Compiled by: Felix, PANews
As major companies step up efforts to introduce tokenized stocks into the U.S. market, Hester Peirce, a Republican commissioner of the U.S. Securities and Exchange Commission (SEC), made it clear in a statement on July 9: Although blockchain technology is powerful, it does not have the magical ability to change the nature of the underlying assets. Tokenized securities are securities in themselves and must comply with federal securities laws.
In addition, Hester Peirce emphasized in the statement that tokenized stocks, notes or interests "are still securities," requiring issuers, intermediaries and traders to comply with existing federal laws when creating, selling or transferring these securities.
Hester Peirce’s statement noted that tokenization can occur in two ways: an issuer can mint a blockchain version of its own shares, or a custodian can wrap a third-party security and issue a receipt.
“Sometimes, issuers will tokenize their own securities. For example, an operating company or investment firm may tokenize its shares. Alternatively, an unaffiliated third party that holds custody of securities issued by another entity may issue new tokenized securities tied to the securities it holds, or tokenize an investor’s ‘security interest’ held against the custodian.”
Hester Peirce warned that the second model introduces counterparty risk because token holders rely on the custodian’s solvency and control over the underlying shares.
Hester Peirce also noted that distributors of tokenized securities must consider their disclosure obligations under the federal securities laws, referring to the SEC’s Division of Corporation Finance’s recent staff statement on this topic. In addition, market participants should meet with the Commission and its staff as early as possible when building their tokenized products.
“Market participants who distribute, purchase, and trade tokenized securities should also consider the nature of these securities and their implications for securities law. For example, depending on the circumstances, a token could be a ‘security receipt,’ which is itself a security but distinct from the underlying security held by the token distributor. Or, if the token does not confer legal and beneficial ownership of the underlying security on the holder, it could be a ‘security-backed swap,’ which retail investors cannot trade over-the-counter. While blockchain-based tokenization is new, the process of issuing instruments representing securities is not. The same legal requirements apply to both on-chain and off-chain versions of these instruments.”
In response to this statement, ConsenSys lawyer Bill Hughes wrote on the X platform, “In short: we’ve heard some crazy stories about your plans to launch tokenized US stocks, and you need to seriously put the brakes on. Meet with us and we can consider whether exemptions or rule changes are necessary. But make no mistake, securities laws apply equally on-chain and off-chain.”
Bloomberg ETF analyst James Seyffart commented on the X platform that Hester Peirce’s clarification sounded like a warning to all companies and protocols planning to build a bridge to security tokenization, a bit like “Hey, pay attention.”
It is worth mentioning that crypto companies including Coinbase and Kraken have shown interest in launching tokenized stocks. If approved by the U.S. Securities and Exchange Commission, they will be able to offer traditional stock trading based on blockchain, thereby competing directly with other more traditional financial brokerage companies.
When asked about the prospects for security tokenization in an interview with CNBC last week, Republican SEC Chairman Paul Atkins said the agency should encourage innovation.
Critics say the new technology could be a means of circumventing SEC regulation and expose retail investors to new risks.
Senator Elizabeth Warren said that a cryptocurrency market structure bill, the CLARITY Act, which is about to be voted on in the House of Representatives, contains "provisions that allow non-cryptocurrency companies to tokenize their assets to circumvent US SEC regulation." "Under the House bill, a public company like Meta or Tesla can easily escape US SEC regulation simply by deciding to put its stock on the blockchain."
Related reading: Tokenized stocks become the new favorite of cryptocurrencies, what about altcoins?
