Tokenization of Financial Assets: Key Regulatory, Market, Legal, and Legislative Considerations

Tokenization—the representation of assets as digital tokens on a decentralized ledger or blockchain—has attracted significant attention among market participants, particularly in the financial sector. Analysts predict that tokenized assets, driven in part by the prospect of greater efficiency and accessibility in the financial system, could be valued between $10 trillion and $16 trillion by 2030.^[1] Attorneys advising clients in this dynamic area of the law need to stay informed about the complex issues and changes in this space.

This piece examines a confluence of key regulatory, market, legal, and legislative issues driving tokenization adoption in financial markets through the lens of the prevailing competition between incumbents and new entrants, as stakeholders balance the technology’s value proposition against its idiosyncratic risks. It provides a snapshot and a useful framework for analyzing the rapidly evolving developments in digital assets as regulators and policymakers attempt to calibrate the optimal purview of regulation when it is at odds with technological development, in a manner that maintains market integrity, fosters competition, and supports a bedrock principle of our capitalist system in which market forces dictate winners and losers.

Essentially, tokenization is a new technology applied to financial products and services. As with the dematerialization of paper stock certificates to uncertificated form, the introduction of electronic exchanges, and other innovations, the use of blockchain and tokenization as a new medium for transferring value introduces distinct risks and opportunities juxtaposed to its traditional counterpart of book-entry or centralized ledgers.

Core value propositions of tokenization include:^[2]

• programmability—the ability to embed code-based instructions that automatically execute when predetermined triggering conditions are met;
• fractionization—dividing assets into smaller, tradable units;
• atomicity—the execution of multiple inseparable transactions, such that either all occur or none occur; and
• composability—the ability to combine and reuse programmed instructions in new ways to develop different products and services.

While tokenization aims to provide a more direct, trustless, and dynamic way to transfer value, blockchain technology is in discord with various established regulatory frameworks and legal constructs. Specifically, the current financial, legal, and regulatory system relies on conventional custody of assets and a network of intermediaries to facilitate transactions and to assign legal responsibility and accountability, practices that are often incongruous with blockchain-based systems.

Differentiating Factors Between Tokenization and Blockchain-Based Systems and Conventional Book-Entry Systems

Pinpointing the key differences between tokenization and blockchain-based systems, and conventional book-entry systems, helps advance the conversation. Specifically, on a blockchain, ownership and asset transfers are not recorded and validated centrally on a master ledger but rather on every computer node running the software, collectively, in accordance with the agreed-upon protocol. As such, the authority of the determinative entity (the blockchain or code) that establishes ownership is decentralized. This creates idiosyncratic risks—notably, the relative immutability of transactions, which makes fraud and errors difficult to reverse.^[3] Additionally, blockchain infrastructure poses various custody risks, including the risk that the loss or theft of the private key associated with an asset can result in irreversible loss.^[4] Furthermore, blockchain’s decentralized features create challenges in ascribing legal responsibility and accountability to intermediaries and market participants.

Intrinsically, the core value proposition of tokenization—to increase the dynamism and velocity of asset transfers and reduce opacity in financial markets—rests on the diffusion of authority within the network and the ubiquity of the ledger among participants. These same forces also create potential friction points in the financial system and discord with traditional legal and regulatory frameworks. Policymakers are balancing the need to provide a conducive pathway for new technology to compete (including adjusting regulatory approaches when technology renders certain constructs obsolete) against other mandates and priorities.

Primary Ways to Structure a Token

Principally, there are three ways to structure a token: as a token issued by the issuer or its representative of the underlying asset in the form of a digital twin token (“DTT”) or a digital-native token (“DNT”) or through various models of a third-party token (“TPT”). In a DTT model, an issuer issues a token that serves as a digital representation of an asset on a blockchain that exists or was issued off-chain, and the master record of ownership of the asset is maintained in traditional book-entry form. In a DNT model, a token represents an asset issued on-chain, and a decentralized ledger or blockchain serves as the master record of ownership. A TPT, by contrast, does not derive from the issuer of the underlying asset or its affiliate. This narrow framework is not meant to be exhaustive; rather, it highlights key issues in tokenization.

