Tokenization of Equities Part II – The Implications

Brett Redfearn:
Competitive companies are looking to find ways of unlocking a broader offering in tokenized securities and doing that doesn't mean asking permission from every issuer along the way.
Peter Haynes:
Welcome to episode 77 of Bid Out, a market structure podcast from North of 49. I'm your host, Peter Haynes, and today we finish up the second part of our discussion with Brett Redfearn on equity tokenization. In part one, we learned the basics about tokenization, the so-called Howey test used to define a security, who will regulate this space, and some recent discussions from SEC officials on the taxonomy of crypto trading. We're now going to pick up this discussion with Brett, starting with the current equity token activity.
So Brett, as I introduced there, can you tell us where in the world equity tokenization activity is currently taking place? And are these foreign markets completely off limits to US investors?
Brett Redfearn:
Peter, thank you very much for having me back. It's a pleasure to continue the discussion. Let me just start by saying this. So this is happening in the US. It's sort of like dipping our toes in the water here, but there is some activity here. So first of all, in the US, it's worth noting one of the first tokenizations of securities that happened in the US was done by the company Securitize. They are, for full disclosure, a client of mine, but they tokenized Exodus in a 75 million Reg A+ offering back in 2021. $75 million, they put it into tokenized form. That security eventually moved on to NYSE AMEX because it was sort of a more robust secondary market. And today it still exists in both tokenized form as well as in book entry form where it can be traded on the AMEX. So you can get that in, for example, Algorand, and I actually own some of it on Exodus wallet in Algorand.
That's happening. They've done other products as well. FG Nexus is one. I think another one in the US that people are probably paying attention to is Galaxy. So Galaxy, very progressive and forward crypto company. They've also tokenized shares of Galaxy and that can also be acquired. You can get shares of that, but it's very small. So Exodus, I think their market cap is 130 million or something like that. FG Nexus is pretty small. I think Galaxy has only tokenized about a million shares or something, a million dollars in value. But it is happening in the US and people are inching their way into it. And that is where you have this sort of... Those models, by the way, are all in that issue or sponsored model I talked about before.
Offshore, different story. So keep in mind in crypto, because of the history of the regulatory environment here, a lot of projects did move offshore. I think that's one of the things Paul Atkins is trying to figure out is how do we open up a regulatory environment for more of this to happen onshore? But in the meantime, yes, a lot of it's happened offshore.
So a couple of the big ones you will hear about. One of them is Ondo Global Markets. So Ondo is a company who has tokenized over a hundred names. I think it's like 103 or something. They have about 320 million in market cap last time I checked off securities that are tokenized. That includes Tesla, buys a lot of other big names that you will hear about. And then you also have Kraken who has their xStocks, and that's being done in conjunction with Backed Finance. And I think right now there's about 140 million in market cap that has been tokenized as well.
This is interesting. These are securities that are tokenized in... Without getting into all the regulatory thicket of how it's being done, when you ask about the question of like, can US investors own it or how are they being transferred? These are permissionless. So this gets back to the point I had made on the last podcast about if you have permissionless tokens, you have the ability to... The very first person has to be KYC. But after that, the transfers can happen to people who are not KYC. And there's questions about whether or not... where it goes and what is the provenance of that round trip and who's touching that before it comes back in. Presumably, US investors are not supposed to own these. The reality is, if it's a permissionless security, it can blow back. So the term blowback is used to mean that these things can blow back to US investors and US investors can in fact purchase these things.
So there are platforms where you can go on, you don't necessarily have to be KYC in DeFi, and I can purchase in xStock, in Tesla. I won't say how and why I know this, but I'm 100% sure that that is possible.
Peter Haynes:
Do you think that the SEC could at some point, if they're worried about AML and, as you say, where that permissionless security ends up, is there a way for the regulator to just come out and say, "Look, if you are active on this market, then you're subject to some sort of government rule violation"? Is that how ultimately they'll be able to crack down on a US investor who may be using a permissionless market that they're not supposed to be on?
Brett Redfearn:
I actually believe, Peter, that it would be the securities regulators in the jurisdictions in which these things are trading that would be more pertinent.
Peter Haynes:
Even if the underlying is a US security?
