The U.S. regulator, the Securities and Exchange Commission (SEC), has reiterated that tokenized securities are still securities and fall under federal securities law.
In a recent statement, the regulator clarified that whether a stock is issued off-chain or on-chain, it must still comply with the relevant laws.
“Regardless of its format, the Securities Act requires that every offer and sale of a security must be registered with the Commission unless an exemption from registration is available.”
The guidance further reiterated,
“Similarly, stock is an ‘equity security’ under the Securities Act and the Exchange Act regardless of its format.”
According to the watchdog, tokenized stocks fall into two categories. The first is issuer-sponsored, which transfers rights and protections to the holder, while the second is third-party sponsored on-chain stocks that offer varied ownership rights and protections.
Securitize, one of the issuers of tokenized securities, welcomed the move, stating that it is crucial for ‘scaling’ the sector.
“Clear frameworks like this are key to responsibly scaling tokenization.”
Source: X
Wall Street opposes DeFi exemptions
The statement followed the recent meeting between the regulator and Wall Street firms on how to treat tokenized securities under the current legal regime.
According to an SEC memo, representatives from Citadel, JPMorgan Chase & Co., Cahill Gordon & Reindel, Securities Industry and Financial Markets Association (SIFMA), pressed against broad exemptions for on-chain stocks.
Referencing the October flash crash and Stream Finance collapse, the TradFi group warned,
“Broad exemptions for tokenized trading activities could undermine investor protection and lead to market disruptions.”
Source: SEC/SIFMA
In fact, in a December letter, Citadel Securities called for similar regulation of DeFi platforms handling tokenized securities like their traditional counterparts.
The DeFi complex has been pushing for legal exemptions, claiming their platforms are disintermediated to warrant the legal responsibility.
In a recent meeting, SIFMA and its TradFi members pushed for a new classification of tokenized securities to enable more effective regulation.
The latest SEC statement reflects some of the concerns they raised. However, it does not address broader DeFi operations. This omission may be because issues related to tokenized securities are still under discussion within the CLARITY Act.
Tokenized stocks eye $1 billion
Even so, the collective DeFi players called Citadel Securities’ push and argument ‘bassless’ and ‘flawed.’
The industry may likely advocate for DeFi exemptions of some sort in the bill. It remains to be seen whether the final framework for tokenized securities will be a compromise between these two camps.
Source: RWA
The sector has gained strong traction, with tokenized securities holders edging close to 300K users, representing a 100% growth in January alone. Additionally, the total value of traded on-chain stocks is teetering toward the $1 billion mark.
Final Thoughts
- The U.S. SEC clarified that tokenized securities still fall under the current federal securities law
- Wall Street pressed against a broad DeFi exemption in tokenized securities trading.