America’s Digital Currency Revolution

0:00 This year marks the 250th anniversary of our country. And that means not only 250 years of an extraordinary political project, but 250 years of that other foundation of American success, a free economy and capital markets. Those markets are currently in the middle of rapid and dynamic transformation as America steps into this century of digital currencies. From the opinion pages of the Wall Street Journal, this is All Things with Kim Stell. And we are therefore so fortunate to have with us this week a man who is at the forefront of solving both old and new regulatory problems in those markets. Securities and Exchange Commission Chairman Paul Atkins. Chairman, thank you so much for joining

0:45 us this week. It's been too long since we've talked. >> Well, thank you, Kim. It's so wonderful to be with you and uh yeah, we it has been a long time, but I'm looking forward to chatting about some of the current issues that are near and near and dear to both of our hearts. >> So, if I'm right, this is your third term at the SEC over the past 30 years. Is that right? >> That is a glutton for punishment here. So anyway, coming back and so yeah, first uh in the early 90s uh as uh working for two chairman, Richard Breeden and Arthur Levit as chief of staff and counselor and then uh came back in the as uh as a commissioner and then now back as chairman >> as chairman as the head and you have seen a lot and you wrote a wonderful piece for us late last year and I just

1:32 want to start with this because you noted uh and I'm going to quote here when promoting the initial federal law regulating sales of securities in 1933. President Franklin Roosevelt explained that its purpose was to protect the public with the least possible interference with honest business. How accurate do you think that statement is today when we describe the SEC? Well, let's say that there just has been, you know, piling up of uh regulations over the years and which uh uh if you just look at uh public company disclosure, it has produced a lot of information, but it also that uh surfit of information um I think helps to obfiscate sometimes more than illuminate and uh the the real

2:20 standard is you know what is material um for a reasonable investor. It's an objective uh type of test that the Supreme Court set out. So, not what any particular investor thinks, but what uh a judge will look at as a reasonable investor. What that person needs to know to basically buy make a decision to buy, sell, or hold his securities. >> Well, and that's one of the things and I I love about what you're doing at the SEC is you are out there pushing it to be at the front of this whole new digital revolution. And we're really going to get into that in a minute, but not at the expense of attacking some long-standing uh problems in my mind of SEC regulation. And you just mentioned one which is obviously disclosure. Uh it

3:05 sounds like you think that uh and you you have said this that we have kind of aired way too much on the side of requiring a lot of information out there that is maybe producing more noise in the market than it is actually helping investors and producing transparency. Tell us what you think the problems are there and what you're thinking of doing to remedy this. Well, it's just uh it's just a matter of uh you know over the years things have built up where um the SEC has identified something that it thought uh you know ought to be disclosed but then there's not really been a retrospective look like uh you know how has that grown out of all proportion uh in fact and so among that is uh executive compensation. So back in

3:53 the early 90s um under Richard Breeden uh the SEC revised uh some of its uh disclosure that it asked companies to give around you know CEO uh compensation and and other you know a couple other high uh uh employees in the companies and in public companies and then over the years it's just gotten more and more and more as executive compensation got more complicated and so much so that Uh I I started uh at here at the SEC back in um April of last year, shortly after I started. We hosted a roundt to look at this whole issue of executive compensation and see, you know, is it fit for purpose now? And it does it

4:39 really help people understand compensation? And I thought, oh goodness, this will probably be the third rail and we'll have all sorts of people protesting and whatnot. But it was amazing. I mean to a person every everyone said it's so complicated no one can understand it. you have to have uh you know companies hire specialists you lawyers and consultants and whatnot to complete the forms and all the different charts and uh uh that the SEC requires and uh with valuation estimates and everything else and it's just so complex uh that um you know I think that's ripe for um you know re-examination and and I think we'll get a lot of uh

5:24 information and suggestions from the public from all sides, you know, investors and companies and everything else. So, I'm looking forward to that. But that's just an example of uh one aspect. And secondly is um uh back when I was a commissioner in uh this is maybe 2005ish something like that uh the SEC um it was a suggestion from the staff that uh we have uh the first thing that one sees when one opens up an annual report the 10K is what's come to be known as item 1A risk factors. So the concept was >> what uh you know what are the what are the risks to the company the material risks that keep management up at night basically was what we were thinking thought maybe a couple pages of bullet

