SEC staff explains protection rules for tokenized stocks and bonds
The U.S. Securities and Exchange Commission's Division of Trading and Markets has outlined how broker-dealers can handle stocks and bonds under existing client protection rules, suggesting that blockchain-based crypto-asset securities will fall under traditional securities protections rather than being seen as a new category.
Crypto Asset Securities said it would not object to a section that considers itself to be self-contained as long as broker-dealers meet operational, security and governance conditions under existing consumer protection laws. This applies only to crypto securities including tokenized stocks or bonds.
While the statement is not a law, it provides clarity on how US regulators expect tokenized securities to be consistent with traditional market protections.
The guidance indicates that tokenized securities will not be treated as a new asset class under special rules. Instead, they are being deployed within existing broker-dealer frameworks, albeit embedded in blockchain networks.
TradFi on the Blockchain: Tokenized Securities' Security Rules
At the heart of the statement is Rule 15c3-3, the regulator's consumer protection rule. This requires broker-dealers to have control or physical possession of fully paid-up client securities.
The division said that crypto asset securities recorded in the blockchain may in some cases meet the “physical possession” requirement. This means that broker-dealers must maintain exclusive control over the private keys used to access and transfer the assets.
Even on the blockchain, customers and third parties, including affiliates, should not have the ability to move their securities without the broker's consent.
The statement draws a clear line between tokenized securities and crypto-native self-sustaining models. Prioritizes customer protection from crypto-license.
Broker traders are expected to prepare for scenarios such as 51% attacks, hard forks, airdrops and other disruptions. They must also contain plans that contain seizure, freezing or transfer restrictions under statutory orders.
The directive reinforces that tokenized shares or bonds, regardless of the technologies used to issue or settle them, are expected to be treated as securities first.
Trading in market-traded securities
In a separate statement on the same day, SEC Commissioner Hester Pearce highlighted the remaining business-related challenges for crypto asset securities.
Pearce raised questions about national securities exchanges that facilitate the trading of crypto-asset securities, including pairs where one is a security and the other is not.
The questions reflect the push for blockchain-based assets to address market-structuring rules originally designed for traditional equity.
Pearce's inquiry concerns whether existing frameworks and related disclosure and reporting requirements impose costs that outweigh their benefits when applied to crypto trading platforms.
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Platforms to access tokenized equities
The disclosures come as crypto platforms and businesses begin to fake securities.
In the year On November 30, Nasdaq's head of digital assets strategy, Matt Savarese, said the exchange plans to move quickly on tokenized shares. He said the exchange plans to work with the SEC as soon as possible to make the feature available on its trading platform.
On Tuesday, Securities announced plans to launch compliant, onchain trading for tokenized shares focused on simulating tokens. The company says it will be offered with a swap-style interface familiar to decentralized finance (DeFi) users.
On Thursday, crypto exchange Coinbase launched a stock trading feature as part of its push to become an “everything exchange”.
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