Brett Redfearn:
Yeah. So remember, there are US securities that are trading on markets in Frankfurt and elsewhere around the world. So to me, this kind of goes to ESMA and the European Commission, for example, in Europe or the FCA, if you're talking about in Tokyo. So to me, it is global regulators and how are different global regulators looking at this? And so my view is that there are some global regulators that are very light touch. If you're talking about, I don't know, Dubai or wherever, Singapore, there are some places where they've said it's sort of easier to do things. I think in Europe, it comes down to what does ESNA think about this? You'll see that some of these products are registered in Lichtenstein where you'll see the Lichtenstein regulator. I saw one notice that came out and the Lichtenstein regulator had written a letter saying, "We're not sure if we like this." And I'm like, "Well, if you pissed off the Lichtenstein regulators you really set a new bar."
Peter Haynes:
That's a low denominator.
Brett Redfearn:
But no, I mean, I think it's tricky and part of it is how they're packaged. So I've heard different stories. I don't know all the details of this, but I've heard in some cases it might be packaged as a debt instrument. So there's ways in which people find to get around some of the very explicit securities laws. And these are things that regulators are really going to have to drill down on, especially if we start to see what are effectively securities in US listed NMS names moving around permissionlessly to who knows who in ways that raise questions. These are questions that regulators and IOSCO and internationally should be thinking about.
Peter Haynes:
Yeah, totally agree. Just before we move on, can you just explain what Robinhood's doing in Europe? People ask a lot of questions because they see them as a first mover or an early mover in offering tokenized securities access to European investors.
Brett Redfearn:
Without getting into all the details, I believe that Robinhood has a very interesting model. Keep in mind that the tokenization process sort of starts to intersect with this competition we're seeing for the 24/7 market. So when people talk about 24/7 trading and so on, a lot of that conversation isn't about when, it's about who and where. It's about, how do we access investors elsewhere in the world who want to be able to trade during off US hours?
And so what Robinhood has done is that they have found a way of tokenizing securities. I think this falls sort of more into that derivatives model that we talked about before, where these are derivative products. I don't believe that the offering includes voting rights and it's derivative. So there is some counterparty risks there. I've read some of the documents they've had, but they have made it available for offshore investors to be able... European investors to be able to purchase NMS securities and sort of a derivative-like product where they share on the upside or the downside of that. And they're very explicit about there's currency risk and so on and so forth. They come with that. But they're offering them something in an offshore market. So it's early days.
Like when Vlad talked about this in his big presentation in Cannes, he talked about a multi-step process. The first step is sort of making these tokens available. But down the road, they're looking about putting these on the exchanges and adding more utility to this. This does not fall into the category I mentioned to before where it can be transferred permissionlessly to other people. So they're not stepping into that pile. I think they're avoiding that very nicely and providing an offering that is the first step in what I think is a bigger vision for their European [inaudible 00:08:37].
Peter Haynes:
I know we just talked a minute ago about issuers and about being permissionless and insiders. Doug Clark, who works for the TMX, was telling me a story recently that he'd been speaking to a lot of the issuers of the TMX that actually don't want their shares traded outside of the traditional TradFi market on alternative platforms. They're worried about bad outcomes that might happen and investors may come back ultimately to bite the issuer. What should Doug tell these issuers? It's too bad the regulator in the US and potentially Canada is going to allow this to happen and you don't have a say in it?
Brett Redfearn:
So first of all, let me just sort of say that you know my view. My view is that we should be talking to issuers. I like the issuer-led model. I think that they should be involved. I think that it's super important. And part of that comes down to the native model that I like where you're talking about issuers being part of that process of moving securities potentially out of DTC back on register and making them available for a broad array of use cases in a more native form. So that is my view.
That being said, there's a lot of competition in this space. People are trying to win in the tokenization of security space. If you have to go knock on every CEO or CFO or IR rep's door of every listed company, it's a slow rollout. So competitive companies are looking to find ways of unlocking a broader offering in tokenized securities and doing that doesn't mean asking permission from every issuer along the way.
I think we're going to see offerings like this. This comes back to sort of the unsponsored depository receipt model, which is very possible where people could simply buy them, custody them, minute token. And I do believe that in that model, there also is a way of making sure that you're passing through the whole array of security entitlements that come with that, including dividends and voting.
Now to the issuer, I think issuers should be paying attention to this issue. I think that in certain cases, like some of these offerings for permissionless, they have reason to potentially be concerned. I think there's questions about whether or not there's trademark infringement. If you look at buying Tesla as an xStock on like Jupiter, so this is a real use case, you're going to see the Tesla logo. So the logo is being used in the sort of, I don't want to say offering, but in the ability to sort of see what the security is and you'll get that.
