Today, SIFMA president and CEO Kenneth E. Bentsen, Jr. testified before the U.S. House of Representatives Committee on Financial Services at a hearing entitled Tokenization and the Future of Securities: Modernizing Our Capital Markets.
The testimony emphasizes SIFMA’s strong support for innovation in the securities markets and its belief that new technologies such as distributed ledger technology (DLT) and tokenization offer many potential benefits for U.S. investors, issuers and other market participants across the securities lifecycle.
At the same time, Bentsen notes “the continued strength of the U.S. securities markets depends on preserving the investor protections and market integrity safeguards that provides the trust and confidence. That strength and efficiency provides for lower cost and greater availability of capital for issuers, broader access and liquidity for investors, and supports retirement savings, business investment, and economic growth. Indeed, our capital markets fund three-quarters of U.S. economic activity, making them essential to the ability of governments, businesses, and consumers to fund their activities – whether that be a company looking to invest in new plant and equipment, a local government seeking to raise funds for infrastructure projects, or a family taking out a mortgage to buy a home. Robust capital markets also provide American workers with opportunities to invest and prepare for retirement, directly and through investment vehicles like 401(k)s and pension funds.”
Bentsen also notes, “our securities markets thrive because of, not despite, long-standing regulatory frameworks that protect investors and ensure market quality and integrity. The goal of policy makers should be to modernize markets in a way that builds on these strengths rather than bypassing them. Developing a durable approach that is built on existing regulatory frameworks will provide the necessary foundation for the growth and development of tokenized securities markets, enabling innovation to flourish and new operating models to develop while also protecting investors and ensuring that our markets remain the envy of the world.”
The testimony highlights the following recommendations as a path forward to maintain U.S. leadership:
- First, tokenized securities are securities, technology does not change the underlying definition of the instrument. And like any securities, tokenized securities should be subject to the same robust investor-protection and market-integrity rules that have helped make the U.S. securities markets the deepest, most liquid, and most efficient in the world.
- Second, DLT and tokenization can deliver meaningful benefits across the securities lifecycle, but those benefits will be realized on a scalable and durable basis only through technology-neutral, functional regulation that protects investors and preserves market quality.
- Third, while there may be areas where the unique features on DLT create genuine “square peg – round hole” challenges in complying with established regulations, and carefully tailored exemptive relief may be necessary to allow innovation while maintaining the spirit of the regulations and the protections they offer such relief should be reserved for instances where the current regulatory framework is fundamentally incompatible with the technology, making existing requirements infeasible. Even then, bespoke exemptions must be narrow, transparent, time-bound, and aligned with the intent of the underlying regulations.They should never bypass notice-and-comment rulemaking or serve as a substitute for formal rulemakings, especially when investors and other market participants may not benefit from understanding how such exemptive relief could result in changing broader regulatory protections they rely upon today. In such cases, Congress and the Commission must ensure regulations are calibrated to actual risks, avoiding workarounds that might undermine investor protection or market integrity.
- Fourth, tokenization must be evaluated as part of a broader set of market-structure reforms that also includes extended-hours (23/5 and eventually 24/7) trading and the ongoing review of Rule 611 on trade through prohibitions and other areas of Regulation National Market System, and more.
The testimony urges Congress to support “the responsible development of tokenized securities markets by reinforcing that tokenized securities are securities, and they should be integrated into the existing federal securities regulatory framework, not placed outside it.”
The testimony concludes: “Tokenization offers real promise across the securities lifecycle, including in issuance, settlement design, collateral mobility, recordkeeping, transparency, and operational efficiency. But those benefits will only be realized if tokenization develops within a framework that preserves investor protection, market integrity, and confidence in fair and orderly markets – thereby building on, rather than undermining, the strength, depth, and efficiency of the U.S. securities markets that investors globally have trust and confidence in today.”
