SEC warns Robinhood, Kraken: tokenized securities are still securities, must comply with federal laws, signaling oversight despite eased crypto stance.
The US Securities and Exchange Commission (SEC) Commissioner, Hester Peirce, has stated on behalf of the Commission. In the statement, she offers her perspective on the current status of tokenized securities. This occurs in the context of the recent initiatives by crypto exchanges like Robinhood and Kraken to introduce blockchain representations of US equities.
The SEC has provided clarification to Robinhood and Kraken regarding tokenized securities
In a press release, Commissioner Peirce stated that blockchain technology, despite its immense power, lacks the “magical abilities” to alter the nature of the fundamental asset itself. She further stated that tokenized securities are still securities and that market participants must consult and comply with federal securities laws when conducting transactions involving these instruments.
This occurred as she observed that numerous traditional firms and new entrants are adopting on-chain products, “enchanted” by the potential of blockchain technology. Robinhood and Kraken, as reported by CoinGape, are at the forefront of this initiative by broadening their selection of tokenized US securities.
SEC Chair Paul Atkins had previously expressed his support for this initiative, stating that the agency would establish frameworks to encourage the tokenization of equities. This is why Peirce’s statement is pertinent, as it offers a glimpse into the SEC’s stance on tokenized securities.
Nevertheless, Peirce recognized blockchain’s significance in advancing these assets. She observed that it has enabled models for distributing and trading securities in a tokenized format. The SEC commissioner also stated that tokenization can improve investors’ ability to use their assets as collateral and facilitate capital formation.
The Factors That Market Participants Must Consider
The dangers Robinhood and Kraken must be aware of were also underscored in Hester Peirce’s release. She observed that an investment company or an unaffiliated third party with custody of securities issued by another entity could tokenize their shares.
She stated that purchasers of these third-party tokens may encounter distinctive risks, including counterparty risks, in any of these instances. Peirce further stated that tokenized securities distributors must consider their disclosure obligations under the federal securities laws.
The SEC Commissioner also advised market participants who distribute, purchase, and trade tokenized securities to consider the nature of the implications of the resulting securities law. She provided an example, pointing out that a token could be a security receipt, which is a security in its own right, but is distinct from the underlying security held by the token’s distributor.
The issue of tokenized securities is already causing concern. OpenAI has recently issued a warning that it has not entered into a partnership with Robinhood regarding tokenized stock offerings. In the interim, Vlad Tenev, the CEO of the exchange, verified that they are in discussions with regulators regarding this offering.
Peirce recommended that other market participants consult with the SEC and its personnel when developing their tokenization product offerings. She confirmed that they are prepared to collaborate with market participants to create suitable exemptions and modernize regulations regarding the latest developments in blockchain technology.
