August 22, 2025 • 35 mins
The SEC’s new regime under Paul Atkins is taking a friendlier approach to crypto, epitomized by Project Crypto, its blueprint for merging traditional and digital finance. In this week’s Votes and Verdicts podcast, Bloomberg Intelligence analysts Elliott Stein and Nathan Dean are joined by BI’s Head of Market Structure Research, Larry Tabb, to discuss the opportunities and challenges. Tabb gives a detailed explanation of the project, with the discussion covering the potential ramifications for trading, settlement, custody and liquidity, as well as how it fits within the SEC’s broader agenda. The status and timing of Congress’s CLARITY Act was also discussed.
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Episode Transcript
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Speaker 1 (00:15):
Hello, and welcome to the Votes and Verdicts podcast, hosted
by the litigation and policy team at Bloomberg Intelligence, the
investment research platform of Bloomberg LP on the Bloomberg terminal.
Bloomberg Intelligence is five hundred analysts and strategists working across
the globe and focused on all major markets. Our coverage
includes over two thousand equities and credits, and we have
(00:36):
outlooks on more than ninety industries and one hundred market industries,
currencies and commodities. This podcast series examines the intersection of
business policy and law. I'm Elliott Stein and analysts with
Bloomberg Intelligence covering financials litigation, and.
Speaker 2 (00:51):
My name is Nathan Dean, and I'm an analyst with
Bloomberg Intelligence covering financials policy.
Speaker 1 (00:56):
And we are delighted today to be joined by our
esteemed BAT colleague Larry tab who is bi's head of
Market Structure Research. And the topic that we wanted to
talk about today is the SEC's Project Crypto, which was
released July thirty first and really aims to reshape the
regulatory landscape for digital assets. Larry published a really insightful
(01:19):
report analyzing the various impacts that this effort could have
on both traditional finance as well as the digital assets space,
and we thought it would be good to have him
on the podcast to talk about his research. Just as
a quick reminder for Bloomberg Terminal subscribers, you can find
all of our bi research on the Bloomberg Terminal at
big you can find all of our litigation and policy
(01:41):
research at BI laws go, and you can find Larry's
market structure research at bimkts go. Just a timestamp this episode,
because things move quickly in this policy and litigation world.
It's August twenty first, twenty twenty five. It's a little
after three pm Eastern daylight time. And with all that
(02:02):
out of the way, Larry, let's bring you in. How
you doing.
Speaker 3 (02:05):
I'm doing great. Thanks, thanks for having me on the podcast.
Always great to be with you guys. You have tremendous
insight into what's going on in the in the policy
and the legal world of finance. So I'm happy to
try to add my two cents or learn some stuff
from you. Guys.
Speaker 1 (02:22):
Well, the feeling is virtual and we're excited to have
you here as well. Not not your first episode, we
had you with Dan Gallagher from Robin Hood last year,
so it's good to have you back. So we've known
for some time that, you know, the new SEC leadership
under Paul Atkins would take a much friendlier approach to
crypto than the Gary Gensler regime. Did you know? We
(02:44):
saw as the leadership turned over that several enforcement actions
against crypto companies got dropped or settled on favorable terms
for the companies. But Project Crypto really seems to set
the table for a much more ambitious overhaul of how
crypto is regulated in the US, how it's sort of
integrated into the broader financial system. To start off, why
(03:06):
don't you give us sort of your sense of what
Project Crypto is, what the SEC is trying to accomplish,
and you know, sort of where you see it going
from here.
Speaker 3 (03:16):
Yeah, in a nuts, what they're trying to do is
enable competition between traditional financial products and crypto enabled financial
products and try to put each of which on a
level playing field. And that means, you know, enabling crypto
brokers to in effect facilitate traditional assets and have traditional
(03:41):
firms facilitate crypto assets and trading, and a lot of that,
you know, kind of makes sense at a high levels like,
you know, if I've got a robin Hood or a
SWAB or you know, Morgan Stanley Financial Advisor account, why
can't and it have my bitcoins or my ethereum or
(04:04):
my stable coins in it?
Speaker 1 (04:06):
Uh?
Speaker 3 (04:06):
And from the other standpoint, if I have a coin
based account, why can't I have traditional equities in it?
And why isn't that all put together on one statement,
one screen, and one set of in kind of a
consolidated set of rules. So it makes a lot of sense.
(04:26):
On the other hand, it opens up a whole host
of practical challenges in areas where we need further definition
and areas where we really need to need to think
about stuff. And the crypto guys kind of one their
cake and needed too. They kind of want to be
(04:47):
able to tokenize equities and and then manage them under
a completely separate set of rules than equities trading on
exchange on traditional exchange, with traditional equities trading on exchange.
And on the other hand, the banks and brokers will
have I most of them, I won't say I think
(05:08):
folks like robin Hood who have new, newer infrastructures, but
by and large, most traditional brokers will probably have a
challenging time getting crypto and traditional securities to work seamlessly
together within a cohesive technology framework.
Speaker 1 (05:29):
I mean, it feels like we're sort of at a
pretty major inflection point in terms of absolutely I mean,
you know, what would you compare this to.
Speaker 3 (05:39):
It's a combination of you know, the foundation of DTCC
and what was it the sixties or seventies, and the
digitization of well not even the digitization, but you know,
you know, internet brokerage, UH self directed brokerage. You're at
(06:02):
a lot of different intersections here, and we probably need
to talk about event contracts. We're seeing event contracts be
you know, increasingly commingled with you know, traditional UH brokerage services,
So there's a lot of stuff going on at the
same time that's going to be pretty interesting to kind
of define all the rules and how, you know, how
(06:25):
everything works.
Speaker 1 (06:26):
Yeah, and I mean on event contact. So we could
probably do a whole separate episode on that, and I
think I think we probably will. You know, as you know,
Brian Egger, who's our gaming analyst, put out a note
this morning on some of the things that Calcey is doing,
so stay tuned for more on that.
Speaker 3 (06:43):
Yeah, Sammy just to deal with with with fandle to
try to create an events platform, and there's that's a
whole here, rate, that's a whole episode.
Speaker 1 (06:53):
Yeah, it just seems like there's so many competing interests
in you know, trying to integrate the digital assets space
into traditional find it's I mean, how much how much
of a talent? Yeah, how much of it talents? Is
that going to be?
Speaker 3 (07:04):
It's going to be a huge challenge. First of all,
let's talk about some of the real macro issues. So,
you know, I don't think that too many people disagree
with the ability for an individual to be able to
trade crypto assets and traditional assets in one place. I
think that makes a lot of sense. The question becomes
is what are the rules of the road going to be?