6:11 points or you know whatever it may be um depending on how complicated the company is could be more but whatnot but uh so what it it then morphed over time from uh you know that concept to here about eight years ago uh Jay Clayton when he is uh uh the chairman of the SEC and the first Trump administration. Uh they amended the rule to say that if it if the uh uh risk factor disclosure would exceed 15 pages, then you have to put an executive summary. And so you have the executive summary, then you have the risk factors, and then you have the balance of the 10K. And the risk factors are incorporated in all of that as well because it's essential to disclosure of the company. And so here you just have

6:58 then you know things repeated over and over in the document. So that doesn't really do much good. So that's an example of how we have to come back and re-examine what we're asking companies to do because if you have a 10K where uh it you know I was uh had hearings a week and a couple weeks ago oversight hearings in house and the senate and uh there I was referring to one uh um uh annual report it's of uh energy it's a company uh down it's an energy company power company and Arkansas and Louisiana and and elsewhere. So the 10K, it's a complicated company, but the 10K was almost a thousand pages, 900 and some

7:45 odd pages. >> War in peace. >> Well, yeah, exceeding that. And so, who wants to read that? I mean, that sends people running. And there was one uh congressman who said, well, wouldn't AI help on that? But what we have to remember is that people are pay the company is paying to put all this together. and with lawyers and accountants and everything else going into that. So, it's really it's the shareholders ultimately who bear that burden. And if it's not helping the shareholders understand the company, then you know what good is it doing? And if it turns people off saying I'm just not going to even look at that, I'm just going to rely on Reddit. Then that's or whatever that or my neighbor when he says I mean that's not what we want either. So we need going back to what you said uh Franklin Roosevelt was

8:31 talking about. We need to re reorient ourselves back to materiality, back to what people need to know about the company. And instead, the reason why these documents have grown so much is fear of litigation. And so, one of my favorite examples of something in a risk factor, which is not really material, is if the government raises the corporate income tax, your dividend may go down. Well, duh. I mean, you know, that's uh there's less money to distribute to the shareholders and uh you know, the they have to make that they feel they have to make that disclosure because just like you know, oh my my c cup of coffee was too hot when the restaurant served it to me, so it scalded my when I spilled it

9:19 on me. Things like that. These are the risks that companies feel they have to disclose because if they do get sued on something that's uh you know rather uh you know not a real material risk to the company then it's um or to the investor um you know is something that you know they could be held liable for they they feel like they have to disclose it. >> Well, you make a great point about the liability because obviously it's this balance. you want shareholders to have the material information that they need. Um but there is this growing concern in the country that um companies are just becoming way too cautious about their actions and and taking risks because they're so worried about ending up running a foul of some of these

10:04 disclosure laws and other SEC rules. And that brings me to this uh big wild and and uh crazy world now of of digital uh finance. um the next huge change that's out there digitization and tokenization and I know you are actually a big fan of of this because you believe it will bring some huge benefits. There are a lot of average Americans who hear the word crypto or digital currency and they immediately get worried or concerned. Um but explain just broadly why you view this as the future and why you want the SEC, the US including regulators and Congress to be at the forefront of this. >> Yeah. Well, thanks. That's uh a great

10:50 question and um and it really is very important because it is this is an incredibly innovative uh part of our uh financial markets today and I think uh you know it's it's uh a major uh a major breakthrough with uh a potential derisking uh of of our financial system. So you know the the various uh particular products that are out there um you know I'm have to be uh agnostic on it's not we're not a merit regulator and we don't recommend for people to invest in one thing or another. So basically that's um you know it's up to people to decide for themselves what they think the um you know the the importance of that uh particular um

11:37 investment is or not. So as far as the individual crypto assets or whatnot that's uh you know beyond the point but really the distributed ledger technology of blockchain technology is I think uh uh uh offers a huge amount of transparency of uh and of uh immediiacy. Um uh so with every minute that you have between the transaction that is undertaken between two parties and the clearance and settlement of it you know the exchange of money for the um thing being um bought uh it invites risk because anything can happen you know market crash or I mean whatever one of the parties dies or you know whatever it

12:23 may be um you know it's no completion right so that that's a risk in our financial systems So we have gotten it back uh when I was uh young that was t plus five you know five business days from the transaction date for um clearance and settlement of a um of a of a transaction and if not it would be a you know a failure of the transaction and there would have to be then rejiggering of things and whatnot but um so now we're down to t plus one uh so I think that's been a a big achievement and so I salute uh my predecessor here at the SEC for um you know getting the market to uh to T+1.

