SEC Staff Statement on Tokenized Securities: New Plumbing, Same Rules

Key Takeaways

• Same laws regardless of format. Tokenization creates no regulatory loopholes. A security remains a security under U.S. securities laws whether its ownership is tracked on a blockchain or a traditional ledger. Offering registration (or a valid exemption), disclosure obligations, and trading rules apply equally to tokenized and conventional securities.
• Two tokenization models. The Statement describes two broad categories of tokenized securities: (1) issuer-sponsored tokenization, where the issuer or its agent issues a security in token form, and (2) third-party tokenization, where an unrelated intermediary creates a token referencing another issuer’s security. Sub-categories carry distinct implications, but economic substance always prevails. If a token confers the same rights as a traditional share, it may be treated as the same class for certain legal purposes.
• Custodial vs. synthetic tokens. In third-party tokenization models, the SEC staff distinguishes between (1) “custodial” tokens, where an intermediary holds the underlying security (or a security entitlement) in custody and issues a token representing an interest in that holding (sometimes called a “tokenized security entitlement”); and (2) “synthetic” tokens, where an intermediary creates a token that merely tracks or references the value of the underlying security (like a derivative), without conferring any direct ownership in it. The SEC staff warns that certain synthetic models can fall under the definition of security-based swaps, triggering additional restrictions, such as sales limited to eligible investors and trading on regulated venues.

Issuer-Sponsored Tokenized Securities

When an issuer tokenizes its own securities, it typically does so in two ways:

• Integrated on-chain recordkeeping. An issuer (or its transfer agent) may integrate DLT into its official shareholder records (or the “master securityholder file”).¹ The token exists on a crypto network, and token transfers automatically update the issuer’s ownership records. The Statement confirms that using a distributed ledger as the recordkeeping mechanism does not alter any legal analysis under U.S. federal securities laws. Tokenized shares with on-chain registries have the same status as traditional shares, and issuers must comply with all the usual requirements (e.g., registration of stock issuances, periodic reporting if public, and proxy rules). The SEC staff explicitly notes that even if it recognizes the legal validity of on-chain shareholder records, this format change does not relax existing obligations like registration, disclosure or trading rules.
• Off-chain record with token notification. Alternatively, an issuer may issue a token alongside a traditional security, without the distributed ledger serving as the official record. In this setup, the master securityholder file remains a conventional off-chain record (maintained by the issuer or transfer agent), and the token is essentially a secondary digital representation that facilitates transfers. On-chain token transfers act as triggers for the issuer or transfer agent to update the official off-chain securityholder register. The token itself does not convey independent rights; it points to the off-chain security entitlement. The SEC staff makes clear that even in this scenario, the presence of a token does not change the regulatory treatment: the tokenized interest will be analyzed under the same U.S. federal securities law framework as a normal security entitlement. Issuers must ensure that any on-chain records are rigorously reconciled with off-chain records so that legal title and transfer of the actual security remain accurate. In practice, this model raises operational questions (e.g., how to securely match token transfers with the official register), though it generally does not introduce novel legal questions under federal securities laws.

Under either approach, the SEC staff acknowledges an issuer could have a single class of securities represented in multiple formats (both tokenized and traditional book-entry) or even create a new class just for the tokenized form. If a tokenized share class carries the same rights and privileges as an existing class, the SEC may deem them the same class for purposes like reporting or exchange listing rules. In other words, you generally cannot evade shareholder caps or regulatory thresholds by splitting a class into “tokenized” vs. “non-tokenized” pieces if they are economically the same. Tokenization is only viewed as a different way to record ownership—not a way to change the security’s characteristics or bypass U.S. law.

