The U.S. Securities and Exchange Commission (SEC) has made a definitive ruling that all tokenized assets are considered securities under Federal law. The SEC made this clarification and provided a detailed explanation in a recent published statement: simply recording ownership of an asset on a blockchain does not change the underlying character and regulatory obligations as a financial instrument.
What the SEC’s Guidance Means About Tokenization
The SEC distinguishes between two different models of tokenized assets:
- The first is an issuer-sponsored tokenized asset where a company tokenizes its own shares (equity) or bonds (debt), and uses the blockchain as its official record of ownership for its shareholders. An example of this model might include companies such as Ripple Treasury that are using blockchain technology as an upgrade to traditional securities.
- The second model includes all third parties that trade synthetic products such as (but not limited to) tokenized swaps or tokenized note-like instruments that replicate or that provide exposure to a stock without conferring actual ownership.
Under the second category of tokenized assets as referenced above, many synthetic tokenized products, including those being traded today, are subject to very stringent regulations from the SEC, especially as they relate to retail investors. Therefore, the SEC has stated that all tokenized synthetic products will be subject to securities and derivatives regulations.
This Clarity is a Double-Edged Sword
This information provides regulatory clarity that the market has demanded, and it also confirms that compliant, issuer-led tokenization projects will receive the SEC’s blessing. In addition, for companies like Ripple that are creating enterprise-level infrastructure, it confirms they are right to focus on working with actual issuers. At the same time, it puts increased pressure on a segment of the crypto market that had previously enjoyed considerable popularity: decentralized platforms offering synthetic stocks.
More importantly, the emphasis that the SEC places on the fact that technology is secondary to the economic substance means that any tokenized asset that provides for an investment contract or entitles an investor to an equity interest will be treated as securities, full stop. Projects will be required/forced to decide to fully comply with the applicable regulations or restructure their products fundamentally.
