SEC Issues Guidance on Applying Federal Securities Laws to Tokenized Securities
The emergence of cryptocurrencies has revolutionized the way people hold and invest their money. For example, numerous cryptocurrencies and other digital assets now allow investors to store value in intangible forms on distributed ledger technology, commonly known as a blockchain. (U.S. Government Accountability Office). These digital investment tools, known as tokenized securities, offer several advantages to investors due to their blockchain-based structure. (CFTE). Tokenization enables decentralized investing by reducing reliance on intermediaries and giving investors greater control. Id. It also ensures clear ownership through immutable blockchain records, strong cryptographic security, and pseudonymous investing that protects investor identities. Id. Despite these benefits, there are several pitfalls to investing in digital assets, primarily regulatory uncertainty. Id. Due to the abstract and technical nature of the digital world, as well as its rapid evolution, regulators and courts have struggled to find the best way to categorize and oversee these forms of investments. The Securities and Exchange Commission (“SEC”) has grappled with this issue and has recently issued several statements and guidance attempting to establish a regulatory framework for digital assets. (SEC). This post discusses the SEC’s latest statement addressing whether a tokenized security qualifies as a security under the SEC’s longstanding legal framework and what that determination means for investors going forward.
Tokenized securities are digital representations of traditional assets such as stocks, bonds, or real estate, as well as shares of publicly traded companies that are transformed into digital assets. (Joseph Taylor, Mad Devs). An asset is tokenized when it is converted into digital form, which can “enhance liquidity by allowing fractional ownership of larger, high-value assets.” Id. This form of fractional ownership is common in real estate investing, where a property’s value is converted into tokens that allow multiple investors to own a share of a tangible asset that cannot ordinarily be divided “off-chain.” Id. Tokenized securities also enable the use of other blockchain-based tools, such as smart contracts. (Oscar Jofre, Kore Inside). These automatic contracts are recorded on the blockchain and execute once their requirements are met, streamlining the investment process and allowing investors and brokers to receive their securities without the burdens of traditional paper-based transactions. Id.
The SEC issued its Statement on Tokenized Securities (the “Statement”) on January 28, 2026. (SEC). In the Statement, the SEC defined a tokenized security as “a crypto asset, where the record of ownership is maintained . . . through . . . crypto networks . . . .” and, importantly, as “a financial instrument” that fits within the definition of a security under the federal securities law. Id. Prior to the Statement being issued, in a speech from late 2025, SEC Chairman Paul Atkins, explained that tokenized securities can satisfy the Howey test, which defines a security as “an investment of money in a common enterprise with a reasonable expectation of profits … derived from the . . . efforts of others.” (Paul Atkins, SEC). The Howey test is the longstanding SEC test for identifying when an investment instrument falls under the definition of a security and therefore can be subject to the SEC’s regulations. Id. Atkins emphasized that “a stock is still a stock whether it is a paper certificate . . . or represented by a token on a public blockchain.” Id. As a result, tokenized securities remain subject to federal securities laws like any other form of investment. Id.
In its Statement, the SEC acknowledged that tokenized securities may appear in a variety of models with differing structures and rights. (SEC). The two primary types are issuer-sponsored tokens and third-party sponsored tokens. Id. Issuer-sponsored tokens are issued directly by the issuer of traditional securities, which may choose to conduct the offering entirely on the blockchain or maintain both “off-chain” and “on-chain”—traditional securities linked to digital assets—systems for transfers and ownership records. (Joshea Mark & Liz Walsh, JD Supra). Issuer-sponsored tokens may represent the same class of stock as traditional securities offerings or a separate class, but they remain subject to federal securities laws and applicable registration requirements. (Rebecca DiStefano & Barbara Jones, The National Law Review).
Third-party sponsored tokens, by contrast, are issued by entities unaffiliated with the underlying issuer. (SEC). The SEC identifies two primary forms of these tokens: custodial tokenized securities and synthetic tokenized securities. (Joshea Mark & Liz Walsh, JD Supra). Custodial tokens are crypto assets created by a third-party that give investors an “indirect interest” in an underlying off-chain security through a “security entitlement.” (SEC). Regardless of their format or how ownership is recorded, these instruments remain subject to federal securities laws. Id. The second category is synthetic tokens, such as “linked securities” and “security-based swaps,” that are structured as crypto assets. Id. These instruments are designed to track the performance of an underlying issuer-issued security and provide holders with the economic returns of the underlying asset without conveying actual ownership. (Mark Highman, et al., Norton Rose Fulbright).
The SEC notes that although the two types of third-party tokenized securities are “economically similar,” they are regulated differently under federal securities laws depending on whether the instrument is classified as a “debt security, equity security or a security-based swap.” Id. A security is treated as a “swap” if it references (i) a narrow-based securities index; (ii) a single security or loan; or (iii) events affecting a specific issuer that impacts its financial condition. (SEC).
However, the Commodity Exchange Act excludes certain instruments from security-based swaps, including “any note, bond, or evidence of indebtedness,” under the Securities Act of 1933, as well as options or similar rights on securities or securities indexes. (Dechert). Tokenized swaps are subject to the same definition and exclusions, requiring third-party issuers to carefully assess the instruments they offer to investors. Id. The SEC emphasizes that regulation depends on the “economic realities” of a tokenized security, not the label attached to it. (Joshea Mark & Liz Walsh, JD Supra).
The market for tokenized stocks has grown to nearly $1 billion. (Bitget). While tokenized stocks remain a small fraction of the overall investment market, this growth signals increasing institutional interest and suggests that tokenization may become a more mainstream method of issuing and trading securities. Id. Even before the Statement, SEC regulators signaled greater openness to these assets, as shown by the no-action letter issued to The Depository Trust & Clearing Corporation (“DTCC”). (DTCC). The letter allows DTCC to offer tokenized assets in a “controlled production environment,” while complying with federal securities laws, suggesting the SEC was preparing to permit broader use of tokenized securities. Id.
The SEC’s confirmation that tokenized securities fall within existing securities laws means that issuers cannot avoid registration, disclosure, and compliance obligations simply by moving assets onto a blockchain. (Cooley).This reduces regulatory uncertainty but also limits the extent to which tokenization can operate outside traditional financial systems. Id. However, critics argue that applying traditional securities laws to tokenized assets may limit innovation by imposing legacy regulatory structures on emerging technology. (Zachary Mouton, Houston Law Review). Some note that subjecting crypto transactions to federal securities laws “may undermine the decentralized peer-to-peer transaction future that the crypto industry seeks to provide.” Id.
Overall, the Statement did not create new regulations for crypto assets but confirmed that tokenized securities fall within the existing federal securities law framework. (SEC). As a result, investors and issuers must ensure that the structure of their tokenized assets complies with applicable securities laws. As regulatory guidance continues to develop, the market for tokenized securities and other crypto assets is likely to keep growing, with the potential to significantly reshape how investments are issued and held.