Tokenized Stocks and Atomic Settlement Could Transform Traditional Finance: Insights From Timothy Massad

New York Morning Trade.

We are seeing Bitcoin below flat and ETH trying to eke out gain.

Both majors are range bound with Bitcoin eyeing another lower high.

Well, this does come as altcoins are mixed in on the heels of the recent rallies in privacy plays Zcash along with tokenization token.

And in the nation's capital, the crypto industry is looking for more support when it comes to innovation.

The White House is still working on strategic reserves and the Senate is still considering the Clarity Act.

But the SEC has paused some planned rule changes regarding the innovation exemption as well as tokenized stocks.

Well, joining me as we kick off the holiday shortened trading week is Timothy Massad, research fellow at Harvard Kennedy School and former CFTC chairman.

Well, good morning, Timothy.

Great to have you here.

Thank you so much for joining us.

So I understand that you're saying that our central bank system needs to be able to handle tokenized money, but your words have been misconstrued on this.

So tell us what's happening here.

And can you please clarify when it comes to CBDCs?

Sure.

Someone said I thought the Fed was creating a CBDC and that's not the case.

I don't think that.

What I have said and what I said last week was it is important that our central bank settlement systems work. for digital money, for tokenized money.

You know, we already have electronic reserves, of course, but as we see stable coins growing and banks looking at tokenized deposits and people talking about atomic settlement of securities, we just have to make sure the settlement system is going to work for that.

And I think the Fed is looking at that.

I use the word that they're quietly working on it basically to distinguish how we're proceeding versus how Europe and the UK are looking at a CBDC, are promoting a CBDC. are talking about that a lot publicly.

But, you know, there's no secret to this.

I mean, Governor Chris Waller has spoken about it.

He's quite knowledgeable on these issues.

And the Fed is working with other central banks on looking at, you know, unified ledger concepts for cross-border payments and things like that.

So it's very important work because we want these private sector initiatives to succeed.

And frankly, it's kind of complemented by the president's executive order that was just issued on fintech and looking at regulatory frameworks where that order directs the Federal Reserve to think about how to give access to settlement systems to other other payment firms.

Yeah, and while I have you here and while we're talking about the regulatory landscape, the White House does want clarity passed by the 4th of July.

And with the Senate on recess until June, that goal does face an uphill battle.

So what do you make of the Clarity Act as it is written now?

And what are the implications here for the industry?

Sure.

Well, I think there's still a big question as to whether this will pass.

And I have a lot of concerns about it.

I mean, many Democrats are very concerned about the lack of an ethics provision because of the way that the president and his family have profited enormously from the sector.

And it's a sector that he's designated as one of priority in terms of policy.

And obviously, we're debating the regulation of it.

I think a lot of Democrats have concerns about whether it does enough in terms of preventing illicit finance and money laundering.

And then there are concerns just over the core substance of it.

Does it do too much, I guess is the way I would put it, in terms of promoting the technology by providing exemptions from traditional regulation?

I think the definition of what's not a security is a little too broad.

I think the defi, the exemption for decentralized finance is a little too broad.

And on top of those concerns, we still don't really have the provisions for the CFTC to regulate the spot market.

The Ag Committee has been working on those.

So I think there's a lot of questions about it.

Clarity is a good thing, but we've got to get the rules right.

And I think we've got to make sure we don't undermine traditional regulation.

Yeah, and as you mentioned, there are a lot of moving parts here and differing opinions.

But when it comes to the Genius Act, this is something that was already passed last year.

So I do want to get your take on how the implementation process is going.

Give us your perspective.

Sure.

Well, I think the OCC has put out a very good, you know, initial proposal.

It's gotten over 300 comments on that.

There's obviously a lot of discussion about the question of Third party companies like crypto exchanges paying yield or rewards.

I mean, that's obviously also an issue for the Clarity Act.

There's other issues in the regs in terms of what's the proper amount of capital, what's the proper scope of activities that a stablecoin issuer can be involved in.

You know, and on this question of yield in particular, you know, I think a lot of banks are still concerned, particularly smaller banks.

We have a lot of small banks in this country that are very important to their communities.

We want to make sure we don't undermine them with this new technology.

I guess the other thing I would say, though, is I still think the Genius Act is incomplete or is flawed.

I don't think we're there yet in terms of creating a framework that ensures that stable coins are safe, reliable, and convenient.

There's issues it doesn't address.

There's issues that I think it didn't do a very good job on, like frankly, bankruptcy of a stablecoin issuer.

We hope that never happens.

But if it does happen, we've got to be able to resolve it quickly.

It doesn't give a clear right of redemption to stablecoin holders.

I think that's important.

It doesn't sufficiently address things like interoperability.

So, you know, there are a lot of issues we still have to work out.

Let's hope we can strengthen it without having to go through a stress event where, you know, those questions are really forced on us.

Yeah, and Timothy, while I have you here, I do want to ask you about tokenized stocks as well as prediction markets.

The SEC delaying its innovation exemption for tokenized stocks.

So for the layperson out there, can you break down this increasing interest in tokenization of traditional securities?

Sure.

Well, this is one of the most important potential applications for the technology, right, is the idea that we might tokenize stocks and bonds and then be able to settle them in what's called atomic settlement, where the money and the securities move at the same time on the same ledger.

You know, we might see significant cost savings and efficiencies and so forth.

But this is going to be a very long process.

This is not going to happen overnight.

There's still a lot of questions about what makes sense here.

We are seeing a lot of good initiatives, though, in this area.

DTCC has announced a big one.

A lot of other traditional firms are looking at this.

So I think it's very important to date.

The crypto world has frankly generated, other than stable coins, a lot of activity that doesn't really have that much social utility in my mind.

But the idea that we might tokenize real world assets, securities, you know, is potentially a very, very important one.

But again, this is going to be a long process.

It's not going to happen overnight.

Yeah, and very quickly, we have a little over 60 seconds here, so I do want to get your take on prediction markets.

The CFTC is suing states that are trying to crack down on prediction markets, and you are a former chairman of the agency.

So what do you make of the CFTC's push for authority over the markets and their support for innovation when it comes to prediction markets?

Sure.

Well, I think most of what goes on on prediction markets is really more akin to gambling, betting.

It's not commodity derivatives.

And therefore, I don't think the CFTC is best positioned to regulate these markets.

We've traditionally left regulation of gambling to states and Indian tribes.

And sure, there's occasionally a product that's a weather derivative or something like that.

Those things that are really used by businesses to hedge commercial risk, that's what the CFTC should be regulating.

It shouldn't be regulating betting on sports or elections or other things like that.

So we've seen a lot of states challenge this.

I think the states have very good claims that You know, this is gambling, this is betting, and it's properly within their regulatory sphere and not the CFTCs.

You know, some of these platforms argue these are swaps.

Well, believe me, I've spent a lot of time in my career working on swaps, from helping write the very first ISDA master agreements to implementing the Dodd-Frank rules to regulate the OTC market.

These are not swaps.

Yes, the definition is very, very broad, but you got to read it in context.

It's not meant to cover the kinds of sports bets that Kalshi and other platforms are offering.

Well, Tim, we will have to leave it there for today, but always great talking to you.

Thank you so much for joining us this morning.

And as always, thank you for all of your insights.