Tokenization of the stock market is "slowing down": SEC Commissioner clarifies that tokenized securities still fall under the category of securities.

Compiled by: Felix, PANews

As major companies intensify efforts to introduce tokenized stocks into the U.S. market, SEC Republican Commissioner Hester Peirce stated in a statement on July 9: While blockchain technology is powerful, it does not possess the magical ability to change the nature of the underlying asset. Tokenized securities are securities themselves and must comply with federal securities laws.

In addition, Hester Peirce emphasized in the statement that tokenized stocks, notes, or rights "are still securities," requiring issuers, intermediaries, and traders to comply with existing federal laws when creating, selling, or transferring these securities.

Hester Peirce's statement indicates that tokenization can occur in two ways: issuers can mint blockchain versions of their own stocks, or custodians can wrap third-party securities and issue receipts.

"Sometimes, issuers will tokenize their own securities. For example, an operating company or an investment firm may tokenize its stock. Alternatively, a non-affiliated third party that holds securities on behalf of other entities may issue new tokenized securities linked to the securities it holds, or tokenize the 'securities interests' held by investors in relation to the custodian."

Hester Peirce warned that the second model would introduce counterparty risk, as token holders rely on the custodian's solvency and control over the underlying stocks.

Hester Peirce also pointed out that distributors of tokenized securities must consider their disclosure obligations under federal securities laws, referring to the recent staff statement from the SEC's Division of Corporation Finance on this topic. Furthermore, market participants should meet with the Commission and its staff as early as possible when developing their tokenized products.

"Market participants involved in the distribution, purchase, and trading of tokenized securities should also consider the nature of these securities and their implications under securities law. For instance, depending on the specific circumstances, a token may constitute a 'security receipt,' which itself is a security but different from the underlying security held by the token distributor. Alternatively, if the token does not confer legal and beneficial ownership of the underlying security to the holder, it may be classified as a 'security-based swap,' which retail investors cannot trade over-the-counter. While blockchain-based tokenization is an emerging phenomenon, the process for issuing instruments representing securities is not. The on-chain and off-chain versions of these instruments are subject to the same legal requirements."

In response to this statement, ConsenSys lawyer Bill Hughes summarized in a post on X platform, "In short: We have heard some crazy stories about your plans to launch tokenized US stocks, and you need to seriously hit the brakes. Let's meet and discuss whether it's necessary to exempt or modify the rules. But don't get me wrong, securities laws apply both on-chain and off-chain."

Bloomberg ETF analyst James Seyffart commented on the X platform that Hester Peirce's clarification sounds like a warning to all companies and protocols planning to build securities tokenization bridges, somewhat like "Hey, pay attention."

It is worth mentioning that currently, cryptocurrency companies including Coinbase and Kraken have shown interest in launching tokenized stocks. If approved by the U.S. Securities and Exchange Commission, they would be able to offer blockchain-based trading of traditional stocks, thereby directly competing with other more traditional financial brokerage firms.

Paul Atkins, the chairman of the U.S. Securities and Exchange Commission and a Republican, stated in an interview with CNBC last week that the agency should encourage innovation when asked about the prospects of securities tokenization.

Critics have stated that this new technology could become a means to circumvent SEC regulation and expose retail investors to new risks.

Senator Elizabeth Warren stated that a cryptocurrency market structure bill, known as the "CLARITY Act," which is about to be voted on in the House of Representatives, includes provisions "allowing non-cryptocurrency companies to tokenize their assets to evade U.S. SEC regulation." "According to the House bill, publicly traded companies like Meta or Tesla can easily evade U.S. SEC oversight simply by deciding to put their stocks on the blockchain."