Modernizing markets for a tokenized future: Principles for tokenized securities and broker-dealers

Just as the internet transformed how information is distributed, blockchain technologies enable new kinds of digital infrastructure that will transform how digital property is owned and transferred. That transformation is already underway with respect to payments, where stablecoin usage is rapidly growing in popularity. Next, it will bring significant efficiency gains and other benefits to our securities markets in the form of tokenized securities.

Unlocking these benefits will require modernizing aspects of U.S. securities laws to account for the technical capabilities of blockchain systems and the market structure of tokenized systems. But that work must be done with care. The transformation underway holds great promise, but it also touches critical infrastructure that supports investor confidence and market integrity across U.S. capital markets. Any regulatory shift should be calibrated to preserve those foundations while allowing innovation to proceed responsibly.

That’s why we submitted a response to the Securities and Exchange Commission’s Crypto Task Force questions concerning tokenized securities as well as broker-dealer capital and records. The SEC is asking the right questions and we’re glad to contribute our perspective as long-term investors in blockchain systems. Here’s a quick walkthrough of some of the ideas we shared. (For a full roundup, read our submissions on tokenized securities and broker dealer principles.)

Recognize the benefits of tokenization

Larry Fink recently said that “every stock, every bond, every fund — every asset — can be tokenized,” concluding, “If they are, it will revolutionize investing.” 

We couldn’t agree more. 

Tokenization is the process of generating and recording a digital representation (i.e., a token) of traditional real-world assets (e.g., stocks, dollars, bonds) on a blockchain network, and it has the potential to bring about a number of benefits, including 24/7 markets, faster settlement, greater liquidity and price discovery, and broader access to investment opportunities. But, because a host of provisions under the federal securities laws could prevent the U.S. from realizing the full potential of tokenized securities, unlocking these benefits requires that regulations evolve.

The SEC can help enable this by building a consistent and objective approach that is both merit-, and technology-neutral — one that fosters innovation while advancing the Commission’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Crucially, any regulatory approach to tokenized securities must distinguish between native digital securities and wrapped legacy instruments — the former offer clearer legal relationships and fewer intermediated risks, and should therefore be prioritized.

Modernize transfer agent rules

Blockchain systems can perform many of the functions of traditional transfer agents, but they can do so faster, more securely, and with fewer intermediaries. Thanks to programmability and composability of blockchain technologies, more efficient clearance and settlement, real-time shareholder records, automated compliance, and auditable transactions all become possible. These features allow for improved trading and corporate governance as well as more efficient use of collateral, freeing up assets for optimal use. Yet existing rules still assume a paper-era or spreadsheet-dependent world.

Current transfer agent regulations under Exchange Act Rule 17Ad-7, which governs recordkeeping, and Rule 17Ad-17, which addresses lost securityholders, do not contemplate the distributed ledgers made possible by blockchain technologies. Beyond recognizing that immutable onchain records can satisfy the requirements of existing regulations, we ask the SEC to clarify that offchain records shouldn’t be presumptively required — especially when onchain systems meet or exceed current standards for security, accessibility, and auditability.

Provide clarity to tokenized mutual funds

While it’s already legally permissible to tokenize shares of mutual funds and money market funds, challenges remain under current law with respect to how those shares trade while complying with NAV (net asset value)-based pricing rules. Specifically, the application of Section 22(d) and Rule 22c-1 under the Investment Company Act of 1940 generally restricts the sale of redeemable shares at anything other than NAV, which creates ambiguity for secondary trading of tokenized fund shares. This is unfortunate as the programmability of crypto assets made possible by blockchain technologies can be used to enforce rules automatically, offering a superior method for compliance in real-time, 24-hour trading environments.

The SEC can resolve this ambiguity and capture the efficiencies of blockchain technologies by clarifying when these rules apply, especially as they pertain to peer-to-peer trading or off–market hours trading, and by permitting trading of tokenized fund interests where programmable functionality is used to enforce NAV-based pricing rules. Further, the SEC should consider extending exemptive relief to open-end tokenized funds similar to the relief granted to ETFs (exchange-traded funds) under Rule 6c-11. This would enable innovation while respecting the investor protections embedded in existing law.

Don’t let state laws block federal innovation

Tokenized securities are still securities under federal law, and they should be regulated accordingly, not treated as a new category. But some state-level regulations, like New York’s BitLicense, could treat tokenized securities like entirely new instruments, inhibiting tokenization. That harms innovation and creates unnecessary duplication and confusion.