And that's a huge issue. So right now, in terms
(07:27):
of equities, there's an order protection rule which is actually
which in effects and that combined with best execution kind
of governs how US equities are executed. And so if
you send an order to the wrong exchange, the exchange
has a role that they need to forward that order
to exchange with the best price, and brokers have the
(07:49):
best execution role so that they you know, if you
don't get the displayed price on a market at the
time you trade, you can go to the to the
to the broker and complain and they there's a good
chance they'll make you whole. So souh. That is not
(08:09):
true with crypto. Crypto generally trades in a vertical silo,
where the cash, the coins, the exchange, the custody all
take place within one company, and so there's you know,
so if you have your assets of coin base, you're
probably going to chape trade on a coin based exchange
(08:29):
and if cracknner some other market has a better price
for that coin, you probably won't get it. And that's
not the way that traditional equities trade, so that needs
to be worked out. The other issue is that Robinhood
a couple of weeks ago announced that they were going
to tokenize equities and actually were specifically talking about privately
(08:54):
private equity, so SpaceX and open ai, and they were
going to allow European investors to buy these tokens. And
that opens up a whole bunch of issues, like where
you know is let's just say open ai. So if
open ai had an I p O and issued stock,
(09:14):
the first person to buy that stock at the I
p O, those proceeds would go to open AI. Who's
going to get the proceeds of this tokenized equity? Is
it going to be uh open AI or is it
going to be Robinhood. Does Robinhood have any you know,
uh obligation to send this money to open Ai? Does
(09:34):
open AI have the ability to say no, Robinhood, you
can't tokenize my stock, because they'd come out actually saying
that they really don't. They're not interested in having their
stock tokened. As well as private securities have a host
of regulations and liquidity rules around them so that the
underlying issuer has the has the right to say no,
(09:55):
I will I won't let Elliott and Nathan have a
have a you know, be able to transfer their private
stock between each other or trade them so they could
actually open a I could watch you know that trade
between you guys. And as the other issue also is,
you know, does Robinhood does Robinhood actually own the open
(10:19):
AI issues or they just tokenizing something out of thin air?
And and you know, is there anything actually standing behind that?
And if that's the case, then is is this just
a treasury transaction for Robinhood? Do they collect money today
with no actual liability, no no need to actually go
out and buy the shares or now that may provide
(10:42):
them some risks later on. But there are all these
questions that need to be answered.
Speaker 2 (10:48):
You know, I was reading a research note and I
think you just addressed what we in the business and
BI called bit. So if you look at his research note,
it stands for Bloomberg Intelligence thoughts. So if you ever
look at one of our note, it's it's paragraph, paragraph, paragraph.
We called him a stand You know, I didn't. I
didn't know that either. I didn't know that either.
Speaker 3 (11:07):
You learned to see I love coming on this show.
I learned something I've been here from more than five years.
Speaker 1 (11:12):
I didn't know.
Speaker 2 (11:13):
You know, I will stink through the record that it's
been I think eight years since I've heard Bloomberg Intelligence thoughts.
So if any of our Bloomberg Intelligence colleagues listen to
this and that it's not Bloomberg Intelligence thought, let's just
rename it Bloomberg Intelligence thought and go from there. But Larry,
you know you talked about the you know the title
of your third thought was tokenizing security raises structural questions,
(11:33):
and you just did a really excellent job of taking
us through a lot of those questions. But your second
one was token boom may strain quality as demand surge,
and so as surgeon, and I'd love you to explore
that idea a little bit because tokenization. We just had
Dan Gallagher on you know, a couple of episodes ago
from Robin Hood, and he talked about what tokenization was
and what Robin Hood's view of tokenization was. But as
(11:57):
you see the market moving forward with this idea of organization,
what does that mean for quality as demand surges?
Speaker 3 (12:04):
So think about it this way. Who's going to be
issuing these tokens? Well, first of all, I think I
broke things down into native tokens and non native token
so we're only talking about natively issued tokens right now.
Speaker 1 (12:19):
You know, you just explain what that means.
Speaker 3 (12:21):
Yeah, So me as a company, I issue with stock,
and that stock doesn't exist in physical format, doesn't exist
in traditional book entry format DTCC. It only exists on
the blockchain. So the original issue security is issued on
the blockchain. And that's actually the best way to do this,
(12:41):
so you don't have to worry about you know, this
is you know, this token is officially issued by IBM.
Let's just say it represents the share of IBM, and
it's not created by Robinhood, it's not created by Larry Tabb,
it's not created by Nathan Dean, it's not created by
anybody else but IBM. Okay, and IBM gets the proceeds
(13:04):
to that. That's the best way, theoretically, the best way
to do this. So the question is on day one,
what kind of tokens are going to be out there?
By in large people weren't able to do this, so
there's going to be no tokens out there, and so
you've got I don't know, well, I think what they
(13:28):
got like somewhere around they'll call it ten thousand securities
equities that are traded in the US. Those ten thousand
securities already have been issued. They're sitting at DTCC in
vaults and the pot in the depository. They already exist.
I'm not sure a whole lot of those companies are
going to go and make the effort to all of
(13:48):
a sudden cancel. You know, IBM is not going to
pull all their securities from DTCC and then reissue them
on the blockchain. Most likely, you know, status quo is
going to continue and and those securities are going to
just trade. So the question is who are the new
companies that are going to trade. They're gonna they're gonna
be new I pos, I buy and larger. The largest
(14:12):
companies in the world and the most stable companies in
the world have already issued their stock. There might be
some new i pos coming up, like we saw Bullish
just go i PO a couple of days ago, and
some of these new guys, you know, they can conceivably
issue stock directly on the blockchain, but the number of
(14:32):
really legitimate companies in the beginning is going to be
kind of limited and and so so you're going to
see things like what happened in the I c O boom,
where all of a sudden there's a gazillion icos, nobody
knows what the hell they are, and only a handful
of them will probably have any type of survivorship. The
same with the specs of what three or four years ago.
(14:55):
There's gonna be a lot that come out, maybe a
half dozen, a dozen, maybe even one hundred will be successful,
but by and large you're going to have to comb
through a lot of insight and understanding and research and
analysis and the web and AI to figure out, you know,
is this real or is this memics and you know
memorys I guess going back to the old commercials. But
(15:20):
so the supply of really you know, good companies is
going to be limited at first until we figure out
a legitimate way to either take these traditional equities and
move them on chain and tokenize them in some legitimate
way that I can guarantee that these are real, legitimate shares,
or more new issues come to market, or companies say
(15:41):
you know what, I want these things on the blockchain.
I don't want them at DTC anymore, and I'm going
to you know, take them out of the depository and
put them on the blockchain.
Speaker 2 (15:49):
Do you have a sense of how many years it
would be for you know, traditional finance markets to begin
that shift.
Speaker 3 (15:57):
I would think if it's just natural election, this is
a five to ten year or more process. I think
they would need to be a concerted effort by the
industry to take the shares in DTCC and migrate them
to a blockchain. And they would actually kind of be
the natural place to do it, because they've got either
(16:17):
the physical shares in the vault or they have the
de materialized shares in their computer, they can just say, okay, now,
all of a sudden, we're going to take traditional shares
and replace them with blockchain shares or with tokens. And
it really depends on the industry getting their act together
and doing it.
Speaker 1 (16:34):
Now.
Speaker 3 (16:34):
That said, that gets into the third part of that
research note, which really talks about the challenges of getting
traditional infrastructure to recognize blockchain. Blockchain infrastructure is significantly different
than what's been done in the past. And many of
(16:55):
the investment management technologies, brokerage technologies, these trading these that
this infrastructure is old. It's it's I built some of it,
you know in Lehman Brothers in the and City Bank
in the in the eighties and early nineties, and and
some of that stuff is still around, and some of
it's even older than that. And a lot of the
(17:19):
people like me past retirement age, and a lot of
these guys are gone. So so the question becomes is
who's going to rewrite this back end infrastructure? And and
there's going to be significant risk and there's no vendors
out there that have you know, traditional and there are
very few, if any traditional and blockchain enabled platforms. So
(17:43):
so there's going to have to be a huge migration
of technology to get these things on the same system.
And until then, they're going to have a blockchain system,
and then they're going to have a traditional system, and
maybe they can create dummy securities that they can put
on the traditional system. So your statement shows your blockchain
and your traditional assets, and those things are gonna have
(18:04):
to get reconciled, and that's going to be a big
pain in the butt.
