SEC Clears Path for Tokenized Securities

In a flurry of activity, the Securities and Exchange Commission (SEC) has taken decisive steps to integrate blockchain technology into traditional securities market infrastructure.  First, in a media appearance, Chairman Paul Atkins publicly championed tokenization as the future of market modernization.  Days later, the SEC’s Division of Trading and Markets issued a no-action letter allowing the Depository Trust Company to launch a pilot program for tokenized securities.  The SEC also opened proceedings on Nasdaq’s proposal to trade tokenized stocks.[1]  Finally, last week, the SEC provided guidance on how broker-dealers could meet their “possession” obligations under the Customer Protection Rule (Rule 15c3-3) with respect to crypto securities, including tokenized securities.[2]

Atkins on Fox Business News: “It Could Become a Reality in Just a Few Years”

Speaking on Fox Business News on December 3, Atkins remarked that tokenization will bring “huge benefits” to capital markets.  His argument centered on two points: transparency and speed.

On transparency, Atkins noted that public companies today often do not know who actually owns its shares or where those shares are held, but if securities lived on a blockchain, direct ownership would be visible.  “The ownership structure and asset attributes will be highly transparent,” the Chairman said.

On speed, Atkins pointed to settlement times. Stock trades currently settle in one business day (T+1), down from two days prior to 2024.  But that gap still allows for risk and settlement uncertainty during the period between execution and settlement. Blockchain-based settlement could happen instantly, reducing the time and the attendant risk.  “Tokenization promises to achieve T+0 settlement,” Atkins said, which “can reduce market risk and increase transparency.”

Atkins acknowledged the SEC had resisted crypto innovation in recent years.  “The SEC has gone against its historical tradition,” he said.  “This situation must end.”  He announced that the agency had renamed its Crypto Task Force to “Project Crypto” and plans to roll out an “innovation exemption” policy next month.  The exemption would let market participants test new products within set limits before seeking full approval.

He also said the SEC and Commodity Futures Trading Commission (CFTC) are working to coordinate their oversight.  The two agencies have long had turf disputes that killed products caught in the middle. “There is no reason for the two sides not to cooperate,” Atkins said.[3]

DTC Gets Three-Year Window for Tokenization Pilot

On December 11, the SEC’s Division of Trading and Markets issued a no-action letter to The Depository Trust Company (DTC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC).  The no-action letter gives DTC a three-year window to develop and operate the preliminary version of its DTCC Tokenization Services without being deemed in violation of certain applicable regulatory requirements.  This no-action letter paves the way for DTC Participants and their clients to begin to tokenize select equity securities, ETFs and fixed-income securities within a secure and regulated environment—a critical first step to bringing the U.S. capital markets “on-chain.”

Under the program, DTC participants can choose to have their security entitlements recorded on a distributed ledger rather than within DTC’s traditional centralized system. The resulting “tokenized entitlements” can move directly between registered wallets on approved blockchains, without DTC intermediating each transfer.  DTC’s software, LedgerScan, tracks all token movements and maintains the official record of ownership.

The pilot includes safeguards reflecting its experimental status.  Eligible securities are limited to liquid instruments: Russell 1000 securities, U.S. Treasury securities, and ETFs tracking major indices such as the S&P 500 index or the Nasdaq-100 index.  Importantly, tokenized entitlements will not be ascribed any eligible collateral or settlement value for purposes of calculating a DTC Participant’s Net Debit Cap or the Collateral Monitor.  In other words, tokenized entitlements will not count toward collateral or settlement values for DTC’s risk management.  Only DTC Participants can register wallets, and tokens can be transferred only between and among other registered wallets.  DTC also retains override keys to reverse transactions when necessary and will make offsetting entries in a “Digital Omnibus Account” on the books of DTC to avoid any “double spend” of the securities entitlements and the digital entitlements represented by the corresponding digital tokens.  The pilot contains other controls, such as periodic reporting to the SEC and notifications to the SEC upon the occurrence of systems issues or other events.

Commissioner Hester Peirce, in a statement on the no-action letter, called DTC’s model “a promising step along the tokenization journey.”[4]  She noted that other firms are trying different approaches (some issuers are tokenizing securities directly).  “Investor choice is critical,” she wrote, “particularly at this early stage when the market is testing what works.”

What Happens Next

The DTC pilot is expected to launch in the second half of 2026 after testing with select participants. Following the pilot program (and taking into account what it learns), DTC expects to expand the program and eventually bring it into full compliance with standard clearing agency rules.

Whether tokenization delivers on its promises—faster settlement, better transparency, lower costs—remains to be seen.  But the SEC is no longer standing in the way.  For an agency that spent years fighting crypto companies in court and relying upon dated regulatory requirements not directly adaptable to crypto infrastructure to impede crypto innovation, this is a notable change.