13:08 But um but as far as now we have a prospect for many instruments perhaps actually T0 where meaning that you have an immediate delivery versus payment and payment versus receipt onchain by use of stable coins or other tokenized uh products. For example, tokenized bank accounts or tokenized money market mutual funds and and things like that. And so that uh really does or or plain old bitcoin or other cryptocurrency. So that offers you know uh real certainty for a transaction. And so um I think that's to be saluted because that then will have uh uh you know just a real

13:54 profound effect on the financial system. And we may have to build in hurdles for you know against fraud or you know whatever else may be there cuz you know once you press that button and it it's gone it's gone. So um anyway so but still the concept of uh you know same day settlement would be you know pretty amazing. >> So de-risking through same day settlement. I've also heard you talk about the importance of transparency and that when you're talking about tokenization on a blockchain and I think a lot of people might be surprised to hear this. There's a lot of companies that are not quite sure where all of their shares are. Um this is an an opportunity to have a lot more transparency about where things are in the market. Just to go back to a term

14:40 you just used, you you have this crypto task force uh which is essentially I guess I would describe it as trying to put together a framework for a holistic transparent treatment of crypto assets under securities law. And a big piece of this is what's known as as you just said tokenization. Just explain that a little bit more what it is and how it how it works and and what you guys are looking at when you talk about tokenization. Well, so for example, I you know to put a uh a a security the share of common stock of you know IBM or whatever you want to company you want to choose. Um but right now well actually again going way back uh uh back into the 1940s50s60s

15:26 uh those shares of stock were represented by a piece of paper you know a certificate. They're really very cool looking. It's like a piece of artwork. It's really uh really pretty neat. But those are pretty much gone uh now. Um and it's moved towards a digital uh you know uh notation uh of that share of stock. So it's kept uh you know that that uh the piece of paper in is kept by the depository trust and clearing corporation in most cases uh in a vault in New York and that's a global certificate that the company issues and then everyone else you and I if we own securities then we have uh you know our our shares are represented um in book

16:12 entry form uh with our broker and then of course ultimately with DTCC and with a So the company has some vague idea of where these um uh securities are. They and they're held in street name in most part meaning in the broker's name. So whether you have Schwab or Morgan Stanley or Goldman Sachs or whoever um you know that's as far as the company can really see and then it has to pay uh third parties to try to figure out you know who actually owns it. So what if we take the next step? And so if we tokenize uh that same share of stock and put it into a smart contract which is then on the blockchain and uh then you can tell through the blockchain where

16:59 that security is. And so when people talk about abuse of naked shorting and things like that, uh you know that we won't have that problem or shouldn't have that problem in the future. And uh and through these smart contracts uh like now that people have been working on how do we have any money laundering protections uh um you know built into onchain transactions and so there have been people working on the ETH ether um uh chain for it's called 3643 uh protocol to uh have built into that smart contract uh the um the AML uh cable KYC sort of uh um checkup on it so

17:45 that it doesn't go for illicit finance or or whatever. So things like that are you know people are working hard at innovation and uh so I think in the next few years uh things will really start changing and here at the SEC what we want to try to do is have what we're calling an innovation exemption so that it's kind of like a sandbox for people to qualify for that and then develop their new products. And so I think there will be huge changes in the in the years to come. >> So a little bit of a safe harbor for people to continue doing innovation. >> Yeah. Exactly. And the good thing is too with all of this uh bit uh that we with um the our project crypto that that's infused now throughout our divisions at the SEC rather than just a task force

18:32 operating. Um we're working handinand glove with the commodity futures trading commission our sister agency which focuses on uh derivatives and futures and commodities and uh and so there the the lines can be vague depending on what sort of product it is and so over the years uh innovators have been stymied like wondering okay is who's the regulator here SEC and the CFTC and the two agencies have been, you know, I'll say, if not squabbling, but right, they're a little bit, it's very tense. And so I compare it to two um two fortresses with a with a no man's land in between. And so that

19:17 no man's land is riddled with a bodies of wouldbe products that got caught in the crossfire and never made it to market. So that's another thing that we intend to change with uh you know Congress is working on much needed legislation called the clarity act uh to set out market structure for digital assets so that there is clarity as between the SEC and the CFTC and we two agencies are committed. my good friend Mike Seelig who used to be uh in my in the chairman's office here uh with me uh at the SEC he's and the uh chief counsel for our project crypto. He's now the chairman of the CFTC. And so we are very committed to working together to solve

