At last week’s meeting of the SEC’s Investor Advisory Committee, SEC Chairman Paul Atkins delivered remarks on the topic of tokenization of securities. In his remarks, Chairman Atkins notes his proposed approach for facilitating decentralized ledger technologies and tokenization in securities markets:

Today, our rules assume that securities are issued, traded, and managed through layers of intermediaries, which help to address risks like information asymmetry and operational friction. But as we consider the rise of public blockchains and tokenization, we must acknowledge that these technologies have the capacity to streamline not only trading but the entire issuer-investor relationship.

In other words, tokenization is not just about transforming how trades occur. It can also enable direct connectivity for proxy voting, dividend payments, and shareholder communications, reducing the need for multiple intermediaries in those processes as well. As we modernize our rules, we must consider the full scope of these changes, both in how markets trade and in how security ownership is recorded and serviced. I welcome the IAC’s assistance in helping us think through how to respond appropriately to these innovations.

As with any technological shift, market participants are experimenting with different tokenization models, and I am interested to hear the panel’s thoughts about the implications of these approaches. Several models may warrant discussion. First, some companies are issuing equity directly on public distributed ledgers in the form of programmable assets that, in some cases, have the ability to embed compliance, voting rights, and other governance functions. This path allows investors to hold a security in digital format, with fewer intermediaries and more transparency.

Second, third parties are tokenizing equities by creating on-chain security entitlements, which represent ownership interests in equities that exist off-chain.

Third, we are seeing synthetic exposures—tokenized products that seek to mirror public equity performance. While today the offer and sale of these products are proliferating offshore, they illustrate the global demand for U.S. market exposure built on distributed ledger-powered infrastructure.

Of course, the shift to on-chain capital markets requires more than just issuance. We must also tackle other stages in the securities transaction lifecycle. For example, tokenized shares risk becoming nothing more than conversation pieces if their owners cannot trade them competitively in liquid on-chain environments. But making this possible requires the Commission to think carefully about how our regulatory mandate intersects with technological realities. Furthermore, issuers should be at the center of the discussion to help ensure that these new systems work effectively and align with the overarching goals of transparency and investor protection.

The previous Commission attempted to address on-chain markets through a brute-force redefinition of “exchange” to include even basic “communication protocols,” and then subjecting whatever was captured by that new definition to the full panoply of our regulatory framework for exchanges. That approach lacked limiting principles, expanded the SEC’s reach beyond what Congress intended, and ultimately created uncertainty that chilled innovation.

We must not repeat that mistake. If we want to boost innovation, investment, and jobs here in the United States, we must provide compliant pathways that allow market participants to leverage the unique capabilities of this new technology. That is why I have asked staff to recommend to the Commission ways in which we can use our exemptive authorities to allow for on-chain innovation while we continue to work on long-term, durable rules of the road.

Congress has given the SEC broad exemptive authorities under the Securities and Exchange Act of 1934, and we must use these authorities responsibly. A thoughtful exemptive framework—cabined, time limited, transparent, and anchored in strong investor protections—could allow the markets to develop on-chain models and give investors innovative new choices. And, drawing on input from market participants, we will be able to craft rules that distinguish between truly decentralized finance and the wide spectrum of centralized, on-chain finance in existence today.

A durable rulebook must recognize this spectrum without forcing square pegs into round holes. If we attempt to regulate decentralized protocols as if they were centralized brokers, we will undermine the very innovation that makes them resilient and transparent. But if we allow centralized intermediaries to benefit from regulatory arbitrage just because they operate on-chain, we erode the principles of accountability and investor protection that have contributed to our global market dominance. Our task, as well as our responsibility, is to write rules that match functional reality. I look forward to working with my counterparts across the Administration in the coming years to do just that.

The SEC’s role is not to resist the market’s transition to on-chain capital markets, nor to force it into legacy definitions, nor to push innovators offshore. Rather, it is to allow market participants to operate and innovate subject to clear guardrails that protect the public, ensuring that U.S. markets remain the most dynamic, transparent, and trusted in the world. If we stay true to this course, we can ensure that the United States leads—not follows—in the next chapter of capital markets innovation.

Meanwhile, in a recent article published in The Economist, Blackrock’s Larry Fink and Rob Goldstein address the move to tokenization, calling it “the next major evolution in market structure.” They liken the state of tokenization today to where the Internet was in 1996, noting that it will not replace the existing financial system any time soon, but that we should think of the development of tokenization as analogous to a bridge being built from two sides of river to converge at the center. They argue for the thoughtful implementation of safeguards as the technological developments advance.

– Dave Lynn