Tokenized Securities Are Still Securities, US SEC’s ‘Crypto Mom’ Affirms

• Digital tokens linked to securities are legally securities.
• Compliance with disclosure rules is mandatory.
• SEC supports innovation within legal boundaries.

The US Securities and Exchange Commission (SEC) once again clarified that tokenized securities will be regulated by federal securities laws irrespective of their digital nature. Commissioner Hester Peirce, SEC crypto mom, has made it clear that blockchain does not alter the nature of these assets.

Peirce gave an announcement advising companies intending to distribute or trade tokenized securities to make contact with the SEC and follow the current regulations. She emphasized that tokenization provides significant approaches to trading and distributing securities, but does not exclude the latter instruments of legal regulation.

Regulatory Clarity on Tokenized Securities

The process of tokenization consists of transforming traditional types of securities, i.e., shares of a company, into digital tokens that are traded on a blockchain. Such a process can be done internally by the issuer itself or by third parties who are custodians of the underlying securities. Tokens issued by third parties are associated with extra risks, among which the counterparty risks should be listed by investors, and Peirce warned about them.

All market participants must comply with the disclosure requirements of federal securities legislation when issuing tokenized securities. To clarify these responsibilities, Peirce cited the recent guidance by the SEC Division of Corporation Finance. She also pointed out that tokenized securities may have a different legal form, including being in the form of security-based swaps or security-based receipts; each of these forms has different regulatory implications.

This position taken by the SEC is agreeable with the appeals made by the former Chair of the SEC, Gary Gensler, that companies need to proactively reach regulators whenever launching products related to crypto that might be considered as securities. Peirce once again noted the willingness of the agency to collaborate with those in the market to modernize rules or devise exemptions where warranted by technological advancement.

Industry Impact and Future Directions

The message arrives when companies such as Robinhood and Coinbase consider tokenizing exchange-traded products and stocks with a view to providing blockchain-based trading opportunities. The recent launch of a tokenization-focused layer-2 blockchain by Robinhood and its submission to the SEC of a regulatory framework proposal are good examples of increased momentum in this area.

Regardless of the optimistic attitude to the prospect of tokenization in connection with the simplification of capital formation and the rise in asset liquidity, issues arise regarding the non-evasion of regulations and safeguarding investors. Certain legislatures have cautioned that tokenization might be used to evade SEC regulation, and thus place retail investors at risk of an unknown danger.

The statements of Peirce restate the fact that innovations should be undertaken within legal frameworks. The SEC is willing to work with the companies to ensure there is a need to make adjustments to regulations, but it also wants to ensure that the tokenized securities follow the securities law that is already in place.

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