#SEConTokenizedSecurities

Based on the SEC's recent statement, a tokenized security is a traditional financial instrument (like a stock) that exists as a crypto asset on a blockchain. The core rule is that using blockchain does not change how securities laws apply. Below is a detailed breakdown of the key points and categories from the SEC.

📜 The SEC's Core Regulatory Position

· Technology-Neutral Regulation: The SEC's main message is clear: the format—whether a security is recorded on a blockchain or in a traditional database—does not change its legal status under federal securities laws.
· No Exemptions from Registration: Every offer and sale of a security must be registered with the SEC unless an exemption applies. This is true for tokenized securities just as it is for traditional ones.

🔍 Breakdown of the Two Main Tokenized Security Models

The SEC's statement outlines two broad categories with distinct characteristics. Here is a summary of the differences:

Issuer-Sponsored Tokenized Securities

This model involves the company that issues the security (or its authorized agent) directly integrating blockchain into its official ownership records.

· Core Concept: Direct, on-chain ownership. The transfer of the crypto asset directly results in a transfer of the security on the issuer's official records.
· Investor Rights & Risks: Provides true equity ownership. Holders are direct security holders of the issuer with rights like voting and dividends. There are minimal new risks beyond those inherent to the underlying business.
· Regulatory Example: The Superstate tokenization of Galaxy stock is an example of this approach for listed securities.

Third Party-Sponsored Tokenized Securities

This model involves a third party unaffiliated with the underlying issuer creating a token linked to a security. This category has two sub-types:

Custodial Model (Tokenized Security Entitlement)

· Core Concept: The third party holds the underlying security and issues tokens representing an indirect interest in it (a "security entitlement").
· Investor Rights & Risks: Rights are derived through the custodian. Holders are exposed to the custodian's counterparty and bankruptcy risk.
· Regulatory Example: The SEC's no-action letter to the Depository Trust Company (DTC) for its tokenization services is a key example of this model.

Synthetic Model

· Core Concept: The third party issues its own security (like a linked note or a security-based swap) that provides synthetic exposure to the value of the referenced asset without granting any rights in the original issuer.
· Investor Rights & Risks: No direct ownership rights (voting, dividends). Risk profile is complex, combining market risk with the credit risk of the third-party issuer. Some products like security-based swaps have restrictions on sales to retail investors.
· Regulatory Context: The SEC specifically warns that many "tokenized stocks" sold to retail investors are synthetic products that provide only indirect exposure. Robinhood's tokenized stocks in Europe have been cited as an example of this type.

📊 Real-World Developments & Broader Implications

Beyond the taxonomy, the SEC has taken concrete steps and other agencies are also active in shaping the market:

· Recent Regulatory Actions: In late 2025, the SEC granted no-action relief to the DTC, allowing it to launch tokenization services for eligible securities like those in the Russell 1000 Index, U.S. Treasuries, and major ETFs.
· Cross-Agency Movement: The Commodity Futures Trading Commission (CFTC) is also active, launching a "Crypto Sprint" and providing guidance allowing the use of tokenized assets as collateral in derivatives markets.
· Industry & Investor Caution: The Securities Industry and Financial Markets Association (SIFMA) supports innovation but strongly opposes broad regulatory exemptions for tokenized securities, arguing they require the same investor protections as traditional markets.

💡 Key Considerations for Investors and Issuers

· Investor Focus: Carefully understand what you own. Ask: Is this an issuer-sponsored token granting direct rights, or a third-party product exposing you to custodial or synthetic risks? The SEC is particularly concerned about synthetic products being marketed to retail investors.
· Issuer Focus: Tokenization does not simplify compliance. You must still navigate securities registration, disclosure, and transfer agent rules. Working with regulated partners (like the DTC) for listed securities may provide a compliant path forward.
· Future Outlook: Regulation aims to bring clarity, not stifle innovation. The SEC's taxonomy and recent no-action letters indicate a preference for bringing tokenization within the existing regulatory framework through issuer-sponsored or regulated custodial models.