Speaker 1 (18:09):
Yeah, I mean that sort of leads me to my
next question is, you know, some of the things some
of the benefits of blockchain offers are, you know, just
like twenty four to seven trading basically anonymity. But how
do you reconcile that with you know, some of the
limitations of the traditional finance infrastructure, like like you know,
compliance requirements like AMN. Exactly right, That's.
Speaker 3 (18:32):
A very good question. I had an interesting conversation with
a guy the other day who who you know about this,
and he said, there are there are actually new technologies
that are out there that will enable folks to do
They won't do the kind of in depth KYC stuff,
but they can at least determine whether you know, did
(18:53):
this coin come from the from the dark web or
did this was this coin used and in the various transactions.
So there, I think there's the basis of some of
the stuff out there, but it would certainly need to
be integrated with industrial back ends for this stuff. But
it's going to be that's going to be a challenge
like where did this especially when you start getting into
self custody. So I buy this coin, let's just say
(19:17):
I buy it from Coinbase, I put it in my
own wallet. Now I no longer want to deal with Coinbase.
I want to deal with schwab or I want to
deal with EA Trade or Morgan Stanley Trade or whoever. Uh,
And so I open up an account there and now
I want to sell that coin. You know, can can
can those will those guys a you know? Also, if
(19:39):
it's a token, will they even recognize the token? Because
if the token was issued by coinbase and it's a
coin Base official token, will will E Trade Morgan Stanley
take it or or you know? Because to a certain extent,
if it's not like an official corporate issue share, then
the question becomes is are these tokens even punishable? So so
(20:01):
if I buy a token from one place. Does that
mean I'm selling it to the same guy back again,
you know, you know, and that's kind of anti competitive
and and so that creates all sorts of other challenges.
So there.
Speaker 1 (20:18):
This.
Speaker 3 (20:18):
You're not going to see this fully integrated for for
a long time, many years, because there are these cans
of worms that need to be uh straightened out and
fixed up and detangled and you know, reconcile.
Speaker 2 (20:35):
So I'm smiling, and I know our listeners can't see
me smiling because Elliott and I come into every podcast
with here are the questions that we're gonna ask, and
Larry has been probably the best guest that we've ever
had who has brought up the exact topic before we've
gotten to the question, because self custody was the next
up on our list, and Larry just went there with
(20:57):
self custody. But it makes me think, you're your remarks
on self custody and your remarks in which you were
saying that you know it's going to be some time
I'm going to put you in charge of the equity
and the traditional finance markets and.
Speaker 1 (21:09):
All of this.
Speaker 2 (21:11):
You're in charge of the entire let's just call it
global market structure. Now, how do you resolve all of this?
Is it going to be led by the SEC? Is
it going to be led by the industry? Are we
talking industry groups? Now? I would anticipate Larry would just
you know, say this is what we're going to do.
Speaker 4 (21:28):
But how would you resolve this? Is it coming from
industry or from Washington? I think to a certain extent
it might have to come from both. I think Washington's
going to have to you know, first of all, when
you start getting into you know, Clarity and the Genius
Act and some of that stuff.
Speaker 3 (21:44):
You kind of I think, you know, the SEC is
you know, a wonderful regulator. They tend to be very thoughtful.
Let's moll out the last administration, but generally they've been
pretty thoughtful about what they do. But they need guidance.
So when you look at when you go back to
the global financial crisis, this, you know, even though Gainstler
(22:07):
was in charge of the CFTC against her, didn't just
go up and make up all this stuff that he
actually you know, Titles seven and all that stuff. It
was passed by Congress, and you know, he had some
interpretation room and people were upset about some of the
ways he interpreted things, but by and large he got
his marching orders from Congress. I think you're going to
need something there too, So Congress is going to have
(22:29):
to lay out what's a stable coin? What what's it? What?
What is a security token? There's all sorts of utility
tokens and and you know, there could be loyalty tokens
and stuff like that, so that I think the question,
and there might be different regulatory structures around each of
those types of things.
Speaker 1 (22:47):
So what's it? What's a loyalty token?
Speaker 3 (22:50):
You know, think about an airline mile like maybe that
goes like a reworse, you know, and maybe you put
that on the blockchain. Should you should that be regulated
like a security Should that be regulated or should it
not be regulated at all? And then the question becomes is,
let's just say, if United Airline tokens UH Airline miles
(23:13):
become tokens, could you use a United Airline token it
H or United Airline token at American or or or
or Jet Blue And do these things become functional or
fungible and do they have actual value? Because in effect,
you know, MX miles are starting to go that way,
(23:34):
so you can you know, pay bills using MX miles
and stuff. So it's almost like it's a you know,
quasi dollar, even though it's a fraction of a dollar
or whatever. But you know, they've got to define what
what falls into what category?
Speaker 1 (23:48):
Yeah, I mean, you know, when we speak of Washington
in the industry, I will say that this SEC in
particular Commissioner Purse is really good about listening to the industry,
and you know, she goes on the One of the
things I love that she does is she'll go on
the road and visit different cities and she'll tweet out saying, Hey,
(24:10):
I'm going to be in this city, Chicago. Yeah, if
you want to meet up and just chat, you know,
let me know. I think that's so great. And I
know the Crypto Working Group or whatever it's called, is
having multiple meetings with the industry sort of to the
same effect.
Speaker 3 (24:26):
You know, plug for us for our next market structure
event on November twelfth, we have Commissioner per speaking, So
there you go, she's going to be in the building.
Speaker 1 (24:37):
All right, Nathan, I have a question for you, you know,
because we're talking about Washington, and how do you mean
I mean, this sounds like an obvious multi year endeavor.
But how does this all fit within the SEC's broader agenda.
Speaker 2 (24:52):
So this is probably one of the top two, if
not top three priorities over the SEC. I mean, I
actually I'll even take that back. I'll say it's one
of the top two. The other is access to private
capital and you know this idea of you know, spurring
more IPOs, but at the same time, you know, ensuring
that private funds also get their you know, their way
with the markets. And what I will say is is
(25:13):
that you know, Project Crypto was a you know, in
many years past, the regulators have been fairly quiet in
terms of their plans. You know, you really don't know
what their plans are. And Project Crypto was a really
good way of coming out and saying putting their stake
in the ground and saying, this is what we're going
to do. And Sherman Back has said multiple times they're
(25:34):
going to move forward with rulemakings even if Congress, like
Larry was mentioning, with the Clarity Act, even if Congress
doesn't do something with the Clarity Act, the SEC is
going to move forward. Now this is where the optimism
of certain folks in the industries meets Washington realism, and
I get this in the crypto space a lot. You know,
(25:55):
it takes a lot of time for a team of
five or six lawyers to write a six hundred page rule,
even if it's going out for proposal to comment, and
so you know, don't be surprised if it takes them
a little bit to figure out because AID right now
they're just going through listening sessions, they're talking to experts,
they're talking to people in the industry. So I think
a proposal will probably come out mid next year, probably
(26:18):
call it first second quarter of next year. What that
proposal is probably could be a series of proposals. I'm
just saying they really don't know yet what the plan is,
so just don't hold me to it if it's one proposal.
But whatever it comes out will most likely be the
first half of next year, and that's plenty of time
to get this done before the next administration or if
it's the Republicans to keep the House sort of or
(26:40):
the White House, or the Democrats take the White House,
it's plenty of time to get it out there. So
I think, you know, this is something the SEC really
wants to do. You're going to see a lot of this,
and I think to Larry's point about Washington and the industry,
I think this SEC in particular is going to solicit
a lot lot of information from the industries traditional finance, crypto,
(27:06):
you know, tokenization. There's going to be a lot of
information gathering going back and forth between the SEC and
I'll just say Wall Street. And so if we have
any listeners out there, you know, just keep your eyes
because I think there's going to be a lot of
open forums for people to get intel on what the
SEC is thinking.