SEC’s Directives on Tokenization

Primarily, there are two main potential development models for tokenization: one in which the technology eliminates the need for certain intermediaries (clearinghouses, exchanges, brokers, dealers, etc.) and upends bedrock principles such as custody; and another in which market intermediaries incorporate the technology into their products and services.

Proponents of blockchain technology argue that today’s market infrastructure is the legacy of decades of layering intermediaries and regulations atop one another in pursuit of policy goals before better technology existed.^[5] This raises an important point for analysis: in the absence of legislation, what posture should regulators adopt when confronted with new technology that challenges the merits of the current regulatory infrastructure and creates market competition?

The U.S. Securities and Exchange Commission (“SEC”) Statement on Tokenized Securities issued on January 28, 2026 (“Statement”),^[6] along with other enactments, provides important clarity and highlights the varied regulatory approaches to balancing technological developments with regulatory objectives and priorities. Key points of the Statement include the following:

• The only difference between a security issued by an issuer (or its agent) as a DNT and a security issued in traditional form is that instead of maintaining the master security-holder file through conventional book-entry, the issuer (or its agents) maintains it on one or more decentralized ledgers or blockchains.
• The format in which a security is issued (e.g., paper stock certificate, digital token) or the method by which holders are recorded (e.g., book-entry, decentralized ledger) does not affect the application of federal securities laws. Stated differently, regardless of form or recordkeeping method, if securities laws are implicated, market participants must comply with federal securities laws.
• An issuer (or its agent) recordkeeping system can include a combination of decentralized ledger technology and a conventional book-entry database.
• An issuer may issue its securities in various classes and formats, enabling security holders to hold them in different forms, including a combination of traditional and tokenized formats.
• The Statement applies substance-over-form principles. If a tokenized security is substantially similar in character to a security issued in traditional format and holders of the tokenized security enjoy substantially similar rights and privileges, the tokenized security may be considered of the same class as the security issued in traditional format.
• Third parties unaffiliated with an issuer of a security could tokenize the unaffiliated issuer’s security.
• A TPT may or may not represent an ownership interest in or a contractual obligation of the issuer of the underlying security and, as such, may or may not confer upon the holder of the TPT any rights as a holder of the underlying security.
• The structures of TPTs may vary and include custodial tokenized securities, in which an unaffiliated third party issues a token representing the underlying security held in custody, and the TPT evidences the holder’s ownership interest in the underlying security.
• A TPT may be structured to provide synthetic exposure to an underlying asset, such as a tokenized securities–based swap, but must comply with applicable securities laws.

The Statement adopts a merit- and technology-neutral tone, stating that the format in which a security is issued, or whether holders are recorded on a centralized or decentralized ledger, does not affect the application of federal securities law. It emphasizes that “regardless of its format, the Securities Act requires that every offer and sale of a security must be registered with the Commission unless an exemption from registration is available.”^[7] The Statement deftly opens the door for issuers to tokenize their securities, aiming to establish fair competition between centralized and decentralized ledgers and to reduce regulatory arbitrage opportunities by applying a substance-over-form approach to federal securities law, thereby fostering an environment where market forces can determine outcomes.

The Statement is silent on the interplay between market intermediaries and tokenization and blockchain technology. Theoretically, the Statement provides an avenue for an issuer to issue its securities through a direct listing as a DNT, such that transferring the DNT results in a title transfer recorded on the selected blockchain. In this admittedly oversimplified hypothetical, market intermediaries are removed from the market infrastructure as much as possible, establishing a close nexus between the buyer and the seller of the securities involved in the transaction.

Applying the substance-over-form principle from the Statement, presumably, in the hypothetical presented above, an issuer would need an “exchange”^[8] as defined by the Securities Exchange Act to provide a marketplace that brings together purchasers and sellers of its securities. The posture of the Statement suggests that, regardless of form, a function that performs commonly known tasks of a stock exchange will be treated as such under the securities laws.

