As regulatory frameworks thaw around digital assets, tokenized securities face complex challenges that require a holistic approach to compliance with the Investment Company Act and broker-dealer rules. By understanding these complexities, developers can create projects that balance economic and technological benefits with regulatory requirements.
Navigating the Regulatory Landscape of Tokenized Securities
The Evolution of Regulatory Frameworks
The recent regulatory thaw around digital assets has brought attention to the complexities of regulating ‘tokenized securities’ . As blockchain technology continues to evolve, it is essential to address the challenges posed by existing securities laws and regulations.
Tokenized securities, also known as security tokens, represent ownership in a company or asset through digital tokens on a blockchain.
These tokens can be traded and transferred electronically, increasing liquidity and accessibility.
Tokenization allows for fractional ownership, enabling smaller investors to participate in previously inaccessible markets.
It also provides enhanced security, transparency, and efficiency compared to traditional securities.
Understanding the Challenges
Tokenized securities face complex regulatory challenges, including compliance with the Investment Company Act and broker-dealer rules. Developers must consider regulatory frameworks from the start to avoid undermining the economic and technological benefits of blockchain projects.
A broker-dealer is a financial institution that acts as an intermediary between buyers and sellers of securities.
They facilitate transactions, provide research and analysis, and offer investment advice to clients.
In the United States, broker-dealers are regulated by the Securities and Exchange Commission (SEC).
There are over 5,000 registered broker-dealers in the country, with major players including Goldman Sachs, Morgan Stanley, and Fidelity Investments.
An exchange is a platform where buyers and sellers can trade various assets, such as cryptocurrencies, commodities, or securities.
It provides a marketplace for transactions to occur, facilitating the exchange of value between parties.
Exchanges often charge fees for their services and may offer additional features like order books, charts, and portfolio management tools.
The Investment Company Act
The ‘Investment Company Act’ regulates companies that invest in securities and let investors get exposure to those investments through shares. Tokenized securities projects may be subject to this act if they give their holders economic exposure to assets pooled by the developer. This riddle requires developers to navigate substantial restrictions on debt and equity raises, borrowing, and even business with affiliates.
Broker-Dealers Under the Securities Exchange Act
Anyone who buys and sells securities for others or stands ready to buy and sell securities for their own account may be a broker or dealer. The SEC considers indicia such as providing liquidity, charging a fee related to the trade price, actively finding investors, or playing a role in holding customer funds or securities.
Exchanges Under the Securities Exchange Act
A platform using smart contracts to bring together orders for tokenized securities from multiple buyers and sellers for matching and execution could qualify as an exchange. However, only broker-dealers can currently trade on exchanges, and exchanges cannot hold customer accounts or custody customer securities.
Security-Based Swaps Under the Securities Exchange Act
Tokens that provide for the exchange of future payments based on the value of a security without conveying ownership rights are likely to be swaps. Security-based swaps are under the joint jurisdiction of the SEC and the Commodity Futures Trading Commission, with notable requirements including rules prohibiting retail investors from purchasing swaps.
Anti-Money Laundering and Know-Your-Customer Requirements
Companies involved in trading or transferring tokenized securities must also consider the applicability of anti-money laundering and know-your-customer laws. Compliance requirements depend on the role being played in the transactions but can include collecting and verifying customer information.
A Holistic Approach to Regulatory Considerations
Solving these regulatory challenges is not an end in itself; it is a crucial part of designing any tokenized securities project. Developers must analyze regulatory considerations holistically from the beginning, considering the economics, technology, and regulatory framework as intertwined areas. Leaving regulatory considerations for the end can lead to a game of Jenga, where problematic parts are removed only to topple the benefits of and objectives for the economics and technology.
Conclusion
The riddles posed by tokenized securities are not merely obstacles to the advantages of blockchain technology but crucial parts of the answer. By understanding these challenges and taking a holistic approach to regulatory considerations, developers can create tokenized securities projects that balance economic and technological benefits with regulatory compliance.
- coindesk.com | Working Through the Riddles of Tokenized Securities
