If Trump clears the way, tokenism could change US markets.

Comment by: Alex O'Donnell, Cointelegraph Senior Writer.

Tokenization could revolutionize US financial markets, but flawed rules have hampered adoption. Crypto-friendly President Donald Trump has a historic opportunity to lead the way and change things.

Ending US cryptocurrency fraud is a great first step, but it won't go far. In order for the token to thrive, Trump's team—including the potential crypto czar and chairman of the Commodity Futures Trading Commission—must combine the best features of traditional markets with decentralized finance (DeFi) to revamp old rules.

The challenge is to maintain key investor protections without compromising benefits such as Know Your Customer (KYC) checks, regulatory and exchange protection rules. This is a big question, but it does not require new laws. Trump's team should start on day one.

Improving financial markets

Tokenized real-world values ​​(RWAs) – including securities such as stocks, bonds and mutual funds – can improve every aspect of securities markets.

Programmable smart contracts enshrine investors' rights in immutable code and open up endless avenues for innovation. Public blockchain ledgers increase transparency and automate settlement and reporting. Self-sustainability preserves the autonomy of owners.

Even the US Treasury Department is a fan. Tokenization “promises to unleash new economic opportunities and increase efficiency,” the department said in an October report. It is considering a tokenization of US Treasury bills.

Security tokens are on the rise, but less than they should be. According to RWA.xyz, on November 20, they ordered about $12 billion in total value locked (TVL). Tokenized funds are highly rated. BlackRock's USD Institutional Digital Liquidity Fund (BUIDL), the largest, manages more than $540 million.

That barely misses an achievable market cap of $30 trillion, Colin Butler, Polygon's head of global institutional capital, told Cointelegraph in August.

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The problem is not a secret. US investor protections date back nearly a century, unwittingly stymieing token issuers. Adapting them to blockchain only works if regulators know how to use decentralization.

Facilitating KYC checks

KYC regulations are among the biggest barriers to tokenization. They need an investment app that looks at each consumer to individually verify the identity of users, including personal details like net worth and trading experience.

Pressing the same questions on DeFi would be a death sentence. Web3 is a web of interconnected open source smart contracts. Submit too many identity checks, and the web unravels. Regulators should update KYC guidelines accordingly.

Decentralized identity protocols, like Circle's Verite, are the best bet. Users can complete a comprehensive KYC check for dozens of authorized DeFi apps in their authorized wallets. Meanwhile, protocols can easily call Vrite's smart contracts to KYC users without collecting personal information.

Decentralized securities exchanges

Integrating decentralized financial transactions into US financial markets is more difficult. Securities exchanges are highly regulated and rely on a central clearing house called the Depository Trust & Clearing Corporation (DTCC) to settle trades.

DTCC should continue in chain. It is already testing an onchain trading agreement and has even tested an authorized Avalanche subnet. That's fine, but security tokens mainly exist on permissionless networks like Ethereum and layer-2 blockchains. That is where DTCC needs to focus.

A security token can start by routing transactions to private validating pools, which are already committed to DTCC guidelines. Reinventing protocols like EigenLayer can help trigger economic security and customize consensus rules. Eventually, the DTCC may choose to fully transfer trade agreements to decentralized blockchain networks.

Accepting self-management

Current custodial rules give priority to funds held in brokerage accounts. In Web 3, self-preservation wins. According to Arrington Capital, approximately 70% of crypto holders use non-custodial wallets such as MetaMask. Regulators must adapt.

Self-governance is not new. Before investors held tokens in wallets, they kept paper stock certificates in safes. There are still rules to deal with physically held shares. They offer a framework for managing web3 wallets.

Meanwhile, third-party crypto custodians are on the rise. Insured against cyber security exploits, they can be the preferred choice of many investors. Regulators should recognize this and promote adoption by simplifying token types as much as possible for new users.

These changes are baby steps, but more needs to be done to bring security markets up to speed. Trump wants to establish a strategic Bitcoin (BTC) reserve and turn the US into the “crypto capital of the world.” His presidency is a historic victory for the industry. It's time to start.

Alex O'Donnell is a senior writer for Cointelegraph. He previously founded DeFi developer Umimi Labs and worked as a financial journalist at Reuters for seven years, where he covered M&A and IPOs. He is also the leader of crypto development at the startup accelerator, Expert Dojo.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.