To the point, on July 22, 2026, SEC Commissioner Hester M. Peirce issued a statement, stating in part that “[m]oving activities that fall within the scope of the federal securities laws onchain, as a general matter, does not take those activities outside the scope of the laws the Commission administers.”^[9] Although Peirce’s statement is not formal SEC guidance, it offers valuable insight into how the flexible-by-design federal securities laws and regulatory principles are being applied to new technological innovations such as blockchain-based vaults. Through her statement, Peirce encourages market participants whose activities fall within the securities laws to work with the SEC “to find a compliant path forward,”^[10] which could lead to a series of no-action letters for various vault use cases.

The substance-over-form approach is evolving in interesting ways in the context of blockchain technology. Conventionally, the concept is used to determine whether a set of facts and circumstances warrants applying a regulatory regime. Subtly, blockchain technology is creating a scenario in which technological advancements might achieve the substance of a regulatory objective, rendering certain regulatory forms or constructs superfluous.

Illustratively, thought leaders in the space proffer that the SEC’s custody rule, operationalized through the qualified-custodian requirement, should be viewed functionally as a mechanism to advance a set of regulatory objectives—specifically, to protect client assets against misappropriation, commingling, insolvency exposure, fabricated reporting, and unchecked adviser control. As such, the rule should not favor a particular form or construct.^[11] Stated differently, regardless of form, if a structure satisfies a rule’s regulatory objectives, it should be afforded the same regulatory imprimatur as its counterparts.

Entrepreneurs are developing on-chain vault applications to fulfill the core function of the custody rule promulgated under Section 206(4) of the Investment Advisers Act for tokenized securities. The SEC’s posture toward blockchain-based applications that satisfy the investor protection and prudential objectives of qualified custodians will significantly shape the competitive landscape. If the SEC extends the substance-over-form principle to assess whether a product or service meets statutory objectives and mandates regardless of form, competition between blockchain-based vault systems and traditional custodians for market share is likely to intensify. Recently, through a series of statements, no-action relief, rule proposals, and functional equivalents of a regulatory sandbox, the SEC has shown a propensity to provide pathways for decentralized systems to bring products and services to market within the current regulatory framework.

On March 18, 2026, the SEC approved the Nasdaq Stock Market LLC proposed rule change to enable the trading of securities on the exchange in tokenized form.^[12] Similarly, on January 19, 2026, the New York Stock Exchange, Inc., announced that it is developing a platform for trading and on-chain settlement of tokenized securities, for which it will seek regulatory approvals. The platform will enable 24/7 operations, instant settlements, and stablecoin-based funding.^[13]

Additionally, on December 17, 2025, the SEC’s Division of Trading and Markets staff issued a statement providing its views on the application of paragraph (b)(1) of Rule 15c3-3 under the Exchange Act regarding broker-dealers’ responsibilities when they are in custody of “crypto asset securities” for customers.^[14] As with exchanges, if a market participant in a blockchain ecosystem meets the statutory definition of a broker-dealer, it will be subject to the securities laws; however, recent SEC directives provide an avenue for broker-dealers to engage with the technology. To the extent that tokenization and blockchain technology eliminate the need for broker-dealers, market forces will presumably phase them out.

Market Adoption

As tokenization gains momentum, market participants are working to leverage its potential benefits while managing its risks. On December 11, 2025, in a no-action letter, the SEC granted the request of the Depository Trust Company (“DTC”) to confirm that the Division of Trading and Markets staff would not recommend enforcement action for violations of applicable securities laws if its parent company, the Depository Trust and Clearing Corporation (“DTCC”), launched its pilot program for securities tokenization.^[15] DTCC provides custody, clearing, and settlement services to the financial industry. In 2020, DTCC processed $2.3 quadrillion in securities; and as of 2025, DTC custodies over $100 trillion in securities.^[16]

Broadly, the no-action letter provides a three-year regulatory sandbox for DTCC to launch its Pilot Tokenization Service Program. Strategically, it gives DTCC an advantage as the first major mover in the space. The program allows participants to elect to convert their securities entitlements in the Russell 1000 index and other qualified securities into a DTT^[17] on preapproved blockchains and using preapproved wallets. Any transfer of a DTT would be tracked and made visible to DTC through its LedgerScan software.

