Wealth managers respond positively to SEC's 'token' statement

To paraphrase (and digitize) Shakespeare: A tokenized security by any other name is still a security.

At least that’s what the SEC is telling financial advisors. For now.

SEC Commissioner Hester Peirce tried to get ahead of potential confusion last week by issuing a statement regarding the regulation of tokenized securities. In a release titled “Enchanting, but not Magical,” Peirce explained that, while blockchain-powered tokens may facilitate capital formation and enhance investors’ ability to use their assets as collateral, they do not have “magical abilities” to transform the nature of the underlying asset.

“Tokenized securities are still securities. Accordingly, market participants must consider - and adhere to - the federal securities laws when transacting in these instruments,” Peirce said.

Perhaps surprisingly, wealth managers generally responded positively to the commissioner’s statement. Instead of pushing back against the possibility of stricter oversight in the nascent arena of digital finance, they applauded her clarification of the current situation.

Patrick McGowan, managing director and head of manager research and alternative investments at Sanctuary Wealth, said the SEC's announcement represented a significant regulatory clarification that “offers both clarity and complexity” for institutional participants in the tokenized securities and crypto asset markets.

“In plain speak, the SEC just reminded everyone that putting stocks or other assets on a blockchain does not change their legal status, they are still ordinary securities and must play by the same rules,” McGowan said.

He added that over the long term there will be a blurring the lines of regulatory obligations, which will introduce complexity in distinguishing between ETFs and other cryptocurrencies.

Elsewhere, Miguel Kudry, CEO and co-founder of blockchain asset management platform L1, welcomed the SEC’s recent statements clarifying the treatment of tokenized securities, saying his firm’s customers and partners see it as a “clear green light to move onchain and launch differentiated products their clients are already demanding.”

Meanwhile, Mike Martin, vice president of market strategy at TradingBlock, noted that compared to the previous administration, the SEC’s most recent statements on tokenized securities offer a surprising amount of clarity.

“What gives me the most hope is that the SEC has offered its support to crypto companies as they determine whether their token should be classified as a security or not. This is a significant shift from the Gary Gensler-led SEC, which often treated the industry with outright contempt and kept crypto on the fringes of traditional finance,” Martin said.

Balance innovation with compliance

Given that the SEC has reaffirmed that tokenized assets remain subject to traditional securities laws, wealth management companies will be balancing innovation with compliance when evaluating or offering blockchain-based investment products going forward.

Sanctuary’s McGowan, for example, plans to prioritize compliance and diligence with regard to situations like the approvals of spot ETFs before evaluating any investment products.

“The SEC's guidance emphasizes that tokenized securities must satisfy the same disclosure requirements as traditional securities, including comprehensive risk factor disclosures, custody arrangements, and operational transparency,” McGowan said.

He also plans to vet operational partners carefully, making sure custodians and setup for holding tokens are as reliable as those used in traditional investments. 

“To balance innovation, we are keeping an eye on new products, but under a measured approach,” McGowan said.

L1’s Kudry, meanwhile, believes securities laws won’t get in the way of innovation at all. In fact, he said everything his firm builds takes existing regulatory frameworks into account.

“What’s happening now is the withdrawal and end of enforcement actions and ad-hoc rules from the SEC and other regulators that added ambiguity to how existing securities laws should be interpreted for crypto,” Kudry said.

The new product parade begins 
 

Now that the SEC has made its position clear on what will likely be a flood of tokens coming to market, wealth managers will be forced to monitor the landscape as it evolves. According to McGowan, the tokenization of real-world assets, such as the US Dollar and US Government Bonds, sometimes referred as stablecoins, will likely become a big part of everyday use and the broader economy sooner rather than later once approved by regulators.

“Rather than a complete replacement of traditional systems, they may offer a complementary rail that optimizes for speed and cost, which has the potential to garner a large market share of the payment ecosystem. We will evaluate those that make sense under new guidance,” McGowan said.

TradingBlock’s Martin expects an “explosion” in growing segments like spot crypto ETPs, equity tokens, and real estate tokens.

“Tokenized real estate may offer the most value to US investors, since they already have access to the Treasuries and equities the rest of the world seeks,” Martin said.

He points out that liquidity is a major hurdle for real estate investors. That said,  tokenization can enable fractional ownership, which helps solve this problem by breaking large properties into smaller, tradable pieces.

“This gives retail investors access to an industry once reserved for the elite, allowing them to buy in, trade shares, or exit with just the click of a mouse,” Martin said.