SEC Investor Advisory Committee Discusses Equity Tokenization: A Closer Look

SEC Investor Advisory Committee Discusses Equity Tokenization: A Closer Look

The SEC Investor Advisory Committee recently held a specialized meeting to delve into the complex subject of how publicly traded stocks would function on a blockchain. This gathering brought together industry leaders from prominent institutions like Nasdaq, BlackRock, and Coinbase to explore the intricacies of issuing, trading, and settling tokenized securities.

Key Takeaways from the Discussions

* **Regulatory Focus:** The meeting highlighted the increasing pressure for regulatory clarity in the equity tokenization space. * **Nasdaq's Proposal:** Nasdaq proposed integrating tokenized securities and traditional stocks into a single trading book. * **Compliance with Existing Framework:** The SEC emphasized that tokenized securities are subject to existing federal securities laws. * **Implementation Considerations:** Discussions focused on implementation details such as ownership rights, NBBO adaptation, and the feasibility of short selling. * **Native vs. Wrapped Models:** Key differences between natively issued tokenized shares and those created through wrapping processes were examined.

Nasdaq's Proposal: A Systemic Approach

Nasdaq presents a comprehensive “inside-the-system” approach to equity tokenization. Under this approach, tokenized securities and traditional stocks would share CUSIP codes, priority rules, and economic rights. Blockchain would replace the backend ledger, with front-end regulations remaining unchanged. Issuers would still be required to register with the SEC under the Securities Act, exchanges would operate under the Exchange Act, and the DTC would provide settlement guarantees. Transactions would continue to contribute to the National Best Bid and Offer (NBBO).

The Role of the DTC

The DTC is building a blockchain infrastructure to facilitate potential instant transactions by the third quarter of next year. In this model, transfer agencies would maintain the blockchain registry according to existing standards, with only the underlying database differing.

Critical Distinctions: Native vs. Wrapped Issuance

The meeting highlighted the critical differences between native issuance and wrapped issuance. Native tokenized shares issued by the issuers provide full voting and dividend rights. Wrapped tokens available on offshore platforms often provide only economic exposure without core shareholder rights. Nasdaq cautioned against the risks by citing instances in European markets where tokens tracking Apple's stock decoupled from the underlying asset's price, resulting in significant losses for investors who discovered they held synthetic derivatives.

SIFMA's Stance

SIFMA emphasized that tokenizing assets must preserve full legal and beneficial ownership. Otherwise, they may turn into distinct products. There’s a tiered regulatory friction. The low-friction scenario is the approach proposed by Nasdaq, where firms register tokenized securities, list them, and interchange them with traditional stocks. Current regulations already allow this to be considered a settlement technology innovation. High-friction scenarios include 24/7 trading and trading in non-NMS blockchain venues, which could disrupt the NBBO mechanism.

Legislative Impact

The Senate's Responsible Financial Innovation Act has already classified tokenized stocks and bonds as securities, reinforcing the SEC's authority. Attempts to circumvent regulation may face legislative resistance.

Next Steps: Establishing a Framework for Evaluation

The meeting was not intended to set rules but to provide the SEC with a framework for evaluating equity tokenization. The central disagreement remains whether blockchain should be integrated into existing systems or a new system should be created. This meeting represents a transition from industry discussions to regulatory deliberations, and the balance between technological innovation and existing rules will determine the future trajectory of equity tokenization.