Thank you, Chairman Atkins, Commissioner Uyeda, and Commissioner Crenshaw, and thank you all for joining us in person or online for the Crypto Task Force’s fourth roundtable. Thank you especially to our moderators, Jeff Dinwoodie and Tiffany Smith, and today’s panelists for helping us to get smart on tokenization.

Tokenization is rooted in the internet, which revolutionized our lives by enabling the creation of a range of networks. At the base of these networks are software protocols—a set of rules defining how computers and other devices communicate with each other. Protocols built on top of TCP/IP[1]—the protocol that governs the internet—enable applications that facilitate communication and easy access to information.[2]

Blockchain and other distributed ledger technology protocols are new internet-based protocols enabling the creation of new global networks, this time to facilitate the seamless transfer of assets and related data. These protocols commonly rely on cryptography for their operation and security. Novel crypto assets that would not exist but for the underlying protocols live on these networks. So do traditional assets when they get tokenized. Tokenization fits squarely within the Commission’s jurisdiction because it involves formatting traditional financial assets, like stocks and bonds, as crypto assets (or “tokens”) on a crypto network. Much as earlier internet-based protocols dramatically enhanced our lives by making it easier to communicate and access information, these cryptographic protocols have the potential to improve our lives through enhanced accessibility and efficiency of the markets for traditional financial assets.

Your “smartphone” makes you smarter and more efficient by serving as a portal to the internet and its networks of applications. Similarly, tokenizing traditional assets and putting them on crypto networks makes them smarter. Crypto networks are not only a new type of database or ledger for recording ownership of assets, but also a new type of computing platform that can support applications that allow you to do more with your assets. Smart contracts are self-executing software programs that define important properties of assets and applications running on crypto networks and serve as a portal to the networks of applications supported by these new internet-based protocols. A smart contract can define how and when securities may be purchased, sold, and transferred, as well as automate dividend and interest payments or other distributions. Further, because of the common protocols used to program these smart contracts and the related assets and applications, investors can use tokenized securities seamlessly on or within other smart contract-based applications, including DeFi applications.

Removing securities from siloed databases and tokenizing them on open, composable crypto networks mobilizes them and makes them usable in new and enhanced ways. Stablecoins, the first application of tokenization to achieve scale, demonstrate the efficiency and accessibility improvements that may arise from the use of crypto networks. Tokenization may provide similar benefits to the securities markets, such as increased operational efficiency, transactional transparency, liquidity, and accessibility; faster settlement; and greater investor opportunity. Several tokenized money market products are registered under the Investment Company Act of 1940, and tokenized private funds similarly issue securities designed to maintain a stable value and provide yield. Using crypto networks to maintain the record of ownership enables the securities to be used as collateral in derivatives transactions, rather than requiring investors to redeem the securities and then post cash as collateral. Tokenized securities also may serve as a means of settlement in the purchase and sale of other crypto assets, including other tokenized securities, in peer-to-peer or other types of onchain transactions. If these assets live on the same network, near-instant and simultaneous settlement is possible.

Tokenization cannot reach its full potential without legal clarity. Issuers and transfer agents continue to be unsure about whether a crypto network can be the master securityholder file or a component thereof for purposes of the Exchange Act’s transfer agent rules, even where the relevant state law expressly contemplates the use of a crypto network in connection with the maintenance of the securities ownership record. Further, the Commission’s Special Purpose Broker-Dealer statement, which defines “crypto asset security” to encompass any security that relies on cryptographic protocols, has created confusion regarding a broker-dealer’s ability to custody tokenized traditional securities, even when issuers and transfer agents retain control and can address erroneous or impermissible transactions. The Commission proposed to amend the Advisers Act custody rule to preclude traditional securities that are issued on a public, permissionless crypto network from eligibility for an exception from the qualified custodian requirement.

We are working on providing legal clarity to these and other questions in a sensible manner. Absent a compelling reason grounded in fact and law, the Commission should treat tokenized securities the same as traditionally issued securities. Under this approach, for example, the type of database used to record ownership of securities does not affect the substance of the securities issued, nor does the use of a crypto network give rise to a new or different type of security. A crypto network can constitute all or part of the issuer’s books maintained by its transfer agent. Tokenized mutual fund shares and tokenized privately issued securities should be eligible for the exceptions for such securities from the Advisers Act qualified custodian requirement. Tokenization may raise some legal challenges related, for example, to the integration with DeFi, application of the transfer agent rules and National Market System requirements, use of permissionless networks, and appropriate classification as certificated versus uncertificated securities. We can work through these and other issues with the expert help of today’s panelists and other interested members of the public. I look forward to the upcoming panels.