On January 28, the U.S. Securities and Exchange Commission’s (SEC’s) Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets issued a joint statement explaining how existing federal securities laws apply when traditional securities are “tokenized” on blockchain or other crypto networks.
In sum, changing the format of a security (to a token or other crypto asset) does not change whether, or how, the federal securities laws apply.
What Is a Tokenized Security?
The staff defines a tokenized security as an instrument that already meets the statutory definition of a “security” (e.g., stock, bond, note, security‑based swap) but is formatted as or represented by a crypto asset, with ownership recorded in whole or in part on a crypto network.
Tokenized securities generally fall into two broad categories:
- Issuer‑sponsored tokenized securities: where the issuer or its agent tokenizes its own securities and integrates on‑chain records into its master securityholder file (or uses tokens as instructions to update off‑chain records); and
- Third‑party‑sponsored tokenized securities: where an unaffiliated party tokenizes someone else’s securities, either by issuing a tokenized entitlement backed by custodied securities or by offering synthetic exposure (e.g., a tokenized structured note or security‑based swap).
In each case, the underlying instrument remains a “security,” and registration, exemption, reporting, and other obligations apply as they would if it were issued and recorded using traditional databases.
Custodial vs. Synthetic Third‑Party Models
For custodial tokenized securities, a third party holds the underlying securities and issues a token representing a security entitlement in those assets. The token evidences an indirect interest in the underlying security, and the entitlement itself remains subject to the federal securities laws.
For synthetic tokenized securities, the third party issues its own security, formatted as a token, that provides synthetic exposure to a referenced security or issuer (for example, a tokenized structured note or a security‑based swap). The staff reminds market participants that tokenized security‑based swaps remain subject to the full security‑based swap regime, including limits on sales to non‑eligible contract participants and exchange‑trading requirements.
In all cases, the SEC emphasizes that characterization turns on economic reality, not labels or technology. A token that functions as a note, option, or swap will be analyzed as such, including under the “swap” and “security‑based swap” definitions and their exclusions.
Takeaways
The statement reinforces that:
- Tokenization does not move securities “outside” the securities laws;
- Structures that add third‑party layers often create separate securities with their own regulatory and risk profiles; and
- Retail‑facing tokenized products that provide synthetic exposure, especially security‑based swaps, require careful analysis of registration, exchange‑trading, and eligibility rules.
The staff invites market participants to contact the Divisions of Corporation Finance, Investment Management, or Trading and Markets with specific tokenization questions.