Speaker 3 (27:23):
And make your voice sure, because because I've been talking
to I'm working on a regulatory project now and talking
to a lot of very senior leaders within the industry,
and they're they're kind of worried, especially on the equity side,
that all of a sudden you wind up with all
this no action stuff, which I think, actually, I think
you're going to see no action efforts go on way
(27:45):
before the rules come out, and so so I don't
I'm not so sure it's going to take you know,
two three four years for this stuff to actually hit,
you know, rubber hit the road. I think you might
see them them do some no actions to either test
the waters or or or move things forward. That said,
(28:09):
they're worried that all of a sudden, you know, you
wind up with a no action We are all of
a sudden, you know, a token I share of IBM
doesn't need to conform the best execution rules or doesn't
need to have you know, have any order protection, or
doesn't need to you know, have any exchange competition whatsoever.
(28:30):
And and you wind up with the share of IBM
that's traded as a token, having a very different price
and trading under very different rules than you know, the
dt c C share, and that could be very problematic
and give you know, it's like, oh wait, I just
bought a share of IBM using a token you know,
(28:53):
and now, and the price is twenty percent different than
than what I see is being offered on NASDAK or
New York And that would definitely I wouldn't say twenty
but could very easily be five, you know, three to
five percent different, and you'd have a very different experience
and people might not be very happy with that.
Speaker 2 (29:13):
And just to clarify, when you when you say no action,
you're talking about no action letters where the SEC releases
a letter out to either a firm or you know,
just saying we're not going to take any action in
response to this.
Speaker 3 (29:26):
Correct, go go do it, you know, go with God,
and then you know, we'll see how it develops and
then we may pull that no action later, or or
it might be impacted by a rulemaking that comes down
the pike a year from now.
Speaker 2 (29:40):
You know, I'm glad you brought that up, because not
only are we seeing that with the SEC, but we're
seeing that with pretty much all the financial regulators. This
idea of regulatory innovation or this regulatory sandbox where the
regulators are going to certain companies or certain industries and
just saying, look, why don't we test this. In fact,
Commissioner Purse gave an interview on Bloomberg Television a couple
(30:02):
of weeks ago where they were talking about tokenization and
they asked her about this idea of pilot programs, you know,
and you know, the Bloomer TV host said, are you
going to have a pilot program on this? And she said,
we'll most likely have it in paraphrasing here, multiple pilot programs.
So I wouldn't be surprised if, you know, you start
(30:23):
to see like ideas over here, ideas over here. But
to your point, even if they give you a no
action letter, they can always pull it.
Speaker 3 (30:30):
There's there's no way you're going to see a pilot
program come out of the SEC. A formal pilot program.
They got there. They got their you know, fingers burnt
on the quote the tech size pilot back ten years ago.
So so which which goes back? They widen spreads for
less liquid instruments and it was actually shot down in
(30:52):
the court. And the issue is around why some people
included and some people not included. So you will not
see a pilot program come down, but you will see
multiple no action letters come down, I think, and it'll
it will be kind of an informal pilot program at least.
That's my two cents. I don't know, Nathan, if you agree.
Speaker 2 (31:14):
I agree that that's how they would do it.
Speaker 3 (31:16):
Yeah, yeah, exactly.
Speaker 1 (31:18):
Just one last question actually for Nathan, because well you
both talked about the Clarity Act, and I know Nathan
you put out a piece recently on the Senate Banking
Committee's Crypto Market Structure Discussion draft that builds on the
House's Clarity Act. So where are we in that process?
What are your takeaways and sort of what's the potential
(31:39):
timing for the Clarity Act maybe getting passed.
Speaker 2 (31:44):
Yeah, so the Clarity Act has already passed the House.
That's the hard work for the Clarity Act. Now it
goes to the Senate, and the Senate has said, nah,
thank you very much, but we're going to do our
own thing. The Senate Banking Committee released their discussion draft
for the Responsible Financial Innovation Act of twenty twenty five,
and that is only one half of the puzzle. The
other half has to come from the Senate Agricultural Committee,
(32:06):
and that committee has said that that most likely will
come in September, because if you remember, the SEC is
under the jurisdiction of the Senate Banking Committee. The Commodity
of futurest Trading Commission is under the jurisdiction of the
AD Committee. Now, what the discussion draft did is it
built this idea of an ancillary asset. So you have
securities commodities and they have ancillary assets. And there is
a self certification process within this discussion draft where if
(32:29):
you're just going to launch a token, you self certified
with the SEC that it's considered an ancillary asset, and
therefore you fall into this different bucket of regulation. The
challenge that I see in this is that I'm not
exactly sure the Senate ad Committee is going to be
happy with this, because for the last few years, the
story of the mantra has always been that a lot
(32:49):
of these tokens are commodities, like bitcoin has already been
deemed a commodity. So if I'm over at the Senate
ad Committee, I'm like, why am I giving the sec
more power here? That's going going outside of my committee,
So I could see it. Don't get me wrong, It's
not going to derail the bill, but I could see
a potential one month two month delay of them trying
(33:09):
to figure this out. But ultimately I do think some
form of the Clarity Act plus some additional language will
pass in the first half of next year. I just
don't think it's going to happen in the tailor of
twenty twenty five.
Speaker 3 (33:22):
Question to you, if I self certify, the last thing
I would do was certify that it was an equity,
because if it is certified as an equity, then all
these other rules come in into effect. Would you know?
Wouldn't I take all my equities and then self certify
that they're not equities.
Speaker 2 (33:40):
But you know that's that's the idea, is that you
would self certify that these are not equities and that
these are ancillary assets. And I think what you just
mentioned is one of the biggest holding blocks that will
come out of the Democratic Party is because the Democrats.
You know, there are enough Democrats can that are voting
for crypto these days. The Genius Act passage proved that.
(34:03):
But you know, I do believe here that I think
the Democrats would be a little bit more comfortable if
this falls with either the SEC or the CFTC, and
that self certification process just gives me a little bit
of you know, hesitation. Yeah, exactly, so, I do think
but for the crypto folks that are listening, I may
(34:23):
be out of a little bit of out a consensus here,
but I do think that you will see a comprehensive
market structure bill pass in the first half of next year,
primarily because if you don't, the regulators are going to
have to figure it out by piecemeal and then the
courts will eventually come in and fill up the rest.
And if I'm a Democratic lawmaker, I want to be
the one to make the decision, not regulators.
Speaker 1 (34:44):
Or the courts. That makes sense, yep, And I think
that's probably a good place to leave it. Larry, thank
you so much for coming on. This is really interesting conversation.
Speaker 3 (34:54):
Elliott Ethan always glad to help you guys out, and
I enjoy these very much itself.
Speaker 1 (35:00):
And we can do a sequel maybe, I don't know,
for you know, end of the end of this year
or maybe first part of next year.
Speaker 3 (35:07):
Well, we should talk about stable coins. That's another huge issue.
Speaker 1 (35:10):
All right, that'll be another episode that prediction markets. We're
starting to get.
Speaker 3 (35:14):
A good list here exactly, all right.
