The SEC has just released a statement on the tokenization of securities penned by Commissioner Hester M. Peirce, who many in the industry know as an advocate for innovation-friendly regulatory approaches in dealing with the crypto and blockchain space.
While Ms. Peirce’s statement is not official SEC policy, as a longstanding commissioner and leader of the crypto task force, her opinions carry weight at the regulatory agency.
In the statement, Commissioner Peirce agrees that tokenization is a novel blockchain application, but clarified that it does not mean securities will be exempt from existing regulations, laying emphasis on compliance.
Tokenized securities are still securities according to the SEC
Ms. Peirce acknowledged that blockchain technology has unlocked new models for distributing and trading securities in a “tokenized” format.
She recognizes the merit of tokenization, acknowledging it can facilitate capital formation and enhance investors’ ability to use their assets as collateral. Commissioner Peirce is not alone in this sentiment, as new entrants and many traditional firms have also started embracing on-chain products.
However, as powerful as blockchain technology is, Commissioner Peirce says it does not have the ability to magically transform the nature of the underlying asset. That means tokenized securities will remain securities, and as such, market participants must consider—and adhere to—the federal securities laws when dealing with them.
Distributors of tokenized securities are urged to consider their disclosure obligations under the federal securities laws, and market participants who distribute, purchase, and trade tokenized securities are also asked to consider the nature of the securities and the resulting securities laws implications.
Depending on the structure, Ms. Peirce says a tokenized security could be classified as a “receipt for a security” or a “security-based swap,” which has specific trading restrictions, including not being tradable off-exchange by retail investors.
While Commissioner Peirce acknowledges the novelty of blockchain-based tokenization, she also stated that there is nothing new about the process of issuing an instrument representing a security and as such, the same legal requirements apply to their on- and off-chain versions.
She urged companies to meet with the SEC to see if a tokenized security complies with existing federal laws or discuss with the agency whether there should be changes in the law.
The statement ended with the commissioner expressing the SEC’s readiness to work with market participants when it comes to crafting appropriate exemptions and making changes to existing rules or regulatory requirements that are outdated or unnecessary.
The crypto sector is on a roll right now
The statement from Ms. Peirce comes as some in the crypto industry are pushing for investors to be allowed permission to trade digital versions of stocks and other assets on their platforms in Europe and the United States.
In April, Robinhood, a retail brokerage favored by some crypto investors, penned a letter to Ms. Peirce and the task force in which they described the benefits of tokenization and urged the SEC to avoid a regulatory environment that “stifles growth and innovation.”
Judging by the recently released statement penned by the head of the task force, the letter achieved its aim, and the SEC is seriously considering a friendly environment for the tokenization meta the industry is entering.
Expecting a friendly environment, Robinhood has started offering investors in Europe the chance to trade tokenized shares of OpenAI and SpaceX, which are supposed to reflect the valuations of the private companies.
The offerings reportedly provide ordinary investors exposure to hot start-ups — something usually only wealthy investors were able to do. Now that the SEC is no longer focused on regulating the industry, it is channeling its resources towards coming up with a regulatory scheme that encourages innovation without becoming a “haven for fraudsters.”
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