So I don't know, I think issuers really need to think about that. I think they're starting to push back. I know they pushed back back when Binance and FTX was doing this. There were a couple examples where they wanted them taken off. We'll just have to wait and see. But I think they should be paying attention and I think they should be opining and chiming in on which model they prefer because otherwise you have one model where you have the ability of knowing who your investors are and another model where you really don't.
Peter Haynes:
So Brett, people talk about OPR, order protection, which is an important aspect of TradFi and people are sort of having some read throughs into the move to DeFi. And I want to just talk a little bit about this rule. So there was a recent roundtable in Washington on what is known as Rule 611, which we think of as the order protection rule or trade-through rule. And that was what it was originally called here in Canada. And there was general consensus of the 31 different speakers that participated that the rule should be eliminated. I know a lot of us were surprised that pretty much everyone said, "Yeah, let's move forward and get rid of it." And that's clearly the direction of travel for the Atkins SEC. I do think personally that there was this elephant that was in the room that day, and that was that proponents of tokenization do not want any rules that might potentially link together the DeFi world forcing one platform to be responsible for making sure that they don't allow a trade at a price on a token that's worse than some other platform.
Do you think it was in fact essential for the tokenization movement that OPR be repealed?
Brett Redfearn:
First, I would say that I would not lump all proponents of tokenization into one bucket. I think there are those who are really looking at a substantially lighter regulatory regime to be able to function. Again, I will note my client Securitize has taken an approach where they have a registered broker-dealer, registered transfer agent, a registered ATS, an investment advisor. So all the things that they're doing have been trying to work through regulated entities to bridge things better with traditional finance, and they are a leader in tokenization. So I wouldn't lump them all into that bucket.
Second of all, in terms of the general consensus around 611, we can debate this another day, but I don't necessarily believe there is a general consensus because I don't believe that we have a proposal on the table. So I think what you're going to see in this next roundtable, it's going to be like, okay, well, 611, but what comes with that? So we all know that it can't happen in a vacuum. It has to attach to other things. Does it mean that access fee caps go away? Does it mean that locked and cross goes away? Does it mean that we change the SIP revenue formula? Does it mean that we have to define [inaudible 00:13:34] differently? Does it mean best execution is determined differently?
So this is a domino effect on a number of other things. And until we see an actual proposal, I don't think we really know. And when we see, when we attach things, we'll see what kind of consensus we have because each additional thing raises new questions that need to be addressed in terms of the basis for the rule and in terms of the legal and economic analysis and so on. So quick aside there.
So getting back to your main question, does OPR have to go away for crypto? It's interesting because you'll note that on that last roundtable, they really didn't talk about tokenization. We didn't have crypto entities in the road. And I think it does feel like these questions are being segmented. And so I think it's an important question. How do they converge?
My personal view is that there's a lot of people who have been arguing that in Reg NMS today, there actually isn't an exception for 611 for non-regular way settlement. It's like 611B4 or something like that that says transaction for a security that is not regular way settlement in the trading center can demonstrate that the trade deal was necessary to affect the transaction. So when you think about on-chain transaction or a prefunded world where you have instant settlement, it's actually a different cost. And there's a different cost and there's a different benefit. You don't have the cost of doing [inaudible 00:14:59] settlement. You have a certain benefit there, but there's also a cost and whether it's prefunding or whatever else is involved with that. So then there's a question of should that be baked into the price of that security.
So I think within some reasonable parameters, there's an argument to be made that for on-chain settlement, NMS is potentially problematic and that issue needs to be sort of hammered out. But again, as I mentioned before, a lot of what I see in tokenized securities is in an off-chain world. So I'm not sure whether or not the evolution of tokenized trading where you're having off-chain transactions, which as we talked about last time, the whole world of crypto exchanges like Coinbase is off-chain transactions, I'm not sure in that case you necessarily need to have an exemption from OPR. That's a personal view.
Look, we're going to have to see how this rolls out, but one thing that I do go back to is when Paul Atkins and Jamie Selway come out and they say, "We're talking about innovation without arbitrage," I do believe that we can't have a world where you have one thing that is allowed for one world that's not allowed for another world.