Speaker 1 (35:16):
As a quick reminder, you can read all of our
Bloomberg intelligence research on the Bloomberg terminal at big You
can read all of Larry's research on market on the
Market Structured Dashboard, which is on the Bloomberg terminal at
BI Space MKTS go look for more information about the
event that we talked about with Commissioner Purse. And if
(35:37):
you have any questions about anything we discussed on today's episode,
please don't hesitate to reach out to us. Thanks again,
and have a great day.
Hello, and welcome to the Votes and Verdicts podcast, hosted
by the litigation and policy team at Bloomberg Intelligence, the
investment research platform of Bloomberg LP on the Bloomberg terminal.
Bloomberg Intelligence is five hundred analysts and strategists working across
the globe and focused on all major markets. Our coverage
includes over two thousand equities and credits, and we have
(00:36):
outlooks on more than ninety industries and one hundred market industries,
currencies and commodities. This podcast series examines the intersection of
business policy and law. I'm Elliott Stein and analysts with
Bloomberg Intelligence covering financials litigation, and.
Speaker 2 (00:51):
My name is Nathan Dean, and I'm an analyst with
Bloomberg Intelligence covering financials policy.
Speaker 1 (00:56):
And we are delighted today to be joined by our
esteemed BAT colleague Larry tab who is bi's head of
Market Structure Research. And the topic that we wanted to
talk about today is the SEC's Project Crypto, which was
released July thirty first and really aims to reshape the
regulatory landscape for digital assets. Larry published a really insightful
(01:19):
report analyzing the various impacts that this effort could have
on both traditional finance as well as the digital assets space,
and we thought it would be good to have him
on the podcast to talk about his research. Just as
a quick reminder for Bloomberg Terminal subscribers, you can find
all of our bi research on the Bloomberg Terminal at
big you can find all of our litigation and policy
(01:41):
research at BI laws go, and you can find Larry's
market structure research at bimkts go. Just a timestamp this episode,
because things move quickly in this policy and litigation world.
It's August twenty first, twenty twenty five. It's a little
after three pm Eastern daylight time. And with all that
(02:02):
out of the way, Larry, let's bring you in. How
you doing.
Speaker 3 (02:05):
I'm doing great. Thanks, thanks for having me on the podcast.
Always great to be with you guys. You have tremendous
insight into what's going on in the in the policy
and the legal world of finance. So I'm happy to
try to add my two cents or learn some stuff
from you. Guys.
Speaker 1 (02:22):
Well, the feeling is virtual and we're excited to have
you here as well. Not not your first episode, we
had you with Dan Gallagher from Robin Hood last year,
so it's good to have you back. So we've known
for some time that, you know, the new SEC leadership
under Paul Atkins would take a much friendlier approach to
crypto than the Gary Gensler regime. Did you know? We
(02:44):
saw as the leadership turned over that several enforcement actions
against crypto companies got dropped or settled on favorable terms
for the companies. But Project Crypto really seems to set
the table for a much more ambitious overhaul of how
crypto is regulated in the US, how it's sort of
integrated into the broader financial system. To start off, why
(03:06):
don't you give us sort of your sense of what
Project Crypto is, what the SEC is trying to accomplish,
and you know, sort of where you see it going
from here.
Speaker 3 (03:16):
Yeah, in a nuts, what they're trying to do is
enable competition between traditional financial products and crypto enabled financial
products and try to put each of which on a
level playing field. And that means, you know, enabling crypto
brokers to in effect facilitate traditional assets and have traditional
(03:41):
firms facilitate crypto assets and trading, and a lot of that,
you know, kind of makes sense at a high levels like,
you know, if I've got a robin Hood or a
SWAB or you know, Morgan Stanley Financial Advisor account, why
can't and it have my bitcoins or my ethereum or
(04:04):
my stable coins in it?
Speaker 1 (04:06):
Uh?
Speaker 3 (04:06):
And from the other standpoint, if I have a coin
based account, why can't I have traditional equities in it?
And why isn't that all put together on one statement,
one screen, and one set of in kind of a
consolidated set of rules. So it makes a lot of sense.
(04:26):
On the other hand, it opens up a whole host
of practical challenges in areas where we need further definition
and areas where we really need to need to think
about stuff. And the crypto guys kind of one their
cake and needed too. They kind of want to be
(04:47):
able to tokenize equities and and then manage them under
a completely separate set of rules than equities trading on
exchange on traditional exchange, with traditional equities trading on exchange.
And on the other hand, the banks and brokers will
have I most of them, I won't say I think
(05:08):
folks like robin Hood who have new, newer infrastructures, but
by and large, most traditional brokers will probably have a
challenging time getting crypto and traditional securities to work seamlessly
together within a cohesive technology framework.
Speaker 1 (05:29):
I mean, it feels like we're sort of at a
pretty major inflection point in terms of absolutely I mean,
you know, what would you compare this to.
Speaker 3 (05:39):
It's a combination of you know, the foundation of DTCC
and what was it the sixties or seventies, and the
digitization of well not even the digitization, but you know,
you know, internet brokerage, UH self directed brokerage. You're at
(06:02):
a lot of different intersections here, and we probably need
to talk about event contracts. We're seeing event contracts be
you know, increasingly commingled with you know, traditional UH brokerage services,
So there's a lot of stuff going on at the
same time that's going to be pretty interesting to kind
of define all the rules and how, you know, how
(06:25):
everything works.
Speaker 1 (06:26):
Yeah, and I mean on event contact. So we could
probably do a whole separate episode on that, and I
think I think we probably will. You know, as you know,
Brian Egger, who's our gaming analyst, put out a note
this morning on some of the things that Calcey is doing,
so stay tuned for more on that.
Speaker 3 (06:43):
Yeah, Sammy just to deal with with with fandle to
try to create an events platform, and there's that's a
whole here, rate, that's a whole episode.
Speaker 1 (06:53):
Yeah, it just seems like there's so many competing interests
in you know, trying to integrate the digital assets space
into traditional find it's I mean, how much how much
of a talent? Yeah, how much of it talents? Is
that going to be?
Speaker 3 (07:04):
It's going to be a huge challenge. First of all,
let's talk about some of the real macro issues. So,
you know, I don't think that too many people disagree
with the ability for an individual to be able to
trade crypto assets and traditional assets in one place. I
think that makes a lot of sense. The question becomes
is what are the rules of the road going to be?
And that's a huge issue. So right now, in terms
(07:27):
of equities, there's an order protection rule which is actually
which in effects and that combined with best execution kind
of governs how US equities are executed. And so if
you send an order to the wrong exchange, the exchange
has a role that they need to forward that order
to exchange with the best price, and brokers have the
(07:49):
best execution role so that they you know, if you
don't get the displayed price on a market at the
time you trade, you can go to the to the
to the broker and complain and they there's a good
chance they'll make you whole. So souh. That is not
(08:09):
true with crypto. Crypto generally trades in a vertical silo,
where the cash, the coins, the exchange, the custody all
take place within one company, and so there's you know,
so if you have your assets of coin base, you're
probably going to chape trade on a coin based exchange
(08:29):
and if cracknner some other market has a better price
for that coin, you probably won't get it. And that's
not the way that traditional equities trade, so that needs
to be worked out. The other issue is that Robinhood
a couple of weeks ago announced that they were going
to tokenize equities and actually were specifically talking about privately
(08:54):
private equity, so SpaceX and open ai, and they were
going to allow European investors to buy these tokens. And
that opens up a whole bunch of issues, like where
you know is let's just say open ai. So if
open ai had an I p O and issued stock,
(09:14):
the first person to buy that stock at the I
p O, those proceeds would go to open AI. Who's
going to get the proceeds of this tokenized equity? Is
it going to be uh open AI or is it
going to be Robinhood. Does Robinhood have any you know,
uh obligation to send this money to open Ai? Does
(09:34):
open AI have the ability to say no, Robinhood, you
can't tokenize my stock, because they'd come out actually saying
that they really don't. They're not interested in having their
stock tokened. As well as private securities have a host
of regulations and liquidity rules around them so that the
underlying issuer has the has the right to say no,
(09:55):
I will I won't let Elliott and Nathan have a
have a you know, be able to transfer their private
stock between each other or trade them so they could
actually open a I could watch you know that trade
between you guys. And as the other issue also is,
you know, does Robinhood does Robinhood actually own the open
(10:19):
AI issues or they just tokenizing something out of thin air?