20:03 these problems and make sure that never again will the ase two agencies stand in the way of innovation. >> That's a huge sea change by the way. I mean, this is something that's just been an enduring problem for the entirety of my life covering markets and uh finance. So, that that is remarkable and I wish you well in that harmony. >> Um, but you you brought up Congress and this is another huge question I have uh and I think a lot of people are curious about. So, Congress passed the the Genius Act, which it only deals with stable coin, but it struck me as important in that it was the first time Congress recognized a digital product. Um, as you go about your your crypto task force and you're coming up with

20:50 these new rules of the road, how much can you do on your own and how much of this needs to be uh set into law by Congress? um or is it a question of you can do some things but it would be a lot more enduring if this was something Congress got across the line? >> That's exactly it. So, uh we can we can work together and collaborate. We can pass uh we can adopt joint rules and that sort of thing. we can, you know, distinguish between what we view as as commodities, meaning uh digital um collectibles, digital tools and and digital commodities uh versus >> versus securities. So, we can do that. We can draw those lines. We can work it out between us, but nothing can replace

21:38 a statute that will then it's hard to change statutes. you know, you have to have, you know, 60 votes in the Senate and, you know, uh, and then get it through the House and then the president has to sign it. So, it's it's that is an enduring, uh, type of construct. And so, uh, we really do want and need to have that just to futureproof what we're doing so there's not going to be backsliding in the future. >> And what do you think the prospects of that are? >> I'm hoping I I think uh, you know, it sounds like they will do it. here uh this year and um so I'm looking forward to that and I obviously I'm not uh a member of Congress so I don't know all the um the dealing that's going on there but uh I I take everyone at face value

22:25 that they want and need this and and that'll go through some really very supportive we have been uh providing the both houses what we call technical assistance telling them you know how their ideas can you know mesh with the current uh securities framework and the CFTC has been doing the same. So I think they're well um provisioned as far as their knowledge of how their um their drafts uh you know will affect the marketplace or not. And so I think um I think all that is great and so I'm just I'm looking forward to their uh taking uh good swift action this year on the president getting it to the president's desk and for his signature. >> I'm actually oddly hopeful about this. I think part because it's it's actually

23:11 like a new area that Congress has some actual interest in unlike for instance solving social security. So there's actually a little bit of enthusiasm around this topic. Um last question for you uh as we go and thank you for your time. You know, the US in my mind obviously is still the best place to invest in the world and I know you guys are also taking some uh steps to make IPOs great again uh you know to further attract that kind of interest. But as you look forward over the next decade in particular, what are the biggest risks you would see to the US ever losing that number one position? Uh well, I think you know as long as Americans uh keep their sense of uh you know risktaking

23:59 and and embracing the future and that they you know they they put their money um wisely into the capital markets uh in a in a diversified manners not all their eggs in one basket um but that they take risks. We have an incomparable um uh uh riskon attitude in this country. And whenever I talk to Europeans or the Japanese, it's always how do we get our sense of risk takingaking back? Because after all, you know, America was settled um by people who got in rickety wooden boats and sailed across the stormy sea and arrived with nothing um uh to build. And uh so

24:44 that's part of the American story. Uh obviously um and in Europe uh you know the people who stayed um obviously didn't take those risks. So um but um >> it's a good way to put it. >> So but uh but they still did I mean they in America is an investment. Uh the Europeans they had public companies that uh you know the Dutch and the English uh you know uh sold stock uh for people to invest in. you know, the uh the companies that uh settled uh in the in the US uh you know, financed the the settlements. So anyway, so that was risk-taking and um so that's kind of the the underlying ethos uh in the United States and and over the years building of the railroads and you know building

25:31 of our cities, the skyscrapers and things like that are all financed through uh domestic and foreign investment. So, as long as we have a good strong capital markets that is policed soundly, I mean, we need to get away get the criminals out and and and that sort of thing because they're always bad apples. Um, but uh they're way outweighed by the good apples who are uh trying to create something and that's lasting and that uh builds the life the life and the lifestyle and the society that we have today. So as long as we don't backslide into um socialism and where uh you know if everyone owns something then basically no one owns it

26:17 or cares about it. Um you know that's that's the thing. So we have to stick with free markets uh free uh capital free and freedom to uh individual liberty I think is what really will um you know keep America at the top of our game. And that's what I think America 250 is all about. So, I salute the president and and others who are uh you know uh planning ahead for all the the commemorations uh that will happen later this year. >> Well, what a great way to round that back to the 250 anniversary and we are so pleased that you took some time to come on. Thank you, Chairman Atkins. We want to also thank our listeners for tuning in. We're here every week. If you like the show, you can hit the subscribe

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