Do I believe that part of the driver for thinking about 611 is to unlock new technologies and new platforms? Yeah, I think that could be part of why there's a thinking that 611 is not only blocking freedom to route orders in the US equity market, but it's also blocking some other technologies to be able to come in and be involved in the transfer NMS securities.
Peter Haynes:
Well, it's well known that Atkins dissented on NMS in '05, and clearly it's an agenda item that's at the top of his list in 2025 as he takes over. There were 31 people that spoke at the first roundtable. I think the biggest surprise in the industry was none of them were named Brett Redfearn. I'm curious, December 16th is the second roundtable in Austin where they're going to dig in on some of those other issues, as I understand it, that you just discussed. Will we see you up on stage?
Brett Redfearn:
Well, I don't think they've published the list yet, but I think there's a good chance that you will.
Peter Haynes:
Okay.
Brett Redfearn:
It's interesting. I know that they're looking at three panels and they're kind of trying to figure out... This comes back to the point I made earlier. What are the other sets of things that attach to this? Does it include access fees? How do we think about BESC Ex? How do you think about all the definitions that are out there?
So I do think that they got to peel this onion away and get to the deeper levels of what this involves and what an actual proposal would have to look like. And so I think it would be worthwhile to be part of that discussion. Although I know some people don't want to be involved in it because it's very tricky.
I don't think there's as much of a consensus as you think. I think there are some people who don't love this.
Peter Haynes:
They don't want to speak out against?
Brett Redfearn:
A little bit hesitant about going there. And so they're going to remain quiet. So there is some risk in terms of opining there. And as you know, Peter, I tend not to really hold back on what I'm thinking. So if I do decide to go ahead with that, I'm going to have to be real careful.
Peter Haynes:
Well, I can tell you the industry wants you there. So I hope you do end up finding a way to be part of it. And I do commend the commission again, Jamie Selway and Chair Atkins for the fact that they're continuing to listen to the industry. In fact, I would note that there is a tokenization panel as part of a roundtable on the investor side coming up, I think on December 4th, through the division of investment management where they're talking to a bunch of different institutions about tokenization.
So for those of you trying to learn about it, Brett, that OPR roundtable was awesome from the perspective of learning about what really is going on, learning from other jurisdictions, learning from other different perspectives. So highly encourage the market participants listening who want to learn more to tune into those events and hopefully they'll see you there.
In order to promote this alternative market structure to TradFi that we've been talking about, the Atkins administration, you've mentioned this a couple times, is expected to grant exemptive relief to allow for, quote, sandbox experiments that will allow crypto platforms registered in the US to experiment with tokenization of securities. How do you envision this working in light of the fact that Atkins wants to work fast, but also wants to ensure that future administrations cannot roll changes back easily?
Brett Redfearn:
I think the first thing I'd point out is I thought Director Selway made some really good comments at the last market structure conference, and I think those are worth looking at. And he talked about how new technologies do come around and we can't allow the existing roles to block the ability for innovation to thrive in our marketplace. And so I think that's really the thrust behind that, that if there are new technologies and the role sets are blocking their application, that we need to try to make sure that we're not restricting the ability for innovation to take place.
A couple of things I'll say, this is something else that Jamie Selway said. First of all, this will be generally applicable. So it's very important. We shouldn't expect some kind of exception or something that's only going to be applicable to a handful of crypto entities or something like that. They want to make sure that anybody can come in and avail themselves of a potential exception.
I also believe that it will be a proposed exemption. If you think about Reg ATS, that was an exemption from being an exchange, and so that was a proposed exemption that ended up being a rule. So I think it would be proposed, and I do believe that that's a good thing. We're going to have plenty of time to debate this, and maybe we'll come back and talk about that another day, Peter, about what do we think about the actual details of the proposed exemption? My gut is that this is very much sort of in that on-chain DeFi space.
So when I talked about before, the ability to have unregulated platforms that enable peer-to-peer transfers without a broker or without an exchange or an ATS, should software be allowed, be able to enable me to transfer a share to you? And so I'm sort of thinking about platforms like Uniswap or things like that, but my view is that they want to see where the market goes with this. They want to try it out. But I think that they're also looking to do it in a way that's contained.
So if you think about Reg ATS, there's sort of a 5% market share cap. I think we'll see a market share cap, I think we'll see something that's time limited, but I think that will see something that will be sort of facilitating activity in an on-chain world without regulated entities. Or it could include regulated entities, but also without regulating. So it's going to be really interesting. It's going to raise a whole bunch of questions.