The program establishes two layers for recording transactions. The primary layer functions as the definitive record of ownership and will be maintained in book-entry form. The program does not alter the ultimate custodian of record for the “subject securities” or the legal framework governing their ownership, and DTC will continue to serve as the “securities intermediary” for the subject securities in accordance with Article 8 of the Uniform Commercial Code (“UCC”). The second layer enables participants to conduct peer-to-peer transactions on preapproved blockchains without DTC executing these transactions, with all transactions eventually reconciled on the primary layer. The program enables participants to leverage the benefits of blockchain and tokenization technology without forgoing the value of a central securities depository (“CSD”) to help mitigate risks associated with the technology.

The no-action letter highlights the development models for tokenization and the interaction between decentralized ledgers and market intermediaries, such as CSDs and clearing agencies. Similarly, on August 12, 2026, the SEC staff granted no-action relief to Franklin Templeton–affiliated funds, permitting the custody of tokenized shares of certain money market funds without complying with certain provisions of Rule 17f-2, promulgated under Section 17(f) of the Investment Company Act. Importantly, the administrative controls allow transfer agents “to correct errors or unauthorized transactions, freeze or mitigate wallet records if necessary, and maintain or restore the official record of share ownership in the Integrated System.”^[18] This marks another step in the SEC’s growing treatment of blockchain technology as a recordkeeping mechanism, functionally equivalent to traditional book-entry.

During these early stages of tokenization development, market participants are leveraging tokenization’s benefits while maintaining the advantages of traditional market structures to minimize risk. As blockchain technology evolves to reduce its idiosyncratic risks, as long as the regulatory framework stays flexible, market forces will help dictate the role of intermediaries in market infrastructure.

Commercial Law Implications

The law’s significance for intermediaries in the custody of tokenized assets extends beyond the securities law regulatory framework and has significant commercial law implications. CSDs dominate the custodial services market by volume and are subject to numerous laws and regulations.^[19] CSDs are typically designated as “financial market utilities” and are part of a broader network of subsidiaries of “custodial banks” regulated by the Office of the Comptroller of the Currency. If a CSD provides clearing services, it also falls under Section 17A of the Exchange Act. Additionally, as securities intermediaries that custody securities, CSDs are governed by Article 8 of the UCC for commercial law purposes, which provides a comprehensive set of investor protection rules. Part 5 of Article 8 was codified in 1994 to accommodate market trends toward indirect holding of securities.^[20]

Tokenization and blockchain technology will have to contend with certain foundational aspects of commercial law principles that were designed with traditional book-entry as the primary means of recording and transferring value. Stated succinctly, fundamental principles of commercial law are based on established concepts of custody, intermediaries, and recordkeeping that do not easily align with blockchain infrastructure. As blockchain technology becomes more widely adopted, how these challenges are addressed will affect tokenization’s penetration rate in financial markets.

Notably, the UCC 2022 Amendments, highlighted by Article 12, modernize the UCC to “accommodate emerging technologies, such as artificial intelligence, distributed ledger technology, and virtual currency.”^[21] The revised UCC introduces a new class of electronic property, controllable electronic records, which presumably covers a broad range of digital assets. In essence, the amendments aim to provide pathways for emerging technologies, including blockchain-based custody systems, to use the UCC infrastructure—a critical pillar of commercial transactions. To date, thirty-two jurisdictions have adopted these amendments.^[22] The manner in which Article 12 is implemented will be instrumental in the proliferation of tokenization.

