SEC advisory panel supports initiative for tokenized securities and details safety measures.

The committee that guides the U.S. securities regulator on investor matters has voted to endorse a new initiative aimed at regulating stock transactions on blockchains.

A group advising the U.S. Securities and Exchange Commission has put forth recommendations concerning tokenized securities. (Jesse Hamilton/CoinDesk)

What to know:

• The U.S. Securities and Exchange Commission is being urged by its Investor Advisory Committee to advance regulations on tokenized securities.
• The committee voted in favor of suggestions that specify how these rules should be formulated, emphasizing the necessity for obligatory reporting and fairness in customer orders.
• SEC Chairman Paul Atkins indicated that efforts are already in progress to offer some guidance to the industry to enable regulated tokenization.

An advisory committee for the U.S. Securities and Exchange Commission has suggested that the agency proceed with a policy on tokenized securities that would permit traders to eliminate the intermediary settlement processes that Wall Street investment firms have depended on for many years.

On Thursday, the SEC’s Investor Advisory Committee voted to propose specific exemptions for blockchain-based trading of stocks, provided that such activities include mandatory disclosures, regular external oversight, and a stipulation that the trading of tokenized equity securities aims to ensure that all investors secure the best terms for their orders.

These crypto assets still conform to the legal definition of securities, as SEC Chairman Paul Atkins has consistently asserted, implying that these activities require similar safeguards to those in the traditional system. Atkins stated that his agency is working toward formal regulations regarding tokenization. This initiative now has the support of an official recommendation from the committee, which comprises experienced members from significant trading firms, institutional investors, and academia.

The conventional method of stock trading involves brokers, transfer agents, and centralized settlement databases, often taking a day or longer to complete. In contrast, by placing the same stock on-chain, “the delivery of the tokenized security and the payment can occur as a single transaction, with ownership records directly integrated into a single blockchain.”

The committee informed the commission that this modern approach does carry certain risks:

“The primary risk associated with the tokenization of equity securities is that these reforms or exemptions may introduce new risks that investors may not fully comprehend, resulting in higher costs that could outweigh the advantages of tokenization,” as stated in the recommendation document endorsed by the committee.

In comments made on Thursday, Atkins commended the committee for its “recognition that tokenization can improve settlement efficiency, lower settlement risk, and eliminate unnecessary intermediaries.”

“I anticipate that the Commission will soon contemplate an innovation exemption to facilitate limited trading of specific tokenized securities, with the aim of developing a long-term regulatory framework,” he added.