize the long-term value of the company helps them stand the test of time.

Good regulatory balance also requires ensuring that new competitors can come into the marketplace to serve investors and provide market infrastructure. Sensible regulation protects investors and markets from dishonest and careless intermediaries, whether those intermediaries are established or new. But heavy-handed regulation can protect incumbents by making it too costly for would-be competitors who want to challenge existing firms with better, cheaper products and services. Scaled regulation—imposing fewer requirements on smaller firms—is one way to foster competition. Without dynamic competition, capital markets cannot effectively serve people. Moreover, a concentrated set of incumbents, comfortably hiding behind regulatory barriers, may contribute to market fragility.

Poor regulation may not only keep new competitors out, but may prevent incumbents from using new technologies. Here too regulators can take measures to ensure that regulation does not become a barrier to technology. Rules that mandate objectives to be achieved without prescribing how to achieve them can create a welcoming environment for new technologies. When rules stand in the way of market experimentation with new technologies and fast-to-market innovation, regulators should think creatively. Let me give you a concrete example that I am pondering right now.

As you may be aware, the Commission is revising its approach to crypto regulation. This endeavor is multi-faceted, but one focus is tokenization of traditional securities. Tokenization refers to the use of distributed ledger technology to maintain the record of ownership of traditional assets, including securities, such as stocks and bonds. It entails formatting these assets as crypto assets (or “tokens”) on a blockchain or other distributed ledger technology (“DLT”).

In thinking about how to facilitate private sector tokenization initiatives, I have been inspired by the “regulatory sandbox” structures implemented in other jurisdictions, including some represented in this audience. Those structures have allowed firms to innovate in a live, but controlled, environment. Innovating firms are able to get to market quickly under appropriate, reasonably calibrated conditions. They do not have to comply with inapt regulations, which, in many cases, were developed well before the technologies being tested existed and may be obviated by attributes of that technology. In addition to offering individual firms the opportunity to try something out in the marketplace, these sandboxes can help regulators think about how existing rules could be adapted to accommodate trading tokenized securities at scale.

The SEC’s Crypto Task Force, informed by a February request for comment,[2] is considering a potential exemptive order that would allow firms to use DLT to issue, trade, and settle securities. This potential conditional exemption from certain SEC registration requirements and associated rules would allow firms to use innovative trading systems for eligible tokenized securities. Firms seeking to operate an automated market making system for tokenized securities, for example, may face challenges in complying with the SEC’s Regulation National Market System. Such systems, their operators, or persons interacting with them also may have to register as a broker-dealer, clearing agency, or an exchange. Because only a small number of securities have been tokenized to date, firms may not be willing to devote resources to identify and address the regulatory barriers to trade and settle them. Companies may be hesitant to issue tokenized securities because only a limited number of venues can trade such securities. Exemptive relief could help resolve this chicken-and-egg problem. It also would afford the SEC time to develop and adopt durable adaptations to its existing rules to accommodate DLT.

The contemplated exemption would be conditional. Exempted entities would comply with market integrity conditions for the prevention of fraud and manipulation. Additional conditions might include requirements to provide material and relevant disclosures to users about a platform’s products, services, operations, conflicts of interest, and risks, including smart contract risks; comply with recordkeeping and reporting requirements; be subject to monitoring and examination by SEC staff; and have adequate financial resources for operations. Supplemental requirements for participants offering crypto custodial services might include customer disclosures about custody arrangements and risks and a requirement to implement policies and procedures or substantive requirements related to blockchain and wallet security. Restrictions such as limiting the number and types of tokenized securities listed or traded or trading volume could mitigate risks to investors and markets. The SEC could raise these ceilings for a firm that has performed successfully at its initial limits.

This sketch of a potential exemption is a work-in-progress. The goal is to formulate a commercially feasible approach that protects investors, including by ensuring that they have the benefit of cutting-edge technologies for trading, clearing, and settling securities. I welcome feedback from market participants and other interested parties, including participants in this Institute who have designed and implemented regulatory sandbox frameworks in your jurisdictions. Enabling firms to deploy new products and services in a streamlined fashion contributes to balanced regulation.

Each of us has responsibilities to foster innovation in our own jurisdiction, but cross-border collaboration can help in this regard. Many firms want to serve customers in more than one jurisdiction, particularly because financial markets are international. Regulators would benefit from seeing how products or services work in different environments. Accordingly, I have advocated bilateral collaboration to allow participants in foreign sandboxes simultaneously to run their market experiments in the United States. Such an arrangement would require regulatory information sharing agreements and other cooperation. The challenges that U.S. and non-U.S. firms face in innovating in one nation pale in comparison to the difficulties that await them when they try to offer products and services in more than one jurisdiction. We owe it to our respective citizenry to tackle these frictions through cooperative approaches. The regulatory balancing act is not a solo exercise.

This Institute provides a forum for a discussion of how we can help grow our respective capital markets by implementing a sensible regulatory regime. While each country’s capital market has its own characteristics, this Institute enables regulators to discuss what has worked in developing their markets and, just as importantly, what has not. Getting the balance right in each of our countries is essential, and it is not a zero-sum game. To the contrary, good regulation benefits everyone. Having strong capital markets globally will in turn help foster economic growth at home in all our countries. Balanced regulation in capital markets across the world helps to ensure that resources and, importantly, human talent are deployed in ways that benefit all of us.

Thank you and enjoy the rest of the Institute.