The Justification of Trillion-Dollar Potential in Tokenization: Key Financial authorities present their arguments to the Securities and Exchange Commission
The United States Securities and Exchange Commission (SEC) roundtable on tokenization and related initiatives have underscored the need for coordinated and forward-looking regulatory adaptations to facilitate the transition of traditional assets onto blockchain platforms. The key regulatory changes highlighted include:
- Clarifying the classification of crypto assets: The SEC aims to distinguish when tokenized assets are securities, stablecoins, digital commodities, or digital collectibles, providing proper regulatory treatment and compliance.
- Modernizing securities rules and regulations: The modernization of securities rules will enable the tokenization of traditional financial assets such as common stock, bonds, and partnership interests, and allow trading of these tokenized securities on decentralized finance (DeFi) platforms without central intermediaries.
- Providing interpretive and exemptive relief: The SEC plans to ensure existing regulatory frameworks do not stifle innovation, offering guidelines for custody arrangements, trading, and transfer agent rules as they apply to tokenized assets.
- Developing regulatory frameworks for liquidity risk management: The SEC aims to align liquidity risk management in funds investing in tokenized assets with existing rules such as SEC Rule 22e-4, but adapted for the unique characteristics of tokenization.
- Enabling automation of compliance via smart contracts: The SEC seeks to improve efficiencies and reduce intermediaries while addressing legal and operational risks through the automation of compliance via smart contracts.
- Revamping the regulatory regime governing alternative trading systems (ATS): The SEC may revamp the ATS regulatory regime to accommodate crypto and tokenized asset trading, potentially through new guidance or rulemaking focused on digital assets on national securities exchanges.
The SEC roundtable and Chairman Paul Atkins’s “Project Crypto” initiative emphasize the need for coordinated and forward-looking regulatory adaptations that balance investor protection with fostering innovation in tokenization and blockchain-based financial markets.
Global policy maker coordination and collaboration are crucial since technology is cross-border, and regulatory regimes need to recognize tokenized assets as they move across jurisdictions. Forward pricing rule (Rule 22c-1) modifications may be necessary if 24/7 trading is implemented. Tokenized securities should be able to be settled using stablecoins, just as cash is used in traditional finance.
Industry leaders, such as Franklin Templeton's Sandy Kaul, Apollo's Christine Moy, and BlackRock's Robert Mitchnick, emphasized the potential benefits of using blockchain for transfer agency, tokenizing not just funds but also the underlying Treasury securities, and the inefficiency of the current process of using money market funds for collateral without tokenization.
There is strong support for formal regulatory sandbox or pilot programs to allow firms to use DLT for issuing, trading, and settling tokenized securities. Self-custody should be permitted for investors, enabling direct access to innovation, reducing intermediary fees, and supporting user control without compromising regulatory oversight.
Alex Zozos of Superstate discussed the potential of DLT in automating financial primitives such as collateral, lending, and automated market makers. Innovation in this space could bring significant efficiencies to capital markets while maintaining investor protections, but requires thoughtful regulatory adjustments to realize its full potential.
The 1940 Investment Company Act needs adjustments to accommodate tokenization, including modifications to the single book of record at transfer agency level, access and disclosure requirements for investor communication documents, and considerations for dual share classes - ETF shares.
Johnny Reinsch from the Tokenized Asset Coalition highlighted that tokenized collateral management demonstrated resilience during the Terra stablecoin collapse compared to centralized crypto lending services. The regulatory changes needed for tokenization in the traditional finance sector focus primarily on providing clarity, modernization, and regulatory accommodations to facilitate the transition of traditional assets onto blockchain platforms.
- The SEC roundtable and Chairman Paul Atkins’s initiative stress the importance of regulatory adaptations, balancing investor protection with fostering innovation in tokenization and blockchain-based financial markets.
- Global policy maker coordination is essential, as technology is cross-border, and regulatory regimes should recognize tokenized assets as they move across jurisdictions.
- Industry leaders believe that blockchain can bring significant efficiencies to capital markets, including the potential automation of financial primitives such as collateral, lending, and automated market makers.
- A formal regulatory sandbox or pilot program is strongly supported to allow firms to use DLT for issuing, trading, and settling tokenized securities, and self-custody should be permitted for investors.
- Tokenized securities should be able to be settled using stablecoins, just as cash is used in traditional finance, and the 1940 Investment Company Act needs adjustments to accommodate tokenization.
- The key regulatory changes highlighted during the SEC roundtable include clarifying the classification of crypto assets, modernizing securities rules, providing interpretive and exemptive relief, developing regulatory frameworks for liquidity risk management, enabling automation of compliance via smart contracts, and revamping the regulatory regime governing alternative trading systems (ATS).
