The U.S. Securities and Exchange Commission is working to provide clarity around the emerging category of tokenized securities, via guidance from the Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets published late on Wednesday.
In short, the agency appears to be taking the position that while the format of a tokenized security is changed, these onchain assets will continue to fall under the agency's remit, and carry similar registration, disclosure, and other obligations.
"A tokenized security is a financial instrument enumerated in the definition of 'security' under the federal securities laws that is formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks," the SEC wrote.
The guidance published on Wednesday is part of the current SEC administration's ongoing efforts to provide market clarity for the novel crypto asset class. In November, for instance, SEC Chair Atkins said the agency would create a "token taxonomy" to delineate between digital asset securities.
It also comes as legislators in the U.S. work to pass a crypto market structure bill that would, in part, define roles for the SEC and Commodity Futures Trading Commission in overseeing the industry, and as exchanges around the world look to launch securities trading services, like Kraken's xStocks and Robinhood's Arbitrum-based tokenized stocks.
Tokenization taxonomy
According to the agency, there are two main categories of tokenized securities, namely, "issuer-sponsored tokenized securities" and "third-party sponsored securities."
Under the first category, an issuer integrates blockchain directly into their ownership records so that onchain transfers represent actual security transfers.
"Consequently, the only difference between a security issued in this manner and securities issued in traditional format is that instead of maintaining the master securityholder file through conventional, offchain database records, the issuer (or its agent) maintains the master securityholder file on one or more crypto networks, which functionally are onchain database records," the agency said.
Similarly, the SEC draws a comparison between third-party issued securities — where a third party holds the underlying security in custody and issues a tokenized "entitlement" — and other custodial arrangements, meaning existing laws apply as before.
"Under this model, the crypto asset represents the holder's indirect interest in the underlying security via the security entitlement," the SEC wrote. "The format in which the security entitlement is issued does not affect application of the federal securities laws."
Additionally, there is another type of third-party "synthetic" arrangement where an issuer tokenizes a security issued by another person, giving economic exposure to that underlying security without conferring benefits, like voting rights.
The agency refers to these assets as "linked securities," including some types of structured notes and equity securities. Security-based swaps may also fall under this taxonomy, covering derivatives that provide synthetic exposure and are typically subject to stricter eligibility rules for contract participants
To a large degree, much of the SEC's statement on Wednesday reiterates the agency's existing position. SEC Commissioner Hester Peirce, who has a high-ranking position on the agency's crypto task force, has long signaled that "tokenized securities are still securities." Perhaps the biggest advancement in recent weeks, however, is the spate of development — best symbolized by the New York Stock Exchange saying it would launch a platform for tokenized U.S. equities and exchange-traded funds, pending regulatory approval.