Legislative Activities

Recent legislative activity underscores the importance of the evolving securities law regulatory regime for the development of blockchain technology and digital assets. Broadly, policymakers employ four approaches to address new technologies that enter the market and conflict with the existing regulatory or legal framework: prohibition, regulation by enforcement, ex ante nonbinding guidance and regulatory rulemaking, and legislative enactment. These approaches reflect risk tolerance, governing philosophies, and the potential impact of the new technology. Each approach has its advantages and disadvantages, ranging from facilitating innovation and minimizing uncertainty to mitigating market and prudential risks.^[23]

On July 17, 2025, the House of Representatives passed the Digital Asset Market Clarity Act (“CLARITY Act”); and on July 22, 2026, Senate Republicans released their latest version of the bill. On September 15, the bill failed a procedural Senate vote to advance, significantly reducing the likelihood of comprehensive federal market-structure legislation for digital assets in the near future—and further prompting regulators to fill the gap.^[24] In the absence of comprehensive legislation, the SEC is expected to continue applying the securities laws in a post-Chevron era, in which regulators can no longer rely on judicial deference to an agency’s statutory interpretation^[25] to regulate blockchain technology and tokenization through interpretive releases and rulemaking.

On March 17, 2026, the SEC issued an interpretive release clarifying how federal securities law applies to certain crypto assets and transactions involving them (“2026 Interpretive Release”).^[26] Among other things, the 2026 Interpretive Release provides a taxonomy that defines five categories for crypto assets: digital commodities, digital collectibles, digital tools, stablecoins, and digital securities. Except for digital or tokenized securities, the enumerated types of crypto assets are not viewed as securities in and of themselves, but they can be offered and sold as part of an investment contract, thereby making them securities under the Howey test.^[27] Additionally, the 2026 Interpretive Release provides guidance on when crypto assets are no longer considered investment contracts and on the types of representations or promises that create reliance under the Howey test.

Additionally, on August 18, 2026, the SEC released its proposed rules, “Regulation Crypto Assets,” “to create a tailored offering regime for certain investment contracts involving crypto assets.”^[28] Subsequently, on September 1, 2026, the SEC released its proposed modernized rules for registered transfer agents.^[29] The proposed rules revisit the current regulatory framework “to reflect transfer agents’ current processes and operations, including the use of electronic communications and blockchain technology in connection with securities offerings and the transfer of shares.”^[30]

Most recently, on October 1, 2026, the SEC proposed new rules and amendments for the custody of crypto assets under the Investment Advisers Act of 1940 and the Investment Company Act of 1940.^[31] Among other things, the new rules provide a tailored framework and a pathway for advisers and regulated funds to self-custody crypto assets and to maintain client or regulated fund crypto assets with a state trust company. Conceptually, the proposed rules and amendments aim to modernize custody rules and adopt a substance-over-form approach to the custody rules’ objectives of protecting client assets from loss, theft, misuse, and misappropriation. In a recent statement, Chairman Paul S. Atkins emphasized that only Congress can ensure that regulations in this space establish a durable framework for blockchain technology and decentralized ledgers.^[32] This underscores that interpretive releases convey the SEC’s current views and that regulatory rules are subject to change, whereas legislative actions are more enduring.

Conclusion

As tokenization gains traction, attorneys must have a keen understanding of the intersectionality of key regulatory, market, legal, and legislative issues that influence the technology’s adoption in the financial markets. They should also be familiar with the core features tokenization offers, the problems it aims to solve, its evolving technology stack, and the unique regulatory and legal challenges it faces relative to conventional systems so that they can provide value-added counsel in this rapidly evolving area of the law.

For example, the evolving legal and regulatory landscape and its impact on the programmability and composability features of tokenization, as market participants attempt to leverage developments in artificial intelligence, smart contracts, and decentralized autonomous organizations toward the technology’s use cases, will help drive tokenization’s proliferation rate. Attorneys with a thorough understanding of these issues will play an important role in helping clients navigate any discord between the current market infrastructure and the tokenization of financial assets. A holistic view and an understanding of the interplay of these issues will be an invaluable asset in helping clients meet their short- and long-term objectives.

