Tokenization Battle Threatens Crypto Bill.
Crypto journalist
Anas Hasan
Crypto journalist
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A growing dispute over tokenized stocks threatens to derail Washington's efforts to recall comprehensive crypto regulation, as industry executives split on language in the Senate Banking Committee's landmark digital assets bill.
Coinbase CEO Brian Armstrong earlier this month called the episode a “de facto ban” on tokenized equities, while traditional finance stalwarts, including Ken Griffin of Citadel Securities, argue that companies should follow the same rules whether they are blockchain-based or related to traditional securities.
The rift came after Senate Banking Chairman Tim Scott released a bill containing provisions that would give the Securities and Exchange Commission jurisdiction over financial assets that look like stocks and bonds, regardless of their presence on blockchain networks.
According to Politico, committee Democrats called for the language to be included, catching many crypto executives by surprise and exposing fundamental misunderstandings about how quickly markets should move “on-chain.”
When Coinbase seeks Carveouts, Wall Street seeks equity of control
Traditional financial institutions and their lobbying arms have taken a hard line against preemption of tokenized securities.
Ken Benson, CEO of the Securities Industry and Financial Markets Association, said Wall Street should not exempt blockchain technology companies from existing market structure rules, saying, “If you engage in securities brokerage activities, you should be regulated as such.”
Faryar Shirzad, Coinbase's chief policy officer, said the controversial language would force a lengthy rulemaking process rather than allowing SEC Chairman Paul Atkins to propose simpler carve-outs from existing rules.
“It seems that Chairman Atkins' work at the SEC to implement the president's crypto agenda is designed to undercut, so we are definitely concerned about it,” Shirzad told Politico, emphasizing the potential of the offer to delay the tokenization effort considering that many executives in the American financial markets are inevitable.
Former SEC official Marlon Paz defended the section, saying it clarifies rather than limits the agency's powers.
“Tokenization itself doesn't change the nature of things,” says Paz, who teaches at the University of Pennsylvania School of Law.
Securitize CEO Carlos Domingo and Andreessen Horowitz policy chief Miles Jennings similarly argued that the language merely reiterates existing securities law without creating new barriers.
The SEC strengthened this interpretation on Wednesday, when its staff issued a clarification explaining that certified versions of traditional financial instruments are subject to federal securities laws regardless of the underlying technology.
According to a statement issued by the agency's Division of Corporate Finance, Division of Investment Management and Division of Trade and Markets, while tokenization changes the format but does not change the legal identity of stocks or bonds, ownership registered on crypto networks still incurs the same legal obligations around offering, selling and reporting that apply to conventional securities.
The White House called crisis talks
Beyond the token controversy, the stalled legislation faces mounting procedural and political hurdles that have prompted White House intervention.
According to Bloomberg and Reuters, the administration scheduled a February 2 meeting that brought together Coinbase representatives, bank executives and crypto lobbying groups.
Sen. Roger Marshall cleared another hurdle by agreeing not to introduce the controversial credit card swipe fee amendment during the election.
The Kansas Republican proposal would force payment networks to compete on transaction fees, before White House officials directly intervened to prevent it from being considered, which threatened to undermine Republican support for the original crypto law, sources told Politico.
A narrow legislative window for fiscal crisis and ethical disputes
Washington's government shutdown deadline has escalated challenges to the legislation as Senate Democrats blocked a $1.3 trillion package in the wake of the deadly Minneapolis border patrol shooting.
Former Utah Gov. Gary Herbert cited mounting evidence of “a lack of leadership, an inability to work together,” as congressional sources warned that hundreds of thousands of federal workers could face frustration if negotiations fail before Saturday's deadline.
Patrick Witt, director of the White House Crypto Council, urged swift passage despite the flaws, warning delays would risk “crisis-punishment legislation, à la Dodd-Frank” if Democrats regain control.
“You may not like every part of the Transparency Act,” Witt said, citing investment banker TD Cowen as warning that midterm election positioning would delay implementation until 2029.
One anonymous crypto lobbyist summed up the industry's anxiety over the controversial token language: “I don't think Congress is going to paint it just for fun.”
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