SEC Defines Issuer Sponsored and Third Party Tokenized Securities Under Existing US Securities Laws

• The SEC says tokenized securities fall into issuer sponsored and third party sponsored categories under existing securities laws.

• Issuer sponsored tokenized securities follow the same rules as traditional securities without changes to investor rights.

• Some third party tokenized securities may qualify as security based swaps with stricter regulatory requirements.

The U.S. Securities and Exchange Commission has defined the application of federal securities laws to tokenized securities. The guidance provides the perspective of the agency on the blockchain-based representations of traditional financial instruments. It leans more on structure and not on technology. Thus, the SEC highlighted that tokenization does not alter legal requirements. The update aims to reduce confusion as onchain securities activity grows.

The SEC said tokenized securities fall into two categories: issuer-sponsored and third-party sponsored. Issuer-sponsored tokenized securities are treated the same as traditional securities. Third-party tokenized securities may not provide holders with rights to the underlying…

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The agency confirmed that tokenized securities still fall under existing securities laws. As a result, issuers and intermediaries must follow registration and disclosure requirements. The SEC also stressed that blockchain functions as a recordkeeping tool. Consequently, the legal treatment remains consistent across formats. The guidance centers on two defined categories.

Issuer-Sponsored Tokenized Securities Remain Traditional Securities

The SEC stated that issuer-sponsored tokenized securities receive the same treatment as traditional securities. In this model, issuers tokenize their own securities. They integrate blockchain into ownership records or settlement processes. However, issuers still control official records. Earlier last year, the SEC announced plans to introduce a sandbox regulation for tokenized securities.

Onchain transfers directly reflect ownership changes. Therefore, investor rights remain intact. Issuers must also meet reporting and disclosure obligations. The SEC stressed continuity across issuance formats.

Additionally, the agency compared this approach to conventional systems. Blockchain replaces offchain databases without altering legal duties. As a result, tokenization does not create regulatory shortcuts. The SEC expects issuers to maintain full compliance.

Third-Party Sponsored Tokenization Carries Different Risks

The SEC also outlined third-party sponsored tokenized securities. In these models, unaffiliated parties tokenize existing securities. They often hold the underlying asset in custody. Tokens then represent indirect economic interests.

However, token holders may not receive direct rights. Voting rights and dividends may not apply. Therefore, these products differ from issuer-sponsored structures. The SEC warned that holders face added counterparty risks.

Additionally, some third-party models create synthetic exposure. These arrangements track the value of securities without ownership. Consequently, the agency may classify them differently. Legal treatment depends on structure and function.

Some Tokenized Products May Qualify as Security-Based Swaps

The SEC explained that certain third-party tokenized securities may qualify as security-based swaps. These products provide economic exposure without ownership rights. They often resemble derivatives rather than securities. Therefore, stricter regulatory rules may apply.

Security-based swaps face additional eligibility and compliance standards. Market participants must assess product design carefully. The SEC stressed that form does not override substance. Functional analysis determines regulatory classification.

The guidance arrives as tokenized securities gain market traction. Several platforms plan onchain securities services. Meanwhile, regulators aim to preserve investor protections. Moreover, the SEC recently dropped the Gemini Earn case after investors recovered all crypto assets through bankruptcy and added Gemini funding. The SEC guidance sets clearer boundaries for tokenized market structures.