Peter Haynes:
I want to make sure I tie a bow here on something. You mentioned it was important to talk to the issuer community, and you said this is going to be a rule proposal. Just to be clear for all the listeners, that will mean that the entire community, including issuers, will get a chance to comment on this. Is that correct?
Brett Redfearn:
Me, reading the tea leaves, that is my understanding. I don't know what the SEC is going to do. I believe that it will be a proposed exemption, which means that people will have the opportunity to comment. And if you look at the existing comments that have come out so far, that's what people are saying. Don't surprise us and put something into effect without the ability to comment. And I believe that the prudent way and the way that we'll go will go that way. I think it's rational to make that assumption.
Peter Haynes:
As I was listening to you talk about your time working for AMEX when there was a floor, I was thinking what you were thinking was the move from floor to electronic is kind of similar in many ways to the move from the TradFi world... This one's bigger, obviously. From the TradFi world to the DeFi world. Do you draw those parallels?
Brett Redfearn:
When we talked before about what do we think the world's going to look like in the next five years, there's a part of my brain as I wrestle with this that thinks that the market structure changes that are upon us now with this new technology could be every bit, if not more impactful than what we saw in like 2004, '05, '06, with Reg NMS and the move to automated markets. That when we introduce blockchain technology and we hear these conversations about enabling innovation, there's a chance that we're going to be seeing infrastructural changes and changes in the roles of intermediaries and changes that are pretty substantial.
For this reason, it's really important that we're not only thinking about protecting our existing businesses, but we're really thinking proactively about how to adopt or benefit from some of the opportunities that are potentially created from this. I'm not sure, but to me, it feels like Reg NMS was... That was the biggest market structure change that we had in a generation, it seems. I think there's a chance that this is the next one.
Peter Haynes:
The reason I ask that question is I think back to when I was at the exchange, I started in 1988, and just before I got there, there was an executive that got let go. It was an executive that was attempting to move to a completely automated world. And this particular executive for the exchange had gone public and said, "I want to move the floor to electronic." And of course, you know the personalities that would've existed on that floor.
Long story short, after they made that announcement, he received death threats in his family, big articles in the newspaper, but someone from the floor, I think, called the local newspaper, the Global and Mail, to let the newspaper know that that executive did not have the degree they said they had from university. And when it was investigated, they ended up firing that person and it substantially delayed the process of transferring from a floor to fully electronic environment.
So I think about that and I think about the fact that, are you expecting there to be litigation if in fact there is even the sandbox move here? Is that expected in your front?
Brett Redfearn:
I ran the transaction business at the American Stock Exchange. I managed the Specialist Association and was the one who coordinated meetings with the Floor Brokers Association. And when I had meetings, when they would all get in a room and I'd say, "We have to be more electronic. We have to put in automated training," a lot of the feedback I got was, "What are you trying to do? Kill us?" This was something where because of that ownership structure that existed there, there were a lot of forces in play that made it slow and difficult to evolve. And I think that ultimately was a real negative for the survivability of that market.
Reg NMS, even for the New York Stock Exchange, essentially forced a change to take new technology on. If you think about it, the New York Stock Exchange, a specialist community, membership community at the time, prior to the Arca acquisition, but they didn't really want to go that way. So changing the trade through rule forced floor-based markets to adopt new technology.
But to get back to your specific question with respect to litigation, it's sort of been game on for suing the SEC for a while. I thought I got sued a lot until I saw record and he had a ton of lawsuits and, quite frankly, lost a ton.
Peter Haynes:
He won one lately, posthumously, arguably.
Brett Redfearn:
He did win one, and now that's been delayed a year and could be reworked before it goes into effect, which is the same thing that happened with my market data infrastructure rule, but we won't get into that.
If somebody believes that the rule that being proposed has argumentatively, it might not be meaning all the conditions of the APA and the Administrative Procedures Act, doesn't meet the terms of the economic analysis, will they sue? Yeah, if it messes up their business, it's very possible we would see litigation. And so I think that's one of the reasons why a comment period at an active debate is important for the SEC to make sure that they get it right and that they're thinking about all regulated entities in a way where they're not blocking innovation, but they're also doing things very deliberatively and they're steering clear of APA problems or EA issues.
