The SEC Should Embrace Tokenized Equity, Not Strangle It

The SEC Should Embrace Tokenized Equity, Not Strangle It

By J.W. Verret

Law360 (July 30, 2025, 4:02 PM EDT) --

This article first appeared on Law360 at this link https://www.law360.com/articles/2368088

J.W. Verret

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The financial establishment is at it again. On June 30, the Securities Industry and Financial Markets Association urged the U.S. Securities and Exchange Commission to reject requests from cryptocurrency firms seeking no-action or exemptive relief to offer tokenized equities.[1]

SIFMA argued that "these policy questions are simply too important to be addressed purely through immediate no-action or exemptive requests" and demanded instead "a more transparent process through public comment and engagement from the broader industry." The high-speed market making firm Citadel argued the same.

This mirrors the broader industry talking point that tokenized assets should face the same regulatory burden as traditional securities. For example, in a May 1 blog post, the Bank Policy Institute argued, "A tokenized asset is no different from the traditional form of that asset; therefore, the regulatory framework should be technology-neutral."

This is like taxi medallion owners claiming Uber was just another cab company. Or, I imagine, arguments from horse-and-buggy operators about how the new Model-T motor vehicle was unsafe.

It's protectionism dressed up as prudence. SIFMA raises concerns about how investors would be protected outside the traditional broker-dealer framework, whether firms would need membership in the Financial Industry Regulatory Authority, and how the SEC could oversee "unregistered entities." They worry about the application of Regulation NMS to tokenized trading and whether allowing securities to trade outside consolidated data systems could fragment liquidity and harm price discovery.

The truth is that tokenized securities are fundamentally different from traditional stocks — and that's precisely why they're so valuable. A tokenized share that lives on Layer 1 blockchains like Ethereum or Solana doesn't need the Byzantine web of intermediaries that makes today's stock market resemble a Rube Goldberg machine. No more waiting days for trades to settle. No more mysterious fees extracted by middlemen. No more wondering if your broker actually bought the shares you ordered.

To understand why the old guard is so terrified, you need to know how we got here. As Austin Campbell and Tuongvy Lee detail in their groundbreaking paper "Crypto and the Evolution of the Capital Markets," our current market structure is an artifact of the 1960s "paperwork crisis."[2] Back then, Wall Street was literally drowning in paper stock certificates. Brokers couldn't keep up with the physical paperwork needed to transfer ownership. The New York Stock Exchange had to close one day per week just to let back offices catch up. Over 100 brokerage firms collapsed.

Congress' solution? Create the Depository Trust Company to immobilize all stock certificates in a central vault, with ownership tracked electronically. What was supposed to be a temporary fix became permanent infrastructure. Today, when you buy Apple stock, you don't actually own it, your broker does. You're just the beneficial owner on their books. The actual shares are registered to Cede & Co., DTC's nominee entity.

This indirect ownership system spawned an entire ecosystem of rent-seekers. Every trade now passes through brokers, clearing firms and settlement agents, each taking their cut. The result? A system where two firms control over half of all retail stock trades, where clearing and settlement is monopolized by the Depository Trust Company, and where hidden fees and conflicts of interest are endemic. Payment for order flow, anyone?

Enter blockchain technology. On-chain equity solves the exact problem that created this mess in the first place: the inability to efficiently track and transfer ownership. With tokenized shares, ownership transfers happen instantly and transparently on a public ledger. No more back-office reconciliation. No more settlement risk. No more wondering where your assets actually are.

But here's where it gets really interesting. Smart contracts don't just replicate the current system more efficiently — they can actually enforce securities regulations better than human intermediaries.

Consider Securities Act, Section 11, tracing for securities litigation. Today, plaintiffs struggle to prove they bought shares from a specific offering. With tokenized equity, every share's history is permanently recorded on-chain.

Want to enforce insider trading restrictions? A smart contract can automatically prevent executives from selling outside approved windows.

Concerned about shareholder voting? Your crypto wallet can prompt you to vote your shares directly, no proxy solicitation needed.

The benefits cascade from there. Twenty-four hour trading becomes possible when you don't need to coordinate with centralized clearing. T+0 settlement eliminates the counterparty risk that required creating the National Securities Clearing Corporation in the first place. Regulation D transfer restrictions can be hard-coded into tokens. Market manipulation becomes harder when every transaction is publicly visible.

The current structure exists to solve problems endemic to financial intermediaries regulated by the SEC. Blockchain eliminates these problems.

Demanding years of rulemaking to preserve a system designed for paper certificates is like requiring cars to carry buggy whips.

SIFMA worries about market fragmentation, while defending a system where dark pools hide huge volumes from public view. They invoke investor protection while protecting a structure that enables preferential access for high-frequency traders and other practices that systematically disadvantage retail investors.

Fortunately, there's reason for optimism. Commissioner Hester Peirce has been actively engaging on tokenized securities throughout 2025.

In February, she released her landmark statement, "There Must Be Some Way Out of Here," soliciting public input on crypto regulation.[3]

More recently, in July, she issued "Enchanting, but Not Magical: A Statement on the Tokenization of Securities," acknowledging that "blockchain technology has unlocked novel models for distributing and trading securities" while clarifying that "tokenized securities are still securities."[4] Rather than shutting down innovation, she encouraged market participants to "proactively engage with the SEC" on tokenization projects — a far cry from the prior administration's regulation-by-enforcement approach.

The SEC should grant no-action relief to firms ready to pilot tokenized equity trading. Let them demonstrate how on-chain markets can provide better price discovery, faster settlement and stronger investor protections than our jury-rigged legacy system. Use these experiments to inform eventual rulemaking, not delay innovation while incumbents fortify their moats.

Crypto firms won't necessarily replace traditional finance overnight, but the SEC should open the no-action relief channels now and let partnerships between crypto and traditional finance blossom through organic negotiations, rather than putting its hand on the outcome to pick winners and losers.

Peirce's innovation sandbox proposal shows the way. In her remarks at SEC Speaks in May, she revealed that the SEC's Crypto Task Force is "considering a potential exemptive order that would allow firms to use DLT to issue, trade, and settle securities."[5] This conditional exemption would permit innovative trading systems for tokenized securities while requiring appropriate disclosures, recordkeeping, monitoring and adequate financial resources. It's a practical approach that allows real-world testing under SEC oversight rather than years of theoretical rulemaking.

No-action letters have long been how the SEC lets markets evolve before regulations catch up. That's how electronic trading emerged. That's how exchange-traded funds were born. Tokenized equity deserves the same chance.

Tokenized equity no-action relief for firms ready to build is the sandbox. And that sandbox is ready to grow to a beach, and other countries are waiting for the SEC's lead to build similar beaches informed by our progress.

The financial establishment will keep claiming we need to preserve every aspect of current market structure for "investor protection." But whose interests are really being protected? When you need seven intermediaries to buy a share of stock, when settlement takes days instead of seconds, when market-makers pay for the right to trade against retail orders — that's not protection. That's rent extraction.

Blockchain can deliver what decades of regulation have failed to achieve: truly fair, transparent and efficient markets. The technology exists. Innovative firms are ready. All we need is for regulators to stop listening to incumbents that profit from complexity and start embracing the simplicity that blockchain enables.

The SEC has a choice. It can side with the future — instant settlement, direct ownership and open-source blockchain fairness. Or it can protect the past — paper-based processes, layers of intermediaries and "trust us" opacity. For investors' sake, let's hope they choose wisely.

J.W. Verret is an associate professor at George Mason University's Antonin Scalia Law School.