Federal preemption under Section 18 of the Securities Act of 1933 should apply here: We urge the SEC to affirm that tokenized securities meeting the criteria of “covered securities” are not subject to conflicting state regulation. This isn’t a request for special treatment, but a call for parity between tokenized and non-tokenized securities in line with a technology-neutral approach. The SEC should also encourage harmonization by affirming preemption over conflicting state-level crypto licensing laws where tokenized securities are involved. Similarly, guidance under the Bank Secrecy Act (administered by FinCEN) should confirm that issuers of tokenized securities — who are not transmitting value like a payment processor — are not engaged in money transmission. Clarifying these boundaries is essential to preventing regulatory overreach and maintaining coherent oversight.

Create a pathway for atomic settlement

Blockchain technologies enable atomic settlement — where payment and delivery happen simultaneously — of capital markets transactions. Atomic settlement reduces counterparty risk, frees up capital, and reduces reliance on intermediaries. This not only reduces systemic risk but also enables new market structures that are not easily supported by existing delayed settlement cycles.

We suggest the SEC use its authority under the Exchange Act, particularly Section 15(c)(6) and related rules on settlement cycles (e.g., Rule 15c6-1), to provide guidance on how real-time or atomic settlement mechanisms can coexist with existing market infrastructure. We also propose use of no-action letters to allow for development while ensuring compliance with essential investor protection principles.

Don’t overregulate tokenized trading

Most of the existing rules for trading securities — like those under Regulation NMS (national market system) — can already support tokenized securities. And when trading happens peer-to-peer on public blockchain networks that aren’t controlled (as described in our initial response to the SEC Crypto Task Force’s Request for Information), those systems aren’t even “trading centers” under the current definition in Rule 600(b)(87) of Regulation NMS.

We recommend that the SEC use its exemptive authority under Rule 611(d) of Regulation NMS to allow alternative trading systems (ATSs) to facilitate tokenized trading without needing to comply with certain order routing rules like the order protection rule, particularly when those trades occur in non-“regular way” contracts. In such cases, overly rigid order protection rules may conflict with the atomic, deterministic nature of smart contract execution. Additionally, ATS users should receive clear disclosures where exemptions apply. This would build on the SEC’s existing approach of granting functional relief to facilitate innovation while preserving core principles of fairness and transparency.

Modernize broker-dealer capital requirements

Broker-dealers are one of the most heavily regulated entities in the financial services industry, and the SEC has to date, for all intents and purposes, restricted them from participating in the crypto industry. It’s therefore unsurprising that broker-dealers who want to offer blockchain-related services currently lack sufficient guidance on how to handle crucial aspects of their operations, such as their net capital calculations. 

Net capital calculations are probing analyses that broker-dealers conduct, typically daily, to ensure that they have sufficient liquidity at all times to meet the demands of their businesses. The calculations start with a look through the balance sheet at the composition of each line of the assets, balanced against certain deductions and charges. They require asking questions like: Is each asset “good”? How liquid is each one? Will you get dollar-for-dollar what you expect you have rights to? Is it possible you may not be able to firesale any assets? How much value should be written off or discounted? Any assets that may not be readily convertible into cash are considered non-allowable and get totaled into a one-line deduction.

Deductions help account for the risks inherent to converting assets into their U.S. dollar equivalents. Some example deductions in net capital include aged fails to deliver and fails to receive in a deficit position (when assets aren’t delivered or received on time), aged securities differences (when there are differences between the assets a firm thinks it has and what it actually has), and perhaps most well-known — haircuts on proprietary assets (percentage deductions applied to reflect market risk). For instance, crypto assets — like other assets — may have market exposure that requires some amount of deduction to account for market volatility but it’s not one size fits all. 

Consider the operational challenges

One commonly overlooked issue in crypto operations is that every transaction has two sides. While blockchains can settle trades almost instantly, this only applies if both sides are fully onchain. If one side isn’t, mishaps — like delays or settlement failures — can still happen, just as in traditional finance. 

How to solve this? Decentralized exchanges (DEXs) avoid this problem by using atomic settlement, where either both sides of the trade go through or nothing happens — but these platforms are open to anyone and don’t typically enforce anti-money laundering (AML) or sanctions checks, making it unlikely that broker-dealers will use them right now. We believe there is room instead for a regulated trading venue, like an ATS, in a crypto asset context, so that broker-dealers know the counterparties they’re dealing with. This could allow trades to settle as reliably as they do with atomic settlement on a DEX, but in a more controlled environment.