Third-Party Tokenized Securities

The Statement also addresses scenarios where an entity other than the issuer tokenizes an existing security. This has become more common with certain crypto exchanges and fintech platforms creating tokenized stock products that mirror publicly traded stocks. The SEC staff outlines two general third-party models and warns of the regulatory implications of each:

• Custodial tokenized securities. A third party (such as a broker, bank, or platform) may hold a security (or a bundle of securities) in custody and then issue tokens to investors that represent claims on that holding. Each token essentially confers a security entitlement – an indirect ownership interest – in the asset held. The Statement refers to this as a “tokenized security entitlement” structure. The third party might use DLT within its own recordkeeping system so that on-chain token transfers correspond to changes in the custodian’s internal records of entitlement holders. Alternatively, the custodian may keep the official entitlement ledger off-chain and reconcile it when tokens move. Crucially, the use of tokens here does not change the application of U.S. securities laws. The token is simply a digital wrapper around a traditional security holding. As the SEC staff notes, even so-called digital custodial receipt tokens are not separate or distinct from this basic entitlement model. For regulators, the focus remains on custody and investor protection: the intermediary must safeguard the underlying assets and maintain accurate records just as in any custodial arrangement. Issues like compliance with broker-dealer custody rules and Uniform Commercial Code (“UCC”) Article 8 and, where adopted, Article 12 (establishing who has control of the digital entitlement) are key considerations. In effect, issuing tokens backed by securities in custody is a traditional custody and recordkeeping business implemented with blockchain.
• Synthetic tokenized securities. Alternatively, a third party may issue a token that references another security’s value without holding the underlying at all. In other words, the token is economically linked to an external stock or bond (or an index of such), but is not an actual share of that company nor any claim on the actual underlying asset. Examples include a “linked security” – which is a tokenized debt or equity instrument that pays returns based on the performance of the reference security (similar to a total return swap or a structured note) – or a tokenized security-based swap – which is a type of derivative contract that also provides synthetic exposure to a security or narrow index. If a token only provides economic exposure and no ownership or voting rights, it may be a security-based swap. Consequences are significant: security-based swaps cannot be offered or sold to retail investors in the U.S. absent SEC registration and compliance with exchange trading requirements. The Statement flatly reminds market participants that a tokenized swap cannot be sold to non-“eligible contract participant” investors (e.g., investors with less than $10 million in assets) at all unless a valid registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”) is in effect and the trades occur on a registered national securities exchange. This effectively bars most synthetic stock token offerings from being offered to the general public in the U.S. Even if offered offshore, any inclusion of U.S. persons could violate these rules. Moreover, the SEC staff points out that tokens in this category confer none of the legal rights of the actual stock – no shareholder rights, no dividends from the issuer, etc. – but do introduce new risks. For example, if the third-party token issuer goes bankrupt or fails to honor the contract, token holders could be left with nothing, unlike a direct shareholder who at least has a claim on the issuer of the stock. The SEC staff’s message is that these derivative-like tokens will be treated and regulated just like any other complex synthetic investment product – and sponsors of such products need to comply with all applicable rules or risk enforcement action.

Regulatory Implications for Market Participants

The Statement underscores that tokenization does not create regulatory exemptions or leniency. Key implications include:

• For issuers. Issuing tokenized stock, bonds, fund interests, or other securities triggers the Securities Act registration requirement unless an exemption, such as Regulation D or Regulation S, applies. Public companies issuing tokenized shares remain subject to the reporting and corporate governance obligations under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”); investment funds issuing tokenized units remain subject to regulation under the U.S. Investment Company Act of 1940, as amended; and so forth. Simply put, tokenization does not change classification. Issuers should also carefully consider how tokenization might affect shareholder recordkeeping, transfer agent processes, and class distinctions. The Statement suggests that as long as these tokens represent bona fide securities and investor rights are clear, the SEC staff is open to innovative recordkeeping (indeed, the use of DLT for transfer records has been implicitly accepted through prior SEC actions like the DTC tokenization pilot no-action letter). However, they indicate no relief from liability or disclosure standards. In short, plan for compliance (and engage with the SEC early) if pursuing an on-chain issuance. The SEC staff invites issuers to reach out with interpretive questions or novel proposals and indicates a readiness to engage.
• For Broker-Dealers, custodians, and platforms. Intermediaries offering tokenized securities (whether as custodial tokens or synthetic products) must tread carefully through existing regulations. A broker-dealer facilitating trading of tokenized securities will need to ensure trading is done on a registered exchange or an alternative trading system if required, and that custody of crypto asset securities complies with the Exchange Act Customer Protection Rule and other SEC guidance (such as the December 2025 SEC staff statement on broker-dealer custody of digital asset securities). Custodial token models raise questions of how to perfect security interests or maintain “control” of tokens under commercial law. Some states have begun updating the UCC with the adoption of Article 12 to address digital assets, meaning custodians will have to align their tech with those new laws to ensure customers’ interests are protected (e.g., treating a token as an electronic registry of a security entitlement). Platforms issuing synthetic tokens or offering tokenized security-based swaps will almost certainly need to register as a securities exchange or broker (or limit offerings to “eligible contract participant” investors under a private placement) to remain lawful. The SEC staff’s stance implies that any decentralized platforms or overseas exchanges selling tokenized U.S. equities to retail without registration are violating the U.S. law. In fact, foreign platforms that have offered tokenized versions of U.S. stocks (without the issuers’ involvement) should note that the SEC staff views those tokens as unregistered securities or security-based swaps and has now clearly signaled that such activities are subject to U.S. jurisdiction if U.S. investors are involved. Even outside the U.S., regulators are unlikely to ignore such products. Many jurisdictions will treat a tokenized share of a U.S. stock as a security in its own right, meaning local securities laws also apply. In sum, intermediaries should integrate tokenized assets into existing compliance frameworks. The Statement’s taxonomy helps them identify what category their token product falls into (e.g., security entitlement, linked security, security-based swap, etc.), which in turn points to the relevant regulatory obligations.
• For Investors: The Statement indirectly serves as a consumer protection reminder. If you buy a token that represents a stock or bond issued by the company or its agent, you should expect the same protections (and restrictions) as with the traditional security. For example, tokenized shares of a private company remain restricted and are not freely resellable without an exemption. If you buy from an unrelated third party a token that merely tracks a stock’s price, you are not a shareholder and have no voting or direct claims, and you assume counterparty risk. Tokenized stocks are not a regulatory gray area; they are fully regulated and can be riskier if not structured properly, particularly synthetic tokens that embed derivative exposure. The SEC staff’s clarity enables investors to demand compliance and disclosures and supports enforcement against schemes that pitch “crypto stocks” as a workaround.

International and Future Outlook

Although the Statement is focused on U.S. securities law, its implications resonate globally. Other major jurisdictions are likewise affirming that tokenization is a regulated evolution of finance, not an escape from regulation. For example, the European Union’s Markets in Crypto-Assets Regulation expressly carves out tokenized stocks and bonds from its scope because those are treated as traditional financial instruments subject to existing European Union securities laws. In parallel, the EU’s DLT Pilot Regime allows regulated market infrastructures to experiment with trading tokenized securities under controlled conditions, mirroring the U.S. approach of keeping innovation within the regulatory perimeter. International bodies such as the International Organization of Securities Commissions and the Financial Stability Board recognize the benefits of tokenization while urging vigilance so that new technology does not undermine investor protection. Globally there is convergence on “same activity, same risk, same regulation.” Non-U.S. issuers and intermediaries should heed the Statement where there is a U.S. nexus.

Non-U.S. platforms offering tokenized versions of U.S. equities or synthetic crypto derivatives referencing U.S. securities should expect SEC scrutiny if U.S. investors are involved. On-chain or off-chain, a security is still a security – no special treatment or loopholes. Increased attention to tokenized trading, including in decentralized finance, is likely.

Conclusion

Tokenization promises efficiency and innovation, but it is not a free pass on U.S. securities regulation. Firms should integrate compliance from day one and seek guidance from regulators and experienced counsel when in doubt. The SEC staff indicates a willingness to engage, and proactive dialogue is preferable to discovering later that an unexamined approach violated the rules. Treating tokenized securities as a regulated evolution, not a workaround, allows market participants to capture blockchain’s benefits while maintaining investor protection and market integrity.

For further reading on asset tokenization, please see our article “Asset Tokenization in the US: A Practical Guide,” available on Practical Law / Westlaw.