Introduction
America’s capital markets lead the world because they adapt. Paper certificates gave way to book‑entry records. Trading floors gave way to electronic markets. Manual processes gave way to faster settlement, automated clearing, and global access. Each step raised fair concerns. Each step required guardrails. But America stayed ahead because we did not treat every new tool as a threat to the old system.
Tokenization is the next step in that history.
What Are Tokenized Securities?
Tokenized securities are digital assets that represent ownership in traditional securities – stocks, bonds, or other financial instruments – but are recorded on blockchain ledger technology rather than legacy reconciliation systems. In practice, tokenized securities can take multiple forms. They may be fully backed by the equivalent U.S. –listed assets, they may be notes or structured products that track an underlying equity, or they may be direct entries in a distributed ledger that mirrors the shareholder register.
Key distinctions:
- Market‑infrastructure tokenization: The underlying security lives within the existing legal and operational framework – broker‑dealers, custodians, DTC, transfer agents. Blockchain is used for back‑office functions such as reconciliation, collateral monitoring and transfer controls.
- Customer‑driven tokenization: The product is built around an investor‑centric use case. Often structured as notes, ETFs, or other equity‑linked instruments that are backed by the underlying asset but trade on‑chain.
- Issuer‑sponsored tokenization: The issuer and its transfer agent support direct tokenized ownership. This model can connect tokenized records to existing shareholder systems and corporate‑action processes.
Why Competition Matters
Innovation thrives when investors have choices. For tokenized securities, Washington shouldn’t pick winners before the market has a chance to learn what works, argues Patrick McHenry, vice chairman at Ondo Finance and former Chairman of the House Financial Services Committee. The current debate over tokenized stocks has centered on a basic question: what is the proper form for securities in the U.S. market? Some argue tokenization should happen primarily through existing market infrastructure. Others have introduced products in various forms backed by U.S.‑listed securities designed to meet the needs of the fast‑growing cohort of investors that prefer to invest on‑chain. Still others point to issuers and transfer agents as the preferred pathway.
Three Models to Consider
1. Market‑Infrastructure Tokenization
The underlying securities remain within the existing legal and operational framework: broker‑dealers, custodians, securities intermediaries, DTC, and related records. Blockchain can then be used for recordkeeping, reconciliation, collateral monitoring, transfer controls, and operational efficiency. This approach does not require abandoning the existing U.S. securities market system. It uses technology to improve specific parts of it.
2. Customer‑Driven Tokenization
These products start from a different place: what does the investor want to accomplish? Some products may be notes or other instruments designed to track the performance of U.S.‑listed stocks or ETFs, supported by underlying securities and collateral. Others may use tokenized records for entitlements held through intermediaries. These products are not the same as directly registered shares. They should not be marketed as if they are.
3. Issuer‑Sponsored Tokenization
A company and its transfer agent support tokenized ownership directly. This may be the right model for many issuers. It can connect tokenized records to shareholder systems and support familiar processes for corporate actions, recordkeeping and communications.
Why a Single, Approved Model Is Risky
Tokenized securities are not one thing. They can and do take different forms, and carry different rights. They can sit in different parts of the market structure. Treating them all the same will lead to bad policy and worse products for investors and issuers alike, ultimately putting the U.S. capital markets at a competitive disadvantage globally.
Familiar forms of market exposure, including brokerage‑held securities, ETFs, depository receipts, structured notes, and other equity‑linked instruments, are well‑established parts of the market today. Tokenization alone does not make them more or less legitimate. Their economic and legal structures should dictate their regulatory treatment.
Regulatory Considerations
America should avoid both mistakes. Open markets and regulated markets are not opposites. The U.S. has the deepest securities markets in the world because it combines investor protection with competition, capital formation, and adaptability. That balance is hard to maintain. But it is the reason companies raise capital here, investors around the world seek access here, and innovation happens here rather than offshore.
A more customer‑centric approach to tokenization can support that strength. It can connect global demand back to U.S. assets and U.S. liquidity. It can give investors clearer records and more portable products. It can make collateral and entitlements easier to monitor. It can improve transparency without discarding the legal protections embedded in the current system.
Current Experiments in the Market
Market participants are already experimenting with different models. Some are built around existing securities infrastructure. Others are on‑chain products directly and indirectly backed by U.S.‑listed securities and ETFs. Still others are issuer‑led.
Those differences matter. They are evidence that the market is working through the right questions.
The Path Forward
For years, I argued in Congress that digital asset policy needs clear rules of the road. That remains true. Clarity protects consumers and investors. It also keeps innovation in the United States. But clear rules should not mean forcing emerging new products into a legacy framework. Nor should they mean letting any one group decide which model is allowed to exist. The point is not to pick a single winner at the starting line. The point is to let different models compete on substance and provide optionality to meet the varying needs of investors and issuers.
That is how American markets work best. Tokenized securities markets do not need more gatekeepers. They need clear distinctions, strong controls, and room for responsible competition.
Conclusion: Competition Over Capture
That is how America has led, and how it can continue to lead, financial markets into the future. Tokenized securities markets do not need more gatekeepers. They need clear distinctions, strong controls, and room for responsible competition.
FAQs
1. What are tokenized securities?
Tokenized securities are digital tokens that represent ownership in traditional financial instruments like stocks, bonds, or ETFs. They are recorded on blockchain ledgers, offering benefits such as faster settlement, transparency, and global access while maintaining the legal rights of the underlying asset.
2. Why is competition important for tokenized securities?
Competition ensures that the best structures emerge for investors and issuers. It prevents any single regulator or gatekeeper from imposing a one‑size‑fits‑all solution, encouraging innovation that meets diverse market needs while preserving investor protections.
3. How does regulation affect tokenized securities?
Regulatory treatment depends on the security‑level economic and legal structure. Market‑infrastructure tokenization, customer‑driven tokenization, and issuer‑sponsored tokenization each have distinct compliance requirements. Clear rules are essential to protect investors without stifling innovation.