In the future, stablecoins could replace the cash side of transactions allowing for near-instant settlement, but unless it is done programmatically, initiating the transactions is still subject to delays and human error. Another solution might be to skip cash entirely and let broker-dealers  swap one asset for another directly. This would potentially avoid settlement-related fails and  eliminate the requirement to net trades to determine settlement and haircuts.

Blockchain technologies also introduce new considerations. For example, staking rewards: Some blockchains automatically distribute rewards. In a broker-dealer context, these rewards would likely go into an omnibus account and would need to be reconciled and applied appropriately to customer accounts. If there are differences between what was expected to be received and what’s actually received, that gap should be subject to capital charges just the same as interest or dividend receivables are for traditional assets. Beyond this, staking deposits and rewards entail liquidity risks that don’t exist in traditional finance as lock-up periods and other constraints can delay access to funds.

Explore the liquidity constraints

Assets related to crypto transactions aren’t always readily convertible into cash. For example, aged or overdue staking receivables and other similar crypto-specific assets can tie up capital on a broker-dealer’s balance sheet. We propose that these be treated the same way as traditional financial receivables because they carry the same risks to the available capital of the broker-dealer. Ignoring this, broker-dealers that transact in crypto would gain an undue advantage by counting illiquid assets as usable capital. 

While we appreciate that the SEC has provided some guidance here — for instance, indicating that a commodities-style haircut could be applied to bitcoin — this doesn’t cover the variety of other token types out there. We believe many tokens do not meet the criteria to be considered securities and they have differing enough characteristics as to require different haircut treatment. 

Take two examples: an asset-backed token versus an arcade token. These two token types vary greatly in the relative amount of speculation one would expect around each, as a result, they would require different haircuts to account for the expected volatility. Asset- backed tokens could be backed by something highly speculative, like artwork. In contrast, arcade tokens usually have a clear price ceiling and floor. Their value is derived from being able to spend them (as at the arcade). They can be printed infinitely. Since anyone can go buy an arcade token any time, no one would be able to sell at a premium above that issuance price, meaning it would not make sense to speculate on them. (Of course, there are some situations where there could be a firesale, like if you’re done at the arcade and never coming back you could dump all your tokens, but it’s not a real concern when thinking about the overall speculative nature of the token). 

Based on these differences, we believe that a principles-based approach should be applied, much like haircut rules that exist today. We also believe that broker-dealers should be able to take the haircut on the net long or short position, to the extent there are both positions. These are just a few examples to illustrate our proposed principles-based approach. In a perfect world, using blockchain technologies to the fullest extent of their capabilities for programmability and composability, many of these operational timing situations (such as fails) can be a thing of the past. But for now, broker-dealers face many regulatory hurdles before they can fully realize those benefits. 

Don’t duplicate records

Under the rules 17a-3 and 17a-4, broker-dealers must create and retain records for transactions, customer account records, trade confirmations, and more. As mentioned earlier, it’s been a common refrain amongst traditional finance converts to crypto that transfer agents are a relic that blockchains make obsolete, but that’s not the only part of the process that blockchains can either replace or improve. 

We propose that blockchains can also serve to create and retain certain other records required of a broker-dealer, such as a trade blotter (a record of all trades executed) or trade confirmations, as both are inherently stored on and available to view any time on the blockchain. We believe this aligns with the SEC’s approach on recordkeeping, which is agnostic on the form of the record, as long as it is “secure, accurate, up-to-date, produceable to the Commission and its staff in an easily-readable format, and maintained for the required time periods under the rules.”

The SEC also inquired if these rules should apply to all crypto asset transactions of a broker-dealer, including the non-securities transactions. As we said earlier, there can be similarities between securities transactions and transactions of crypto assets (regardless of their status as securities or non-securities). This does not mean, however, that all of the requirements of 17a-3 and 17a-4 will apply to non-securities crypto asset transactions. For example, if the assets are commodities, then to the extent applicable the Commodities Exchange Act recordkeeping requirements would apply.

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We see a future where traditional exchanges and decentralized platforms operate side-by-side, where investors can choose between fully intermediated services or peer-to-peer blockchain-based trades. As utilization of this technology grows, we believe customers will increasingly expect broker-dealers to offer blockchain-related services. When it comes to tokenized securities, crypto asset transactions by broker-dealers, and related recordkeeping requirements, the solution isn’t to throw out the old playbook. It just needs to be adapted to present circumstances.

We appreciate the SEC’s willingness to engage on these issues. Our message is simple: Let’s update what needs updating, preserve what works, and adopt a flexible regulatory framework fit for a new technological age that supports innovation without compromising stability.

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