SEC Reiterates Tokenized Securities Are Subject to Existing Laws

The US Securities and Exchange Commission (SEC) has reiterated its stance that digital tokens linked to securities are legally considered securities. This clarification comes from Commissioner Hester Peirce, known for her supportive views on cryptocurrency, who emphasized that the digital nature of these assets does not alter their regulatory status.

Peirce advised companies planning to distribute or trade tokenized securities to engage with the SEC and adhere to existing regulations. She highlighted that while tokenization offers innovative approaches to trading and distributing securities, it does not exempt these instruments from legal regulation. The process of tokenization involves converting traditional securities, such as company shares, into digital tokens traded on a blockchain. This can be done by the issuer or third-party custodians, with the latter posing additional risks, including counterparty risks, which investors should be aware of.

All market participants must comply with the disclosure requirements of federal securities legislation when issuing tokenized securities. Peirce referenced recent guidance from the SEC Division of Corporation Finance to clarify these responsibilities. She noted that tokenized securities may take different legal forms, such as security-based swaps or security-based receipts, each with its own regulatory implications.

This position aligns with the views of former SEC Chair Gary Gensler, who advocated for companies to proactively engage with regulators when launching crypto-related products that could be considered securities. Peirce reiterated the SEC's willingness to collaborate with market participants to modernize rules or create exemptions where technological advancements warrant it.

This clarification comes as companies like Robinhood and Coinbase explore tokenizing exchange-traded products and stocks to offer blockchain-based trading opportunities. The recent launch of a tokenization-focused layer-2 blockchain by Robinhood and its submission of a regulatory framework proposal to the SEC exemplify the growing momentum in this area.

While the prospect of tokenization is seen as a way to simplify capital formation and increase asset liquidity, concerns remain about regulatory compliance and investor protection. Some legislators have warned that tokenization could be used to evade SEC regulation, potentially putting retail investors at risk. Peirce's statements underscore the importance of conducting innovations within legal frameworks, ensuring that tokenized securities adhere to existing securities laws.

The SEC's approach aims to balance fostering innovation with protecting investors. By treating tokenized securities as traditional securities, the SEC ensures these digital assets are subject to the same rigorous oversight and disclosure requirements. This approach helps maintain financial market integrity and build investor confidence in the emerging world of digital assets.