SEC leaders seek to clarify how tokenized securities interact with existing regulation

Tokenized securities are financial instruments represented by digital assets and recorded on distributed ledger technology (blockchain or crypto networks). Despite their digital format, tokenized securities are subject to the same federal securities laws as traditionally formatted securities. The SEC clarified on January 28, 2026, that the technological format in which a security is issued, recorded, or transferred does not alter its legal characterization or regulatory requirements. This means every offer and sale of a tokenized security must be registered or exempt under the Securities Act, just like conventional securities.

The SEC identifies two main categories of tokenized securities: issuer-sponsored tokenized securities (where issuers directly tokenize their own securities) and third-party-sponsored tokenized securities (where unaffiliated third parties tokenize securities using custodial or synthetic models). In custodial models, a third-party custodian issues tokens representing indirect ownership of underlying securities. In synthetic models, third parties issue their own tokens providing synthetic exposure to referenced securities, such as structured notes or security-based swaps. Third-party models present additional risks because the rights and benefits associated with the token may differ materially from the underlying security, and token holders face exposure to third-party risks such as bankruptcy. Additionally, third parties issuing synthetic tokens may themselves be deemed investment companies under the Investment Company Act.