And and you know, is there anything actually standing behind that?
And if that's the case, then is is this just
a treasury transaction for Robinhood? Do they collect money today
with no actual liability, no no need to actually go
out and buy the shares or now that may provide
(10:42):
them some risks later on. But there are all these
questions that need to be answered.
Speaker 2 (10:48):
You know, I was reading a research note and I
think you just addressed what we in the business and
BI called bit. So if you look at his research note,
it stands for Bloomberg Intelligence thoughts. So if you ever
look at one of our note, it's it's paragraph, paragraph, paragraph.
We called him a stand You know, I didn't. I
didn't know that either. I didn't know that either.
Speaker 3 (11:07):
You learned to see I love coming on this show.
I learned something I've been here from more than five years.
Speaker 1 (11:12):
I didn't know.
Speaker 2 (11:13):
You know, I will stink through the record that it's
been I think eight years since I've heard Bloomberg Intelligence thoughts.
So if any of our Bloomberg Intelligence colleagues listen to
this and that it's not Bloomberg Intelligence thought, let's just
rename it Bloomberg Intelligence thought and go from there. But Larry,
you know you talked about the you know the title
of your third thought was tokenizing security raises structural questions,
(11:33):
and you just did a really excellent job of taking
us through a lot of those questions. But your second
one was token boom may strain quality as demand surge,
and so as surgeon, and I'd love you to explore
that idea a little bit because tokenization. We just had
Dan Gallagher on you know, a couple of episodes ago
from Robin Hood, and he talked about what tokenization was
and what Robin Hood's view of tokenization was. But as
(11:57):
you see the market moving forward with this idea of organization,
what does that mean for quality as demand surges?
Speaker 3 (12:04):
So think about it this way. Who's going to be
issuing these tokens? Well, first of all, I think I
broke things down into native tokens and non native token
so we're only talking about natively issued tokens right now.
Speaker 1 (12:19):
You know, you just explain what that means.
Speaker 3 (12:21):
Yeah, So me as a company, I issue with stock,
and that stock doesn't exist in physical format, doesn't exist
in traditional book entry format DTCC. It only exists on
the blockchain. So the original issue security is issued on
the blockchain. And that's actually the best way to do this,
(12:41):
so you don't have to worry about you know, this
is you know, this token is officially issued by IBM.
Let's just say it represents the share of IBM, and
it's not created by Robinhood, it's not created by Larry Tabb,
it's not created by Nathan Dean, it's not created by
anybody else but IBM. Okay, and IBM gets the proceeds
(13:04):
to that. That's the best way, theoretically, the best way
to do this. So the question is on day one,
what kind of tokens are going to be out there?
By in large people weren't able to do this, so
there's going to be no tokens out there, and so
you've got I don't know, well, I think what they
(13:28):
got like somewhere around they'll call it ten thousand securities
equities that are traded in the US. Those ten thousand
securities already have been issued. They're sitting at DTCC in
vaults and the pot in the depository. They already exist.
I'm not sure a whole lot of those companies are
going to go and make the effort to all of
(13:48):
a sudden cancel. You know, IBM is not going to
pull all their securities from DTCC and then reissue them
on the blockchain. Most likely, you know, status quo is
going to continue and and those securities are going to
just trade. So the question is who are the new
companies that are going to trade. They're gonna they're gonna
be new I pos, I buy and larger. The largest
(14:12):
companies in the world and the most stable companies in
the world have already issued their stock. There might be
some new i pos coming up, like we saw Bullish
just go i PO a couple of days ago, and
some of these new guys, you know, they can conceivably
issue stock directly on the blockchain, but the number of
(14:32):
really legitimate companies in the beginning is going to be
kind of limited and and so so you're going to
see things like what happened in the I c O boom,
where all of a sudden there's a gazillion icos, nobody
knows what the hell they are, and only a handful
of them will probably have any type of survivorship. The
same with the specs of what three or four years ago.
(14:55):
There's gonna be a lot that come out, maybe a
half dozen, a dozen, maybe even one hundred will be successful,
but by and large you're going to have to comb
through a lot of insight and understanding and research and
analysis and the web and AI to figure out, you know,
is this real or is this memics and you know
memorys I guess going back to the old commercials. But
(15:20):
so the supply of really you know, good companies is
going to be limited at first until we figure out
a legitimate way to either take these traditional equities and
move them on chain and tokenize them in some legitimate
way that I can guarantee that these are real, legitimate shares,
or more new issues come to market, or companies say
(15:41):
you know what, I want these things on the blockchain.
I don't want them at DTC anymore, and I'm going
to you know, take them out of the depository and
put them on the blockchain.
Speaker 2 (15:49):
Do you have a sense of how many years it
would be for you know, traditional finance markets to begin
that shift.
Speaker 3 (15:57):
I would think if it's just natural election, this is
a five to ten year or more process. I think
they would need to be a concerted effort by the
industry to take the shares in DTCC and migrate them
to a blockchain. And they would actually kind of be
the natural place to do it, because they've got either
(16:17):
the physical shares in the vault or they have the
de materialized shares in their computer, they can just say, okay, now,
all of a sudden, we're going to take traditional shares
and replace them with blockchain shares or with tokens. And
it really depends on the industry getting their act together
and doing it.
Speaker 1 (16:34):
Now.
Speaker 3 (16:34):
That said, that gets into the third part of that
research note, which really talks about the challenges of getting
traditional infrastructure to recognize blockchain. Blockchain infrastructure is significantly different
than what's been done in the past. And many of
(16:55):
the investment management technologies, brokerage technologies, these trading these that
this infrastructure is old. It's it's I built some of it,
you know in Lehman Brothers in the and City Bank
in the in the eighties and early nineties, and and
some of that stuff is still around, and some of
it's even older than that. And a lot of the
(17:19):
people like me past retirement age, and a lot of
these guys are gone. So so the question becomes is
who's going to rewrite this back end infrastructure? And and
there's going to be significant risk and there's no vendors
out there that have you know, traditional and there are
very few, if any traditional and blockchain enabled platforms. So
(17:43):
so there's going to have to be a huge migration
of technology to get these things on the same system.
And until then, they're going to have a blockchain system,
and then they're going to have a traditional system, and
maybe they can create dummy securities that they can put
on the traditional system. So your statement shows your blockchain
and your traditional assets, and those things are gonna have
(18:04):
to get reconciled, and that's going to be a big
pain in the butt.
Speaker 1 (18:09):
Yeah, I mean that sort of leads me to my
next question is, you know, some of the things some
of the benefits of blockchain offers are, you know, just
like twenty four to seven trading basically anonymity. But how
do you reconcile that with you know, some of the
limitations of the traditional finance infrastructure, like like you know,
compliance requirements like AMN. Exactly right, That's.
