Tokenized Stocks May Be Onchain, But The Sec Still Wants The Keys

The US Securities and Exchange Commission outlined how tokenized equities can exist inside US market safeguards, favoring broker-led custody over crypto-native self-custody.

The US Securities and Exchange Commission’s Trading and Markets Division on Wednesday laid out how broker-dealers can custody tokenized stocks and bonds under existing customer protection rules, signaling that blockchain-based crypto asset securities will be slotted into traditional securities safeguards rather than treated as a new category.

The division said it would not object to broker-dealers deeming themselves in possession of crypto asset securities under existing customer protection rules, as long as they meet a set of operational, security and governance conditions. This applies only to crypto securities, including tokenized stocks or bonds.

While the statement is not a rule, it provides clarity on how US regulators expect tokenized securities to fit within traditional market safeguards.

The guidance suggests that tokenized securities are not treated as a new asset class with unique rules. Instead, they are being placed into existing broker-dealer frameworks, even if they settle within blockchain networks.

At the core of the statement is Rule 15c3-3, the regulator’s consumer protection rule. This requires broker-dealers to maintain control or physical possession of fully paid customer securities.

The division said that crypto asset securities recorded in blockchains may satisfy the “physical possession” requirements under certain circumstances. This means broker-dealers must retain exclusive control over the private keys used to access and transfer the assets.

Despite being on a blockchain, customers and third parties, including affiliates, should not have the ability to move the security without the authorization of the broker.

The statement draws a clear boundary between tokenized securities and crypto-native self-custody models. It prioritizes customer protection over crypto’s permissionless ethos.

Broker-dealers are expected to prepare for scenarios like 51% attacks, hard forks, airdrops and other disruptions. They must also maintain plans that account for seizure, freezing or transfer restrictions under lawful orders.

Source: CoinTelegraph