Commissioner Peirce Warns Against Regulatory Blind Spots in Tokenized Securities
Commentary by Gage Raju-Salicki and Steven Lofchie
SEC Commissioner Hester M. Peirce addressed the growing trend of tokenizing securities using blockchain technology. She asserted that tokenized securities remained fully subject to the federal securities laws.
In a public statement, she warned that some market participants might be overlooking regulatory responsibilities. She said that "[d]istributors of tokenized securities must consider their disclosure obligations under the federal securities laws," and added that they "may wish to refer to the Division of Corporation Finance's recent staff statement on this topic." (See related coverage.)
Ms. Peirce raised concerns about third parties issuing tokens tied to securities they do not originate. She highlighted that "[p]urchasers of these third-party tokens may face unique risks, such as counterparty risks."
She emphasized that blockchain does not trump legal definitions. She asserted: "While blockchain-based tokenization is new, the process of issuing an instrument representing a security is not. The same legal requirements apply to on- and off-chain versions of these instruments." Ms. Peirce encouraged market participants, "as they structure their tokenization product offerings," to meet with the SEC and its staff.
Commentary
It's noteworthy to see the leader of the SEC Crypto Task Force issue this statement. She is making clear that, "[w]hile blockchain-based tokenization is new, the process of issuing an instrument representing a security is not."
Tokenization does have significant upsides: it's faster for settlement, provides a public-facing, immutable view of the market and allows for all kinds of assets to be traded. But tokenization does not mean that the SEC's disclosure and other requirements are no longer relevant.
Commentary
Under the prior administration, the SEC seemed to take the view that any asset represented in digital form was per se a security. The new SEC has rejected that expansive definition of "security" and said that any individual financial instrument must be specifically analyzed as to its appropriate treatment.
While there has been a 180 degree change in the SEC's position, it is not from: everything is a security to nothing is a security. The 180 degree change is from a blanket assumption that everything is a security to a requirement of specific analysis of each asset.