Peter Haynes:
I've always felt like suing because your business model's being upended or impacted isn't necessarily a reason why the regulators should not do that. Obviously, they have to make the decision, which is in the best interest of the overall market, not the individuals who may be financially put out as a result of these changes.
Now, speaking of exchanges, I used the term flatfooted recently to describe the position of traditional exchanges in response to the competitive threats to tokenization, to which one exchange executive in the room, when I was speaking, had fired off a couple of daggers my way. Is this an accurate assessment in your mind, Brett? Is there actually a threat to the TradFi infrastructure providers? And what did you make personally of the $2 billion investment that NYSE made in Polymarket?
Brett Redfearn:
There's a few questions baked in there, but first of all, I think generally speaking, traditional exchanges have woken up and smelled coffee. They're not flatfooted anymore. It's time to get cooking. You see NASDAQ's proposal with DTCC. We see New York diving into blockchain and prediction markets. Remember, this Polymarket acquisition, there was a lot of blockchain being discussed when you saw Jeff Sprecher get on CNBC with Shayne talking about what are they going to do? There's all sorts of other things happening. You see Robinhood's deal recently announced with Susquehanna and the Miami Stock Exchange about futures and derivatives exchange cleaning houses, so also an aggressive move in the prediction market.
So things are changing. Things are really moving quickly. I think NYSE's investment is really interesting. You saw in that CFTC harmonization roundtable, there were some daggers fired there back and forth. I'm surprised from some of the things they said, that you saw that investment come right after that. It's a bold move. It shows that things are changing and it shows that people really are thinking about this technology seriously with big investments at stake, like real money being put on the table here.
And like I said, I don't think it's just about prediction markets. I think it's about the blockchain infrastructure that comes with that as well. Do I think that there's a threat? Yeah, I think there is. I don't know exactly how this shakes out. I believe that the secondary market environment in US equities is... Everybody says it's the best, most liquid, deepest markets in the world. That is very true. It's a high bar to do better. Doing better here is going to require solving some things that work pretty well and that are pretty challenging. So when I talk about settlement, DTCC, quite frankly, our netting process is very efficient and works very well. And so to do that in a way that adds additional utility and saves money is challenging and complicated. So I think that, yes, I think there is a threat, but I think there's a lot of wood to chop to get to something that works better than what works really well today.
Peter Haynes:
And I want to pick up on this because you mentioned a lot of eyeballs on this. I'll tell you a set of eyeballs that I've been spending more time with lately are investors that own exchanges or own infrastructure plays. So when that question comes to me and I'm thinking about what are the areas of the sort of chain of transaction execution that are at risk, you've mentioned a couple times clearing, you've mentioned custody, you've mentioned transfer agents. From your perspective, if you were to sort of rank them, what parts of that infrastructure do you think are most at risk? And do any of the players in that space have the ability to repurpose themselves or are they more likely to be replaced by nimbler competition?
Brett Redfearn:
Well, all of them have some risk and I think all of them also have the ability to repurpose themselves. So I think it depends on the ability to be responsive and to stay on top of what's going on and to be front-footed, not flatfooted. So when people talk about disintermediation, it's funny, I've been in a lot of conversations where everybody wants to disintermediate some other intermediary. So you're hearing these conversations where, well, is DTC going to take over the role of transfer agents or custodians? Or could TAs move stock custody out of DTCC and that affects DTCC? Or if Coinbase moves securities in a way where they can do things on DeFi, do they even need broker-dealers? So there's a lot of different discussions about ways in which the roles of intermediaries could change and there will be different models that involve disintermediating somebody else. So I think that there is risk, there are threats here.
This also goes for proxy distribution. Could that be completely transformed? And is there risk in that existing model? Yeah, there are some real inefficiencies there that could be solved for.
So I think everybody has to look at the applications and the use cases, how they potentially affect your business, and whether or not it means that it's time to become more efficient to evolve and to embrace some of these opportunities or to have somebody do it and be a loser on the other end.
Peter Haynes:
When you spoke at our conference just after you were on stage, I was interviewing the CEO of the Ontario Securities Commission, a gentleman by the name of Grant Vingoe. I'm curious after listening to Grant that day, what advice do you have to him and the rest of the Canadian Securities Administrators, which is our umbrella regulator across provinces in Canada, about regulating the future state of markets in light of the fast-moving US regulatory environment, which we've been discussing, and also taking into consideration the wants of the new players who want to move fast and you're trying to maintain investor protection and capital formation at the same time?