1. Broadridge Fin. Sols., Inc., Next-Gen Markets: The Rise and Reality of Tokenization (2025). ↑

2. Int’l Org. of Sec. Comm’ns, Tokenization of Financial Assets (2025). ↑

3. Meredith Somers, The Risks and Unintended Consequences of Blockchain, MIT Sloan Expert Insights (June 18, 2019). ↑

4. Trevor Laurence Jockims, For Bitcoin Bulls Who Self-Custody Crypto, the Global Risks Are Growing, CNBC (Apr. 6, 2025). ↑

5. Tuongvy Le & Austin Campbell, Crypto and the Evolution of the Capital Markets, SSRN (May 12, 2025). ↑

6. Press Release, Div. of Corp. Fin., Div. of Inv. Mgmt. & Div. of Trading & Mkts., U.S. Sec. & Exch. Comm’n, Statement on Tokenized Securities (Jan. 28, 2026). ↑

7. Id. ↑

8. Definitions and Application, 15 U.S.C. § 78c(a) (definition of exchange). ↑

9. Statement, Hester M. Peirce, U.S. Sec. & Exch. Comm’r, Headstands and Summervaults: A Statement on Crypto Vaults and Lending Strategies (July 22, 2026). ↑

10. Id. ↑

11. Chris Brummer & TuongVy Le, Vaults as Qualified Custodians: A Joint White Paper (June 2026). ↑

12. Self-Regulatory Organizations, Exchange Act Release No. 34-105047 (Mar. 18, 2026). ↑

13. Press Release, Intercont’l Exch., The New York Stock Exchange Develops Tokenized Securities Platform (Jan. 19, 2026). ↑

14. Statement, Div. of Trading & Mkts., U.S. Sec. & Exch. Comm’n, Statement on the Custody of Crypto Asset Securities by Broker-Dealers (Dec. 17, 2025). ↑

15. Depository Trust Co., SEC No-Action Letter (Dec. 11, 2025). ↑

16. Press Release, Depository Trust Co., DTCC Central Securities Depository Subsidiary Surpasses $100 Trillion in Assets Under Custody, Marking Historic Milestone (June 18, 2025). ↑

17. As defined earlier in this article. ↑

18. Franklin Templeton, SEC No-Action Letter (Aug. 12, 2026). ↑

19. Financial Market Infrastructures and Critical Service Providers, BIS Data Portal (2024). ↑

20. Carl S. Bjerre, Sandra M. Rocks, Edwin E. Smith & Steven O. Weise, Missing an Opportunity: Cryptocurrency Exchanges and Their Customers Should Consider Using UCC Article 8, ABA Bus. L. Today (Apr. 3, 2023). ↑

21. 2022 Amendments to UCC (Unif. L. Comm’n 2022). ↑

22. Id. ↑

23. Florence G’Sell, Balancing Code and Law: Governance and Policy Challenges of Blockchain (2026). ↑

24. Stephen T. Gannon & Elizabeth Lan Davis, The Long, Winding, and Rocky Road Toward Crypto Clarity, Davis Wright Tremaine LLP (Sep. 21, 2026). ↑

25. Loper Bright Enters. v. Raimondo, 603 U.S. 369, 144 S. Ct. 2244, 219 L. Ed. 2d 832 (2024). ↑

26. Application of the Federal Securities Law to Certain Types of Crypto Assets, Exchange Act Release Nos. 33-11412, 34-105020 (Mar. 17, 2026). ↑

27. See SEC v. W.J. Howey Co., 328 U.S. 293 (1946); Frantz Jacques, Intersectionality of Regulatory Law and Development of Digital Assets, Bloomberg L.: Prac. Guidance (Dec. 2024). ↑

28. Regulation Crypto Assets, 91 Fed. Reg. 54510 (proposed Aug. 21, 2026). ↑

29. Press Release, U.S. Sec. & Exch. Comm’n, SEC Proposes to Modernize Rules for Registered Transfer Agents (Sep. 1, 2026). ↑

30. Id. (citing Chairman Atkins). ↑

31. Adviser and Regulated Fund Custody Rules, U.S. Sec. & Exch. Comm’n (proposed Oct. 1, 2026); Adviser and Regulated Fund Custody Rules, 91 Fed. Reg. 63870 (proposed Oct. 6, 2026). ↑

32. Statement, Paul S. Atkins, U.S. Sec. & Exch. Comm’n Chairman, Regulation Crypto Assets: A Token Safe Harbor (Mar. 17, 2026). ↑