SIFMA Urges Investor Protections for Tokenized Securities
Commentary by Gage Raju-Salicki
SIFMA capital markets and operations directors called for extending investor protections to tokenized securities markets.
In a blog post, SIFMA’s Head of International Capital Markets and Strategic Initiatives and its Deputy Head of Technology, Operations, and Business Continuity emphasized that robust investor protections are the foundation of U.S. market integrity and must carry over to digital and tokenized securities. They said that modernization is necessary to accommodate new technologies, but that innovation must not come at the expense of safeguards that ensure transparency, resiliency, and investor confidence.
The authors referenced SIFMA’s recent letter to the SEC’s Crypto Task Force, which urged regulators to anchor digital-asset oversight in the core protections of existing market structures—such as transparency, custody safeguards, and separation of functions. They stressed that any regulatory updates should build on these frameworks while also providing clarity on when a token is, and is not, a security.
- On Market Integrity: the authors underscored the importance of protections such as fair access, price transparency, best execution, and market surveillance to prevent manipulation, fraud, and abusive practices.
- On Broker-Dealer Responsibilities: The authors highlighted the essential role broker-dealers play in ensuring disclosures, safeguarding customer assets, conducting due diligence for issuers, and maintaining orderly trading in secondary markets.
- On Custody: The authors stressed that core custody protections—segregation of client assets, separation of financial activities, and proper controls—are technology-agnostic and must be preserved in tokenized securities markets.
- On Separation of Functions: The authors warned that combining trading, custody, and brokerage functions within a single platform reintroduces conflicts of interest and systemic risks, as demonstrated by failures in some digital-asset markets.
- On Investor Clarity: The authors emphasized that tokenized securities remain securities, regardless of the technology used, and called for consistent taxonomies that reflect underlying economic characteristics rather than technological form.
- On Innovation: The authors said that while regulatory sandboxes or innovation exemptions can provide flexibility, they must include strict guardrails on investor participation, transaction limits, and project duration, and should supplement—not replace—the formal rulemaking process.
The SIFMA executives advised that building durable markets for tokenized securities requires extending long-standing investor protections into digital frameworks, ensuring that innovation strengthens rather than undermines investor trust.
Commentary
The SIFMA directors identify key consumer protections, which are crucial to the functioning of any sound market.
More interesting, perhaps, is their consideration of the legal classification of tokenized securities. The directors highlighted Commissioner Peirce's recent statement on the question: "it must be clear to investors that they are purchasing a tokenized security with legal and beneficial ownership of an operating or investment company and not, as is the case in certain models, a token that mirrors the value of the underlying security but does not grant those legal and economic rights (i.e., essentially a specific type of derivative known as a "security-based swap")."
The legal classification question is not one that is seeing large debate right now, particularly because, as the SIFMA directors underscore, SEC Commissioner Peirce has identified most of these assets as securities (and most of these assets are not available in the United States presently). However, it still feels like they are responding to the joint SEC-CFTC statement regarding spot commodity products and more. That joint statement isn’t itself a green light for these assets, but it does raise further questions as to where regulators will land on this issue. To that end, we may ’see in the near future - given “Project Crypto” and “Crypto Sprint” - the emergence of a regulatory consensus on this issue and an answer to many of SIFMA’s questions.