Tokenized Securities Are Still Securities, US SEC Warns Robinhood, Kraken

US SEC Commissioner Hester Peirce has released a statement on behalf of the Commission, in which she provides insights into the status of tokenized securities. This comes amid the move by crypto exchanges such as Robinhood and Kraken to launch representations of US equities on the blockchain.

SEC Provides Clarity To Robinhood, Kraken On Tokenized Equities

In a press release, Commissioner Peirce remarked that as powerful as blockchain technology is, it does not have “magical abilities” to transform the nature of the underlying asset. She added that tokenized securities are still securities and that market participants must consider and adhere to federal securities laws when transacting these instruments.

This came as she noted that new entrants and many traditional firms are embracing on-chain products, “enchanted” by the possibilities of blockchain technology. As CoinGape reported, exchanges Robinhood and Kraken are leading the charge in this regard by expanding their offering to tokenized US securities.

SEC Chair Paul Atkins had earlier backed this move, declaring that the agency would provide frameworks to promote the tokenization of stocks. As such, Peirce’s statement is timely as it provides insights into the SEC’s position on tokenized securities.

However, Peirce acknowledged the role of blockchain in advancing these assets. She noted that it has unlocked models for distributing and trading securities in a tokenized format. The SEC commissioner added that tokenization may facilitate capital formation and enhance investors’ ability to use their assets as collateral.

What Market Participants Must Be Mindful Of

Hester Peirce’s release also highlighted the risks that firms like Robinhood and Kraken must be mindful of. She noted that an investment company could tokenize its shares, or an unaffiliated third party with custody of securities issued by another entity could do so.

In any of these instances, she stated that purchasers of these third-party tokens may face unique risks, such as counterparty risks. Peirce added that distributors of tokenized securities must consider their disclosure obligations under the federal securities laws.

The SEC Commissioner also told market participants who distribute, purchase, and trade tokenized securities to consider the nature of the resulting securities law implications. She gave an example, noting that a token could be a receipt for security, which is itself a security, but is distinct from the underlying security held by the distributor of the token.

The issue of tokenized securities is already raising issues. OpenAI recently warned that it hasn’t partnered with Robinhood on the tokenized stock offerings. Meanwhile, the exchange’s CEO, Vlad Tenev, confirmed that they are in talks with regulators over this offering.

Peirce advised other market participants to consider meeting with the SEC and its staff as they structure their tokenization product offerings. She affirmed that they are ready to work with market participants to craft appropriate exemptions and modernize rules on new aspects of blockchain technology.