The U.S. Securities and Exchange Commission (SEC) has issued new guidance on tokenized securities, making clear that digital tokens representing securities are subject to the same federal securities laws as traditional instruments — and that issuing them on a blockchain does not exempt them from compliance.
The Divisions of Corporation Finance, Investment Management, and Trading and Markets created this guidance and made it available in the SEC’s official statement on tokenized securities. It provides insight into managing compliance when using crypto networks to issue or represent securities.
The SEC shows issuers how to tokenize securities and follow the rules.
The SEC said a tokenized security will still be an existing security under US law even if crypto ledgers classify it otherwise. The guidance explains that a security becomes “tokenized” when ownership records are kept, even partly, on a crypto network. But nothing else really changes. However, this does not change the fact that the underlying asset is still a security under US law.
The SEC made it clear that putting a security on a blockchain or turning it into a token doesn’t change what it is or how it should be regulated. A new format doesn’t mean new rules.
Therefore, if the token moves between accounts on the blockchain, the official record of ownership for the security can be updated to reflect the transfer, making the token transfer a legal transfer of the security itself.
The SEC said the new changes don’t affect the application of federal securities laws, so all offers and sales must still be recorded under the Securities Act unless an exemption applies.
The statement also explains that the issuer of the securities can offer the same security in different formats. The company can offer shares to some investors in the traditional way, while offering tokenized shares to others. This does not change the legal status of the shares.
When tokenized securities have the same rights and privileges as traditional securities, the SEC has indicated that such securities can be treated as belonging to the same class under certain provisions of the securities laws.
The SEC also provided alternatives to tokenization, in which the blockchain is not the actual record of ownership. In this case, the issuer has the option to create a token that does not represent actual ownership but is used to notify the issuer of a change in ownership.
The issuer then updates ownership records off-chain based on that information, while the underlying security remains recorded in a traditional system.
The SEC warns third parties to follow the law when they tokenize securities.
Additional risks, the SEC noted, also exist when third parties issue securities they did not originally issue themselves, as such structures tend to raise legal and investor protection issues.
In its release, the agency stated that these models may alter the relationships among investors, issuers, and intermediaries, making it more difficult for investors to understand exactly what they own and who is responsible for their rights.
In this regard, the SEC stated that firms that utilize third-party tokenization must determine how existing securities laws apply.
The agency said third-party tokenized securities will be divided into custodial and synthetic securities. Custodial tokenized securities will remain security entitlements and must comply with the same federal laws for custody assets. On the other hand, synthetic tokenized securities do not give investors voting rights, equity interests, or access to issuer information, but they will be subject to stricter laws.
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