Paradigm Files Comment Letter on the SEC’s Transfer Agent Proposal
Paradigm filed a comment letter with the SEC this week regarding its proposal to modernize the transfer agent rules, the first comprehensive update to that framework in decades.
Transfer agents are a part of the market most people never think about, doing the vital but soundless work of ensuring the official record accurately reflects who owns what. A year ago, we asked the SEC to let a blockchain serve that role, but we also noted it was a small step on its own; bringing stocks onto blockchains would require the transfer agent rules to catch up. This proposal represents a giant leap towards that goal, and the Commission deserves credit for taking it.
But even great steps require moving dextrously. We support this proposal, but there are critical places where changes are necessary so the SEC does not trip in the process.
Code should not be treated as a transfer agent. A smart contract that enforces a token’s transfer rules is a tool to be used by whoever controls it, e.g., the issuer or its transfer agent. The developer who wrote or published the code, on the other hand, is no more a transfer agent than a vendor of the software a traditional transfer agent runs. Just as elsewhere in crypto, it is paramount that developers of code not be dragooned into registering with the SEC. The person who can issue, cancel, or reassign positions is the transfer agent; the person who writes the code at their direction is not. The proposal doesn’t say otherwise, but it also doesn’t say so directly, so we ask the Commission to draw a clear line.
Control should be defined functionally. The proposal requires a transfer agent to maintain “exclusive control” over the master securityholder file but never says what that means. We’ve been in this undefined gray space before and didn’t like the results: prior SEC staff used the same definitional gap to keep broker-dealers out of digital asset custody. Fortunately, that prior guidance was withdrawn and commercial law has since solved this problem, supplying a functional test for control, a presumption of exclusivity, and rules for control shared with another party. We ask the Commission to incorporate that framework and not revivify moribund concepts.
Modern rules respect modern developments. Tokenized securities move differently than their paper predecessors, and we suggest that this proposal account for that fact in three places. First, a transfer agent that maintains reasonable policies and procedures should not be penalized for delays caused by network congestion, chain reorganizations, or protocol upgrades it does not control. Second, the rule should recognize that tokenized private funds already rely on whitelists to keep secondary transfers within the exemptions from registration, rather than requiring an expensive legal opinion for every transfer. And third, stablecoins and tokenized deposits should be treated as “funds” that a transfer agent may hold in a segregated wallet it controls, rather than only in a bank account. We should hold tokenized entities to high standards that fit with the realities of the blockchain, but not require them to do things that make little sense in a digital ecosystem.
In our comment a year ago, we said that “we believe the benefits of tokenized stocks will accrue to not merely the vast majority of market participants, but the vast majority of Americans.” We still believe that, and we believe the Commission does too. We appreciate the Commission’s engagement and look forward to continued dialogue as it moves toward a final rule.
You can read our full comment letter here.