The US Securities and Exchange Commission (SEC) reported that putting a security on a blockchain will not change its legal status. SEC also added that a tokenized asset will face the same registration requirements as traditional instruments. It opined that if anything is acting like a stock, bond, or investment contract, then it is essential to treat it as a security under the law, even if it is wrapped in a fancy blockchain technology.
Two Categories of Tokenized Securities
In a joint statement held on Wednesday, the agency’s Division of Corporation Finance, Trading and Markets, and Investment Management reported that the tokens that represent a security must remain subject to Federal Securities Law under the Securities Act of 1933. The agency also divided the tokenized securities into two categories: issuer-backed tokenized securities and third-party issued tokens. In the issuer-led model, the firm or agency must tie its on-chain transfers to the official shareholder records. Third-party tokenization is more complicated as an unaffiliated firm creates a crypto asset tied to someone else’s security. The SEC noted this model varies widely, and it introduces additional risks like bankruptcy.
On-chain transactions are referred to as securities transferred that are directly recorded on a blockchain or distributed ledger, instead of conventional database systems. According to the statement, issuers can offer tokenized securities as a separate class or along with traditional shares. If a tokenized security has a substantially similar character and confers substantially similar rights and privileges, it can be treated as the same class, regardless of the format, for certain purposes under the Federal Securities Laws. However, a key difference the agency notes is that, “instead of maintaining the master securityholder file through conventional, off-chain database records, the issuer (or its agent) maintains the master securityholder file on one or more crypto networks.”
SEC and Trump’s Presidency
The SEC issued the statement on behalf of the federal agency, shifting its stance on crypto under the Trump administration. Meanwhile, the SEC has dropped or closed more than a dozen cases over the past year, which also included actions issued against the major crypto companies that constituted tokens, staking products, and wallet infrastructure as unregistered securities. The SEC guidance reinforces that securities laws apply to all tokenized securities regardless of their technological format.
However, the statement lacked clarity on the harder questions raised by the abandoned cases, like whether crypto-native products like tokens or staking programs are deemed as securities in the first place.
Custodial vs. Synthetic Tokens
The SEC has observed two common third-party approaches: custodial and synthetic. In the custodial tokenization, the underlying security sits in custody, while the token represents an entitlement or indirect interest. By contrast, in the synthetic tokenization, the token represents the third party’s own instrument that is used for tracking the underlying security.
On security-based swaps, the staff noted that offerings to people who are not eligible for contract participation can trigger additional requirements like registration or exchange-trading conditions. The SEC actually issued its statement as a compliance road map and not a green light. It is encouraging firms to engage with the agency as they are preparing for registrations, proposals, and requests for action.
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