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SEC Sets Clear Rules for Tokenized Securities: Two Main Categories to Know

What the SEC announced

The U.S. Securities and Exchange Commission (SEC) has released new guidance. It explains how the country’s laws about securities work when a security is turned into a digital, crypto-like asset. The guidance came from three parts of the SEC: the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets. This happened on January 28. The goal is to make the rules easier to understand for people who create or buy tokenized securities, and to help them follow existing registration and disclosure requirements.

In the new guidance, the SEC groups tokenized securities into two main types. These are: (1) issuer-sponsored tokenized securities, and (2) third-party-sponsored tokenized securities. Let’s look at each type in simple terms, with clear examples where helpful.

1) Issuer-sponsored tokenized securities

What is a tokenized security? In simple words, a tokenized security is a financial instrument that meets the law’s **definition of a security**. It is presented as a crypto asset, and its ownership records are kept on one or more crypto networks. A crypto network is a technology system that records who owns what, in a secure and shared way.

In the issuer-sponsored model, the company that issues the security (or its agent) uses distributed ledger technology (DLT). DLT is a kind of electronic system that records transfers of assets. With issuer sponsorship, when the crypto asset is transferred on the network, the transfer also changes the official list of security owners (the master securityholder file). This helps keep two things in line: the crypto token and the official ownership records.

Issuers may offer the same security in different forms. The tokenized version can be considered the same type (or class) as the traditional security if the rights and privileges are substantially similar. That means things like voting rights or dividend payments could be very similar between the digital version and the old paper or standard version.

Sometimes, an issuer might issue a crypto asset that does not directly connect to the master securityholder file. Even in those cases, the crypto asset could still be used to transfer ownership that is recorded outside the main on-chain system. In plain terms, the on-chain or off-chain records must still reflect who truly owns the security according to the law.

2) Third-party issuance: custodial or synthetic tokenized securities

The second category covers tokenized securities that are created by a party not linked to the issuer. These are called third-party-sponsored tokenized securities. They come in two forms: custodial tokenized securities and synthetic tokenized securities.

Custodial tokenized securities

Custodial means a third party issues a crypto asset that represents ownership in someone else’s security. The ownership records for this crypto asset can be kept on the blockchain (on-chain) or outside of it (off-chain), by the third party. In simple words, a trusted middleman keeps track of who owns the asset, while the crypto token is used to represent that ownership.

Synthetic tokenized securities

Synthetic tokenized securities include two kinds: linked securities and security-based swaps. A linked security is an instrument that tells you how much of the real security you own. A security-based swap is a contract that gives you exposure to the value of the underlying security, but you do not get direct rights from the original issuer. In other words, you don’t own the actual security; you own exposure to it through a swap or similar contract.

These crypto asset versions can only be offered to certain participants who meet specific rules (called eligible contract participants) unless the crypto asset is registered with the SEC and traded on a national securities exchange. This is a step to protect investors and keep markets fair and orderly.

The SEC also notes that simply changing how a security is presented (its classification or format) does not change the law that applies to it. In other words, calling something a tokenized security does not remove it from the existing securities rules. The agency is open to talking with market participants who want more clarity or who are preparing filings to meet the rules.

The overall purpose of the guidance is to help companies and investors understand how to operate with tokenized securities within the current legal framework. It aims to clarify what information must be registered, what must be disclosed, and how to stay compliant as these digital tools grow in finance.

Source note: The article we’re summarizing says the information came from CryptoPotato, which published the report about the SEC’s guidance on tokenized securities.

What this means for people in the market

For investors, the key idea is that tokenized securities are still securities. They must follow the same rules that apply to traditional securities. The way ownership is recorded on a digital network should connect to official ownership records when necessary. This helps people know who owns what, and who has rights to benefits like voting or dividends.

For companies and other market participants, the guidance gives specific categories and scenarios. It tells them whether their tokenized product will be treated as a traditional security, a new digital version, or something else. This helps them plan their filings, disclosures, and any required registrations with the SEC.

In short, the SEC wants to keep investor protection strong while also allowing innovation in how securities can be issued and traded using digital technology. If a company or an investor wants more clarity, the SEC says it is ready to discuss and help with filings and communications.

Definitions and extra context can help readers understand the topic better. Below are plain-language explanations of key terms with links to more information in Wikipedia. These definitions use the Wikipedia pages to give a quick, reliable reference for learners new to this topic.

Source: CryptoPotato and the SEC guidance release on tokenized securities.

Definitions