Brett Redfearn:
Well, I'm glad you ended with that last part because I do believe that investor protection, capital formation, fair and orderly markets are... And those are the three key missions of the SEC. I think those things have to always be at the core here. We have to proceed not to use technology for the purposes of using the technology, but in ways in which value is added to investors, to issuers, and to the infrastructure of our markets to make it more efficient. So as long as we have sort of those core principles at mind, I think that that's really important. It's not just, "Oh, it's cool. We're trying something on blockchain," but it's got to make it better in the process.
But I think that the first thing is it needs to be understood. I used to say about the SEC that no matter what they do, the street is always going to be five steps ahead of them. They're discovering practices or products or things like that a little bit late. And it really means that you have to be smart in knowing what's going on, so you're not surprised by it. So I think that hiring crypto people or experimenting with that or having... The SEC had FinHub or different places have areas where... We have the crypto task force. You need people with expertise who are drilling into it, who are talking to industry participants, who are learning, learning, learning, and let them break your brain on how things could work because it's a very different model. So I think understanding that is key.
It's very hard. I've told the SEC, I think it makes sense to hire more, I hate the term crypto bros, but people who really understand it, who play around with it. And part of the problem is that if you go in there, you can't own it anymore. So it's like a weird rule because people are going to be like, "Well, I love this. I'm not going to come in here and sell out all of my crypto." And there's been use cases where I've said, "Well, I can buy this or I can do that with crypto." They're not allowed to do it because of the rules of the entity. And they should be. They need to try things. They need do experiment.
So to me, I think it's really important to understand it, to talk to people who aren't on your normal list. They're going to show up with long hair and T-shirts and goatees and shorts. I don't know. It's different people who are thinking differently about markets and about the world. A lot of these folks are coming from Silicon Valley and not from Wall Street or wherever, really dive into that technology. And I think that's super important, that understanding is fundamentally important, while at the same time, never lose touch with the core principles that need to govern our markets.
Peter Haynes:
Let me just broaden that question out and ask you, as you talk about all these people that are going to be coming into the OSC and to the SEC asking for approval to do things, what advice do you have for regulators in general and market participants for that matter who are trying to separate the grifters in this space from the innovators with true intent to improve securities market infrastructure?
Brett Redfearn:
When I was at the SEC and a lot of the entities would come in and say, "We want to do everything the regulated way," or what have you, and at that time we would ask questions like, "Well, this is broker-dealer activity. Have you registered as a broker-dealer?" Well, then some would say no. Or "Have you registered as an ATS? You're building an ATS." And they would say no. You really have to do think about the regulated structure that we're in, and for regulated activities, operate within it or have very specific recommendations about where in the existing rule set and laws, what needs to be changed. Regulators don't want to hear like, "We want to do this," without something specific to go on.
And then look at behavior. There's a lot of super cool things that are happening in the space. And suffice it to say that there still are grifters out there. There still is fraud, there's still manipulation, there are still pump-and-dump schemes, there are still scamming stuff. That's still out there. And we're in an interesting time. It's very important that during this time that that behavior is monitored very closely because, quite frankly, what worries me is that if things blow up, it's going to just be a big setback.
So I think that there still has to be an aggressive understanding and watching of activity that's out there and to make sure that it's going in the right direction. There are so many good actors who are just trying to innovate that need an unlock because our existing rules are in the way. And to the extent that we have ways of building the right guardrails and to ensure that they're not harming investors or they're not enabling manipulation or they're not bringing illicit actors into the space to launder money, then let it go. And that's going to take some work. And they need to roll up their sleeves and do it in a way that doesn't let the existing work site get in the way, but again, doesn't take the guardrails down in the process.
Peter Haynes:
I think the CLARITY Act's 185 pages or something like that. I don't remember what the exact number was, but you're right. If there's a hiccup, it's going to be a thousand pages and that's not going to be good for the industry. And so I want to finish up here with your crystal ball. We're looking forward now five to 10 years. Is there going to be a difference between being a stock in Canada, US, or UK? Will there still be local exchanges? Will there still be a cachet to be listed on the New York Stock Exchange? Walk us through how you see this playing out.
Brett Redfearn:
I think never before, Peter, have I felt that the future of the evolution of some of what could happen in markets is more uncertain. There's a lot of uncertainty, which means that there's a lot of opportunity and there's certainly some risks as well to capital markets.