Speaker 3 (18:32):
A very good question. I had an interesting conversation with
a guy the other day who who you know about this,
and he said, there are there are actually new technologies
that are out there that will enable folks to do
They won't do the kind of in depth KYC stuff,
but they can at least determine whether you know, did
(18:53):
this coin come from the from the dark web or
did this was this coin used and in the various transactions.
So there, I think there's the basis of some of
the stuff out there, but it would certainly need to
be integrated with industrial back ends for this stuff. But
it's going to be that's going to be a challenge
like where did this especially when you start getting into
self custody. So I buy this coin, let's just say
(19:17):
I buy it from Coinbase, I put it in my
own wallet. Now I no longer want to deal with Coinbase.
I want to deal with schwab or I want to
deal with EA Trade or Morgan Stanley Trade or whoever. Uh,
And so I open up an account there and now
I want to sell that coin. You know, can can
can those will those guys a you know? Also, if
(19:39):
it's a token, will they even recognize the token? Because
if the token was issued by coinbase and it's a
coin Base official token, will will E Trade Morgan Stanley
take it or or you know? Because to a certain extent,
if it's not like an official corporate issue share, then
the question becomes is are these tokens even punishable? So so
(20:01):
if I buy a token from one place. Does that
mean I'm selling it to the same guy back again,
you know, you know, and that's kind of anti competitive
and and so that creates all sorts of other challenges.
So there.
Speaker 1 (20:18):
This.
Speaker 3 (20:18):
You're not going to see this fully integrated for for
a long time, many years, because there are these cans
of worms that need to be uh straightened out and
fixed up and detangled and you know, reconcile.
Speaker 2 (20:35):
So I'm smiling, and I know our listeners can't see
me smiling because Elliott and I come into every podcast
with here are the questions that we're gonna ask, and
Larry has been probably the best guest that we've ever
had who has brought up the exact topic before we've
gotten to the question, because self custody was the next
up on our list, and Larry just went there with
(20:57):
self custody. But it makes me think, you're your remarks
on self custody and your remarks in which you were
saying that you know it's going to be some time
I'm going to put you in charge of the equity
and the traditional finance markets and.
Speaker 1 (21:09):
All of this.
Speaker 2 (21:11):
You're in charge of the entire let's just call it
global market structure. Now, how do you resolve all of this?
Is it going to be led by the SEC? Is
it going to be led by the industry? Are we
talking industry groups? Now? I would anticipate Larry would just
you know, say this is what we're going to do.
Speaker 4 (21:28):
But how would you resolve this? Is it coming from
industry or from Washington? I think to a certain extent
it might have to come from both. I think Washington's
going to have to you know, first of all, when
you start getting into you know, Clarity and the Genius
Act and some of that stuff.
Speaker 3 (21:44):
You kind of I think, you know, the SEC is
you know, a wonderful regulator. They tend to be very thoughtful.
Let's moll out the last administration, but generally they've been
pretty thoughtful about what they do. But they need guidance.
So when you look at when you go back to
the global financial crisis, this, you know, even though Gainstler
(22:07):
was in charge of the CFTC against her, didn't just
go up and make up all this stuff that he
actually you know, Titles seven and all that stuff. It
was passed by Congress, and you know, he had some
interpretation room and people were upset about some of the
ways he interpreted things, but by and large he got
his marching orders from Congress. I think you're going to
need something there too, So Congress is going to have
(22:29):
to lay out what's a stable coin? What what's it? What?
What is a security token? There's all sorts of utility
tokens and and you know, there could be loyalty tokens
and stuff like that, so that I think the question,
and there might be different regulatory structures around each of
those types of things.
Speaker 1 (22:47):
So what's it? What's a loyalty token?
Speaker 3 (22:50):
You know, think about an airline mile like maybe that
goes like a reworse, you know, and maybe you put
that on the blockchain. Should you should that be regulated
like a security Should that be regulated or should it
not be regulated at all? And then the question becomes is,
let's just say, if United Airline tokens UH Airline miles
(23:13):
become tokens, could you use a United Airline token it
H or United Airline token at American or or or
or Jet Blue And do these things become functional or
fungible and do they have actual value? Because in effect,
you know, MX miles are starting to go that way,
(23:34):
so you can you know, pay bills using MX miles
and stuff. So it's almost like it's a you know,
quasi dollar, even though it's a fraction of a dollar
or whatever. But you know, they've got to define what
what falls into what category?
Speaker 1 (23:48):
Yeah, I mean, you know, when we speak of Washington
in the industry, I will say that this SEC in
particular Commissioner Purse is really good about listening to the industry,
and you know, she goes on the One of the
things I love that she does is she'll go on
the road and visit different cities and she'll tweet out saying, Hey,
(24:10):
I'm going to be in this city, Chicago. Yeah, if
you want to meet up and just chat, you know,
let me know. I think that's so great. And I
know the Crypto Working Group or whatever it's called, is
having multiple meetings with the industry sort of to the
same effect.
Speaker 3 (24:26):
You know, plug for us for our next market structure
event on November twelfth, we have Commissioner per speaking, So
there you go, she's going to be in the building.
Speaker 1 (24:37):
All right, Nathan, I have a question for you, you know,
because we're talking about Washington, and how do you mean
I mean, this sounds like an obvious multi year endeavor.
But how does this all fit within the SEC's broader agenda.
Speaker 2 (24:52):
So this is probably one of the top two, if
not top three priorities over the SEC. I mean, I
actually I'll even take that back. I'll say it's one
of the top two. The other is access to private
capital and you know this idea of you know, spurring
more IPOs, but at the same time, you know, ensuring
that private funds also get their you know, their way
with the markets. And what I will say is is
(25:13):
that you know, Project Crypto was a you know, in
many years past, the regulators have been fairly quiet in
terms of their plans. You know, you really don't know
what their plans are. And Project Crypto was a really
good way of coming out and saying putting their stake
in the ground and saying, this is what we're going
to do. And Sherman Back has said multiple times they're
(25:34):
going to move forward with rulemakings even if Congress, like
Larry was mentioning, with the Clarity Act, even if Congress
doesn't do something with the Clarity Act, the SEC is
going to move forward. Now this is where the optimism
of certain folks in the industries meets Washington realism, and
I get this in the crypto space a lot. You know,
(25:55):
it takes a lot of time for a team of
five or six lawyers to write a six hundred page rule,
even if it's going out for proposal to comment, and
so you know, don't be surprised if it takes them
a little bit to figure out because AID right now
they're just going through listening sessions, they're talking to experts,
they're talking to people in the industry. So I think
a proposal will probably come out mid next year, probably
(26:18):
call it first second quarter of next year. What that
proposal is probably could be a series of proposals. I'm
just saying they really don't know yet what the plan is,
so just don't hold me to it if it's one proposal.
But whatever it comes out will most likely be the
first half of next year, and that's plenty of time
to get this done before the next administration or if
it's the Republicans to keep the House sort of or
(26:40):
the White House, or the Democrats take the White House,
it's plenty of time to get it out there. So
I think, you know, this is something the SEC really
wants to do. You're going to see a lot of this,
and I think to Larry's point about Washington and the industry,
I think this SEC in particular is going to solicit
a lot lot of information from the industries traditional finance, crypto,
(27:06):
you know, tokenization. There's going to be a lot of
information gathering going back and forth between the SEC and
I'll just say Wall Street. And so if we have
any listeners out there, you know, just keep your eyes
because I think there's going to be a lot of
open forums for people to get intel on what the
SEC is thinking.
