- Key insight: Tokenization of assets is going to transform global finance. But by dragging their heels on establishing clear rules of the road, U.S. regulators could be pushing the development of key infrastructure overseas.
- What's at stake: If U.S. regulators fail to provide clear pathways for tokenized markets to develop here, they should not be surprised when the next generation of capital market infrastructure is built abroad.
- Forward look: Regulators do not need to choose between investor protection and innovation. They need to provide timely, workable rules that allow responsible activity to develop in the United States.
That is no longer
Tokenization is the process of representing traditional financial assets on blockchain networks so that ownership, transfer and related market functions can operate on more modern, programmable rails. A tokenized Treasury bond is still a Treasury bond. A tokenized share of a real estate fund is still a share of a real estate fund. The assets themselves do not change, but the rails beneath them do.
That distinction matters. Tokenized securities remain subject to the same investor protections that apply today. The debate in Washington centers on how to apply the law to market infrastructure in the era of tokenization. Regulators do not need to choose between investor protection and innovation. They need to provide timely, workable rules that allow responsible activity to develop in the United States.
So far, that clarity has been too slow to arrive.
Some incumbent players have entered the fray, aiming to protect their legacy systems — and profit margins — rather than adapt to new innovations. Citadel Securities recently submitted a
Securities laws regulate intermediaries because intermediaries exercise custody, control and discretion over user assets. Validators, autonomous smart contracts and noncustodial software do not do those things. Extending intermediary regulation to neutral infrastructure would impose compliance obligations on systems that have no mechanism to meet them.
That would not protect investors. It would foreclose the very modernization these markets need.
The SEC already has tools to support responsible innovation in this space, including exemptive relief, no-action letters and iterative pathways — the same tools it has used when encountering past innovations in financial markets. U.S. capital markets have modernized in waves before. In-person floor trading gave way to electronic markets in the 1990s, making transactions faster, cheaper and more accessible. Paper settlement gave way to electronic clearing. Each transition made markets more efficient and expanded the number of people who could participate.
Tokenization is the next phase of that same modernizing process. But it cannot reach its full potential in the United States if regulators apply old categories to new infrastructure without regard to how that infrastructure actually works.
A number of large banks, the Federal Reserve of New York and Swift participated in a proof of concept of a shared ledger that would allow cross-border transactions to settle instantly in U.S. dollars — with regulators literally in the loop.
Today's financial system still runs largely on rails built for an earlier era, including batch-processing logic, siloed databases, and settlement windows that made sense for a time when trades were executed by phone and confirmed by fax. Most Americans assume that once a transaction is executed, it is complete. In reality, settlement often takes time. Proceeds from a stock sale may not be fully available until the next business day. Transfers between accounts can be delayed by cut-off times, weekends and handoffs between institutions. Behind-the-scenes, multiple intermediaries must reconcile records and manage risk before a transaction is finalized.
Tokenization offers a more efficient path. By placing assets and ownership records on shared, programmable infrastructure, it enables transactions where transfer and payment can occur in closer alignment, reducing delays, improving transparency and minimizing the need for duplicative reconciliation. Blockchain networks can make records self-executing and universally verifiable. Smart contracts can automate compliance checks and transfer restrictions, reducing costs and operational risks. Importantly, these efficiencies can also lower transaction and administrative costs for consumers by reducing the number of intermediaries and manual processes involved in financial transactions.
Regulatory ambiguity will not stop this development. It will push it elsewhere.
The institutional financial world is not waiting. BlackRock launched its
These developments should be welcomed, not forced into regulatory limbo. The question is not whether tokenized markets should be subject to rules. They should. The question is whether regulators will provide rules appropriately tailored to the functions being performed, rather than treating neutral blockchain infrastructure as if it were a traditional intermediary.
The United States built the electronic trading infrastructure that made its capital markets the most competitive in the world, giving Americans the opportunity to build wealth for future generations. Tokenization is the next version of that opportunity — one that can modernize the rails beneath our financial markets and expand who gets to participate in them.
But opportunity alone will not secure American leadership. If regulators fail to provide clear pathways for tokenized markets to develop here, they should not be surprised when the next generation of capital market infrastructure is built abroad.