What's important to me in this unlock of innovation is we do have a lot of faith and trust in our markets. We do have the deepest, most liquid capital markets in the world. We can't mess that up. We want to allow innovation. We don't want to do it to the expense, fundamentally, of our capital market. So there's a balancing act that's going to need to be done here.
That in mind, I tend to have a lot of confidence in our processes. I think if something's put out for comment and all the comments come in and there's debate, I have confidence that that starts to land in a good direction. And if it doesn't, the court system then can come into play and can bring things back on track.
So fundamentally, I think our capital markets will be okay. When it comes down to the individual participants that are out there, yeah, I mean, I think there still will be exchange. Quite frankly, people talk about there's too many exchanges. I actually think there's going to be more platforms. When you unlock innovation in the libertarian framework, it basically means more markets, more ways of transacting. It could be more complicated.
Peter Haynes:
That's good for trader business. If I'm a trader, it's going to get more complicated. They're going to need me. Don't you agree?
Brett Redfearn:
It's good for traders. The question is it good for investors?
Peter Haynes:
Right.
Brett Redfearn:
We need to do things in a way where we don't harm price formation or we don't undermine investor confidence. I'm a believer that we can thread that needle appropriately, but that's going to take a lot of comment, a lot of feedback from people, and regulators really working hard to land on the right spot. I think New York will still have cachet, but I think even there, I think there's going to be more listings on the Texas stock exchange than people think. So we'll have competition in the listings [inaudible 00:38:10].
Peter Haynes:
I agree there.
Brett Redfearn:
I think if we take away OPR, we might actually have fewer equity markets, but more DeFi pools or something like that. So I'm not exactly sure, but I can tell you one thing, it's going to be interesting and it's going to be fun. It's going to be important to get it right.
Peter Haynes:
Hey, we did see an exchange application get turned down today or yesterday. That's just the first time I think we've seen that in a long time. And that was the Dream Exchange who was turned down, but for maybe other reasons is people will read into the reasons that the SEC made that decision. So it's an interesting case. Lots of publicity in the Wall Street Journal recently on that particular application.
Final question for you. And this is one... I was at an event recently and we went through some of these topics, and at the very end, the last question this person asked me was, who do you look to and listen to about the future? So my question for you is, who do you listen to for what direction the future is going in and what advice do you have for the listening audience, and particularly the institutional investors that want to learn more about tokenization?
Brett Redfearn:
I find that I need to change my routines in terms of that exact question. So part of the way I've designed my own client list is to try to find people who are doing very different things and who are experimenting around in the tokenization space or in the blockchain space. That process of being involved in that has really helped to educate me. Even going to conferences, you go to a crypto conference... It's funny, I go to the equity market structure conferences, where I know everybody, I go to crypto conferences. They're all at least 20 years younger than me and they're talking a language that I still to this day, I'm like, "What exactly is that?" You walk around the people that are offering things in the crowd, they're doing all kinds of different things. And by the way, there's a million of these things, so you just got to find the right ones. And the parties are pretty good too, Peter.
Going to these events is really important. Talking to people you wouldn't normally talk to is super important. And I would say, in terms of advice, I sort of have this view that there's three types of people out there. There's those who watch it happen, there's those who make it happen, and there's those who end up saying, "What happened?" The best way of not being caught off guard and caught flatfooted is to be engaged in deploying the technology, to trying experiments, to doing things, to being in the community, to making things happen, to engaging and having a view on what is the best way to go. If you're making it happen, you're not going to be the person who says, "What just happened?" and be in trouble.
Peter Haynes:
One other thing I would say just in finishing up here is a lot of these infrastructure players and marketplaces are in the process of going public and/or are already public. So I would encourage the investors, the institutional investors, to take the meetings. And you can learn a lot about these entities by taking the meetings that will take place during roadshows and other things here.
Brad, I can't believe how much ground we covered here over the two podcasts. Can't thank you enough on behalf of TD Securities, for one, attending our conference and participating there, but two, also allowing us to go deep into the weeds here. And as you said, we got to talk about this, we got to talk about that in the future. Look forward to seeing you hopefully if it works out on December 16th on stage there, providing some wisdom to the SEC and the community about the next round of OPR. And again, I thank you for joining the podcast series and I'm sure this won't be the last time we talk.
Brett Redfearn:
Thanks so much for having me, Peter. This was great.