Speaker 3 (27:23):
And make your voice sure, because because I've been talking
to I'm working on a regulatory project now and talking
to a lot of very senior leaders within the industry,
and they're they're kind of worried, especially on the equity side,
that all of a sudden you wind up with all
this no action stuff, which I think, actually, I think
you're going to see no action efforts go on way
(27:45):
before the rules come out, and so so I don't
I'm not so sure it's going to take you know,
two three four years for this stuff to actually hit,
you know, rubber hit the road. I think you might
see them them do some no actions to either test
the waters or or or move things forward. That said,
(28:09):
they're worried that all of a sudden, you know, you
wind up with a no action We are all of
a sudden, you know, a token I share of IBM
doesn't need to conform the best execution rules or doesn't
need to have you know, have any order protection, or
doesn't need to you know, have any exchange competition whatsoever.
(28:30):
And and you wind up with the share of IBM
that's traded as a token, having a very different price
and trading under very different rules than you know, the
dt c C share, and that could be very problematic
and give you know, it's like, oh wait, I just
bought a share of IBM using a token you know,
(28:53):
and now, and the price is twenty percent different than
than what I see is being offered on NASDAK or
New York And that would definitely I wouldn't say twenty
but could very easily be five, you know, three to
five percent different, and you'd have a very different experience
and people might not be very happy with that.
Speaker 2 (29:13):
And just to clarify, when you when you say no action,
you're talking about no action letters where the SEC releases
a letter out to either a firm or you know,
just saying we're not going to take any action in
response to this.
Speaker 3 (29:26):
Correct, go go do it, you know, go with God,
and then you know, we'll see how it develops and
then we may pull that no action later, or or
it might be impacted by a rulemaking that comes down
the pike a year from now.
Speaker 2 (29:40):
You know, I'm glad you brought that up, because not
only are we seeing that with the SEC, but we're
seeing that with pretty much all the financial regulators. This
idea of regulatory innovation or this regulatory sandbox where the
regulators are going to certain companies or certain industries and
just saying, look, why don't we test this. In fact,
Commissioner Purse gave an interview on Bloomberg Television a couple
(30:02):
of weeks ago where they were talking about tokenization and
they asked her about this idea of pilot programs, you know,
and you know, the Bloomer TV host said, are you
going to have a pilot program on this? And she said,
we'll most likely have it in paraphrasing here, multiple pilot programs.
So I wouldn't be surprised if, you know, you start
(30:23):
to see like ideas over here, ideas over here. But
to your point, even if they give you a no
action letter, they can always pull it.
Speaker 3 (30:30):
There's there's no way you're going to see a pilot
program come out of the SEC. A formal pilot program.
They got there. They got their you know, fingers burnt
on the quote the tech size pilot back ten years ago.
So so which which goes back? They widen spreads for
less liquid instruments and it was actually shot down in
(30:52):
the court. And the issue is around why some people
included and some people not included. So you will not
see a pilot program come down, but you will see
multiple no action letters come down, I think, and it'll
it will be kind of an informal pilot program at least.
That's my two cents. I don't know, Nathan, if you agree.
Speaker 2 (31:14):
I agree that that's how they would do it.
Speaker 3 (31:16):
Yeah, yeah, exactly.
Speaker 1 (31:18):
Just one last question actually for Nathan, because well you
both talked about the Clarity Act, and I know Nathan
you put out a piece recently on the Senate Banking
Committee's Crypto Market Structure Discussion draft that builds on the
House's Clarity Act. So where are we in that process?
What are your takeaways and sort of what's the potential
(31:39):
timing for the Clarity Act maybe getting passed.
Speaker 2 (31:44):
Yeah, so the Clarity Act has already passed the House.
That's the hard work for the Clarity Act. Now it
goes to the Senate, and the Senate has said, nah,
thank you very much, but we're going to do our
own thing. The Senate Banking Committee released their discussion draft
for the Responsible Financial Innovation Act of twenty twenty five,
and that is only one half of the puzzle. The
other half has to come from the Senate Agricultural Committee,
(32:06):
and that committee has said that that most likely will
come in September, because if you remember, the SEC is
under the jurisdiction of the Senate Banking Committee. The Commodity
of futurest Trading Commission is under the jurisdiction of the
AD Committee. Now, what the discussion draft did is it
built this idea of an ancillary asset. So you have
securities commodities and they have ancillary assets. And there is
a self certification process within this discussion draft where if
(32:29):
you're just going to launch a token, you self certified
with the SEC that it's considered an ancillary asset, and
therefore you fall into this different bucket of regulation. The
challenge that I see in this is that I'm not
exactly sure the Senate ad Committee is going to be
happy with this, because for the last few years, the
story of the mantra has always been that a lot
(32:49):
of these tokens are commodities, like bitcoin has already been
deemed a commodity. So if I'm over at the Senate
ad Committee, I'm like, why am I giving the sec
more power here? That's going going outside of my committee,
So I could see it. Don't get me wrong, It's
not going to derail the bill, but I could see
a potential one month two month delay of them trying
(33:09):
to figure this out. But ultimately I do think some
form of the Clarity Act plus some additional language will
pass in the first half of next year. I just
don't think it's going to happen in the tailor of
twenty twenty five.
Speaker 3 (33:22):
Question to you, if I self certify, the last thing
I would do was certify that it was an equity,
because if it is certified as an equity, then all
these other rules come in into effect. Would you know?
Wouldn't I take all my equities and then self certify
that they're not equities.
Speaker 2 (33:40):
But you know that's that's the idea, is that you
would self certify that these are not equities and that
these are ancillary assets. And I think what you just
mentioned is one of the biggest holding blocks that will
come out of the Democratic Party is because the Democrats.
You know, there are enough Democrats can that are voting
for crypto these days. The Genius Act passage proved that.
(34:03):
But you know, I do believe here that I think
the Democrats would be a little bit more comfortable if
this falls with either the SEC or the CFTC, and
that self certification process just gives me a little bit
of you know, hesitation. Yeah, exactly, so, I do think
but for the crypto folks that are listening, I may
(34:23):
be out of a little bit of out a consensus here,
but I do think that you will see a comprehensive
market structure bill pass in the first half of next year,
primarily because if you don't, the regulators are going to
have to figure it out by piecemeal and then the
courts will eventually come in and fill up the rest.
And if I'm a Democratic lawmaker, I want to be
the one to make the decision, not regulators.
Speaker 1 (34:44):
Or the courts. That makes sense, yep, And I think
that's probably a good place to leave it. Larry, thank
you so much for coming on. This is really interesting conversation.
Speaker 3 (34:54):
Elliott Ethan always glad to help you guys out, and
I enjoy these very much itself.
Speaker 1 (35:00):
And we can do a sequel maybe, I don't know,
for you know, end of the end of this year
or maybe first part of next year.
Speaker 3 (35:07):
Well, we should talk about stable coins. That's another huge issue.
Speaker 1 (35:10):
All right, that'll be another episode that prediction markets. We're
starting to get.
Speaker 3 (35:14):
A good list here exactly, all right.
Speaker 1 (35:16):
As a quick reminder, you can read all of our
Bloomberg intelligence research on the Bloomberg terminal at big You
can read all of Larry's research on market on the
Market Structured Dashboard, which is on the Bloomberg terminal at
BI Space MKTS go look for more information about the
event that we talked about with Commissioner Purse. And if
(35:37):
you have any questions about anything we discussed on today's episode,
please don't hesitate to reach out to us. Thanks again,
and have a great day.
Host
Elliott Stein
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