The U.S. Securities and Exchange Commission appears to be broadening its efforts to understand blockchain technology and its implications for the securities industry. Although there is no single definition of blockchain technology, it typically involves a type of distributed-ledger technology that includes a decentralized, public or private peer-to-peer network that records transactions that occur through the network in shared digital ledger.  Oftentimes, each node in the network maintains a full or partial copy of the continually updated digital ledger.  A number of participants in the financial services industry are considering and testing the use of blockchain technology in their businesses.

The SEC’s formal work on blockchain-related matters seems to have begun with the establishment of the Digital Currency Working Group, which apparently was started in 2013.  Since that time, the SEC has been asked to clarify whether digital currencies are securities. 

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The SEC has taken the position that although digital currencies may not be securities, shares in entities that own such currencies would be securities.  In the same vein, the SEC also brought an enforcement action against a person who established online venues to trade securities using virtual currencies without registering the venues as either broker-dealers or securities exchanges.

The SEC’s activity with respect to blockchain technology outside of digital currencies became visible over the past year. 

In December of 2015, the SEC’s Division of Corporation Finance reviewed the registration statement of Overstock.com, which sought to sell digital securities through a public offering.  That registration statement became effective on Dec. 9, 2015.  This appears to be the first time a publicly-trade company has registered a public offering of digital securities with the SEC.

Shortly after the Overstock registration statement became effective, the SEC published an Advance Notice of Proposed Rulemaking and Concept Release on transfer agent regulations.  The SEC noted in its release that blockchain technology is being tested in a variety of settings to determine whether usefulness to the securities industry.  The SEC then asked if a distributed public ledger system would be useful to transfer agents, which track the owners of securities issued by public companies, and sought comment on how such a system it would be used.  In addition, the SEC requested input on what regulatory actions would be necessary, if any, to facilitate the use of distributed ledgers by transfer agents, and whether transfer agents’ use of these systems would be consistent with federal securities laws and regulations.

This past spring, Mary Jo White, the SEC’s Chair, discussed blockchain technology at a meeting of the SEC-Rock Center on Corporate Governance Silicon Valley Initiative at Stanford University.  Chair White noted the proliferation of blockchain technology and identified as a key regulatory issue whether blockchain applications require registration under existing SEC regulatory regimes, such as those governing transfer agents and clearing agencies.

The SEC is considering two issuers applications to list exchange-traded funds the underlying assets of which are bitcoins.  The SEC this year also issued a cease-and-desist order with respect to an entity that issued securities whose value were tied to the value of bitcoin for violating certain trading practices rules.

On Nov. 14 of this year, the SEC held its FinTech Forum, which included a panel on blockchain technology.  At the FinTech Forum, the SEC’s head of the SEC Distributed Ledger Technology Working Group, Valerie Szczepanik, moderated a panel entitled “Impact of Recent Innovation on Trading, Settlement, and Clearance” that focused on the use of blockchain technology in the financial services industry.  The panelists were Brad Peterson, Chief Information Office/Chief Technology Officer at Nasdaq; Chris Church, Chief Business Development Officer, Digital Asset Holdings; Mark Wetjen, Head of Global Public Policy at DTCC; Professor Emin Gun Sirer, Cornell University; and Grainne McNamara, Principal in the Capital Markets team at PricewaterhouseCoopers.

Certain themes on the use of blockchain technologies in the financial services industry emerged among the panelists.  They agreed that blockchain technology will likely revolutionize and disrupt the financial services industry, but believed the technology is not likely to eliminate the need for existing intermediaries.  Instead, entities such clearing agencies, trading platforms and transfer agencies will need to adapt blockchain technology to their businesses to become more efficient, accurate and secure.

Mr. Church stated that certain elements must be in place before blockchain technology can be broadly implemented, namely network effects, standards, and regulations.  With respect to network effects, a critical mass of organizations will need to utilize blockchain technology before the benefits of the technology are realized.  Standards governing blockchain technology will also need to be established.  That task should largely fall to the blockchain community itself through standard-setting groups such as the Hyperledger Project.  Finally, regulation needs to be established to secure the privacy of data held by and transmitted using blockchains.

The panelists also acknowledged that blockchain technology might not be appropriate for all businesses or other organizations.  According to Ms. McNamara from PwC, the technology is most likely to be useful for organizations that:

  • share data among multiple parties;
  • require confirmation of transactions among multiple parties;
  • want to minimize intermediation;
  • engage in time-sensitive business;
  • have multi-party workflows.

Once an organization determines that blockchain technology might be appropriate for its activities, it needs to undertake a four-step process before implementation of the technology:

  • proof of concept;
  • prototyping;
  • pilot programs; 
  • production application.          

It is unclear what the SEC’s plans are with respect to addressing the regulatory implications of blockchain technology.  At present, the SEC seems to be in an information-gathering mode.  Those efforts seem to be primarily aimed at showing that the SEC is aware of the technology as the agency tries to get a sense of the implications of the technology for the regulatory regimes it administers.  Note, however, that its current working group is the most recent iteration of the Digital Currency Working Group, and is reportedly populated with at least 75 persons from across the agency.

What is clear, however, is that the SEC will be forced to make decisions on the regulatory implications of blockchain technology in the near future.  As discussed above, the Division of Corporation Finance permitted Overstock’s registration statement to offer digital securities to the public to become effective.  Overstock recently announced a partnership with a broker-dealer and its intent to start trading its digital shares in December of 2016.  There is no public record, however, indicating that the SEC or its staff has considered how securities issued in digital form will trade and settle.  The SEC will also need to determine if bitcoin-based ETFs can be listed for trading on stock exchanges.

To address the regulatory implications of blockchain, the SEC needs personnel who understand the technology.  The working group reportedly has hired outside consultants to educate it on blockchain technology.  Little else is known about these efforts at this time, however.  Moreover, the SEC’s blockchain effort is in its infancy, so its staffing and resources may evolve as blockchain technology’s use in the securities industry evolves.

Matthew Comstock is a partner with Murphy and McGonigle, PC, where he has a diverse practice covering all aspects of the broker-dealer, trading and markets business. Previously, Mr. Comstock was an attorney in the SEC’s Division of Trading and Markets, where he held the positions of Branch Chief, Special Counsel and Staff Attorney in the Office of Financial Responsibility.


The views expressed by authors are their own and not the views of The Hill.