There’s a lot of buzz and confusion around blockchain technology and “tokenization” of securities.
At its best, tokenization promises to make ownership and settlement faster, cleaner, and more transparent. Recording securities transactions on the blockchain could unlock new efficiencies, enable fractional ownership, and open the door to markets that operate 24/7. But as this opportunity becomes more tangible, so do the risks.
SEC Commissioner Hester M. Peirce recently reminded the industry[1] of a critical point: “Tokenized securities are still securities.” The technology may be new, but it doesn’t change the fact that tokenized shares are securities, with all the rights, regulations, and investor protections that need to come with that. The same legal frameworks will need to apply to on- and off-chain versions of these instruments.
[1] https://www.sec.gov/newsroom/speeches-statements/peirce-statement-tokenized-securities-070925
Building a Bridge between Innovation and Regulation
At OTC Markets Group, we believe our markets are well-positioned to be part of the next generation of trading, data, and disclosure solutions for tokenized securities.
Over two years ago, we received regulatory approval for broker-dealers to trade digital asset securities, (including security tokens) on our OTC Link ATS. Yet today, the regulatory framework and key infrastructures needed for companies to issue blockchain native securities tokens, and for brokers to trade them, are still not in place.
With the SEC and Congress finally looking to define the rules of the road for responsible tokenization, public company management teams should focus less on buzzwords and more on structures.
Commissioner Peirce’s speech provides a useful framework to think about three different paths for tokenizing securities, each with its own implications for issuers, investors and markets.
1.Direct Ownership Rights: Tokenized Shares That Live on the Blockchain
The day is fast approaching when a company’s transfer agent will be able to record shareholder ownership directly on a blockchain in the form of a freely tradable token.
In the Issuer Sponsored Token Model diagram[1] presented by Computershare to the SEC, a digital share token represents the same ownership interest in a security as a paper certificate or electronic book entry. Tomorrow’s transfer agents may seamlessly move investor ownership between DTC and digital tokens, and across different blockchains, with the click of a button.
[1] https://www.sec.gov/files/ctf-memo-computershare-limited-072825.pdf
Under this model, every shareholder retains full shareholder rights, including voting, dividend, and governance rights under state law. It’s elegant, transparent and inclusive. Tokens coexist with traditional forms of ownership, preserving the existing plumbing of public markets while laying the groundwork for modernization.
Tokenizing ownership at the transfer agent level is where many believe the real innovation lies. It could ultimately simplify everything from stock lending to dividend payments to proxy voting. Publicly available shareholder file data could provide more timely and trusted transparency of securities issuance and ownership. But it’s not a quick fix. Operational, legal, and regulatory rigor will be essential.
At the same time, DTC and other centralized securities depositories will be running programs to tokenize entitlements to member positions, so brokers and banks can also leverage blockchain technologies for securities held at DTC. Eventually, interoperability could allow these initiatives to converge.
It’s worth noting that some platforms already claim to offer blockchain-based securities. In practice, many are closed systems that lock investors in, using blockchain more as branding than as functional infrastructure.
2. Tokenized Receipts: Regulated Custody with a Digital Face
The next approach is what regulators like Commissioner Peirce have recently described as a “receipt for a security,” which represents a direct claim on underlying shares held by a regulated custodian or broker.
Think of it like an American Depositary Receipt (ADR) that lives on a blockchain. The investor holds a token representing ownership rights in a receipt, but the custodian holds the actual shares. The token trades freely and share for share redemption keeps its price anchored to the underlying stock.
We and others have advocated for the SEC to establish a clear pathway for this model, perhaps through new registration forms akin to the Form F6 used for ADRs today. For example, “Form D6” and “Form S6” could govern the issuance of tokenized receipts and securitized digital assets. This model doesn’t force public companies to rewrite their corporate records or SEC filings. It’s familiar, regulated, and achievable in the near term within the existing system. Like ADRs, these instruments require real backing with easy creation and redemption, regulated custodians, and full SEC disclosure about fees, rights and the nature of the token as a receipt.
Done right, tokenized receipts could serve as a bridge, connecting blockchain innovation to the trusted frameworks of public markets.
3. SPV Wrappers, IOUs and Swap Derivatives: The Clever but Complicated Route
Finally, there’s the financial-engineering path: creating tokens through special-purpose vehicles, notes, or swaps that track a company’s share price.
This is where things get complicated. These structures don’t convey direct ownership, only economic exposure, and often carry high fees, counterparty risk, and opacity.
Companies are right to be concerned that the sponsors of these products may use their name and goodwill to lock investors into opaque products. Regulators and the courts will also need to address if these types of vehicles can even use the names and trademarks of the underlying securities they claim to represent.
With these tokenized financial products, that chain of risk can become long and tangled. Their opacity opens the door to information asymmetries, undisclosed fees and fraudsters. Wrapping private company securities does not solve the problem of how to provide retail investors with current financial information of the underlying companies.
There’s nothing inherently wrong with financial innovation, so long as everyone understands who is carrying the risk when things go sideways. Many of these products have a role for sophisticated institutions trading with well capitalized counterparties, but they don’t align with principles of fair, transparent, retail-accessible markets. For these reasons, the SEC does not currently allow any security-based swaps to be traded off exchange by U.S. retail investors.
A baseline of investor disclosure with clear regulatory standards for issuers and custodians will need to be established, as we don’t want retail investors to be left holding the digital equivalent of an empty bag.
The Takeaway for Public Company Leaders
Tokenization -and our role in it- isn’t a revolutionary idea, it’s an evolution of the same mission we’ve always had: to operate markets that connect broker-dealers and companies with investors efficiently, fairly, and transparently.
Here’s how executives and directors should think about tokenization:
- Keep the investor experience front and center. If the so-called innovation doesn’t make ownership clearer, trading cheaper, or information more accessible, it’s probably not progress.
- Issuer compliance matters in securities markets. Put operating within current securities laws front and center so broker-dealers can lawfully transact in the company’s securities.
- Match innovation to regulation. New technology should enhance investor protection, not test its limits.
- First movers should start small and test carefully. Pilot programs can build practical experience without unnecessary risk.
- Engage early with regulators and market operators. The best innovation happens through collaboration, not in isolation.
At OTC Markets, we’ve spent more than a century modernizing markets so information and access to capital flow seamlessly among brokers, issuers and investors.
Tokenization could be the next chapter in that story, but only if we build it on the same foundation that’s kept markets trusted for generations: transparency, connectivity, and choice.
The goal isn’t to chase the next tech fad. It’s to make our markets better informed and more efficient, for everyone.
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