Public Stocks on Public Blockchains: How Do We Get There?

Tokenization is the most significant opportunity for equities markets in decades.

While the economy has largely transitioned from its pre-internet analog structures and moved online, financial markets remain woefully stuck in a time warp. That U.S. markets are the deepest and most liquid in the world despite being held back by ancient technology underscores the opportunity that moving markets onchain presents. Part of the reason for this slothful transition is regulatory; for years now, the SEC has hindered, harried, or even blocked efforts to tokenize securities.

A new day is now dawning, however, as SEC Chair Atkins laid out last month in his speech on Project Crypto, an “initiative to modernize the securities rules and regulations to enable America’s financial markets to move on-chain.” A key part of Project Crypto is supporting the tokenization of the equities markets. Only by harnessing technological advancements, while preserving the securities laws’ foundational principles, can we ensure that the United States will remain the preeminent jurisdiction for capital markets.

With that in mind, Paradigm yesterday filed a comment letter with the SEC on how the opportunities posed by tokenization can be fully realized. I want to highlight two of the most important suggestions in the letter.

First, we lay out three principles for modernizing securities regulations for tokenization: any regulatory changes should be targeted, updates should be technology neutral regarding the assets themselves, and the updates must take into account the unique characteristics and technical capabilities of crypto. We agree with Commissioner Hester Peirce that “tokenized securities are still securities.” Putting a share of Apple stock on the blockchain does not instantly transform that stock into a non-security. At the same time, technology does matter. As Europe’s regulators often say, different technology does require different regulations and you cannot flatten all new technological innovations into an existing box. Juggling all three of these principles is difficult, but we believe it is critical if tokenization is to truly benefit America’s consumers and investors.

Second, we propose ways to allow for IPOs to occur onchain. If we are going to embrace tokenization, there is no reason to exclude the process that onboards stocks to the public markets from tokenization. To do otherwise would be akin to requiring people ride horses to the end of their driveways, after which point they may enter their car.

To allow for onchain IPOs, however, a few regulatory actions are necessary. Beyond the fact that the SEC should affirm that a tokenized security is still a security under federal law, there should also be changes to how transfer agents are regulated. At present, transfer agents are required as a matter of recordkeeping, but the chain can serve this role as well if not better. Thus, the SEC should either allow issuers to be their own transfer agents, create a new class of registrations for transfer agents on the blockchain, or eliminate any superfluous regulatory requirements for transfer agents onchain. What matters here is less the exact road taken towards onchain IPOs, however, but instead the end goal: that onchain IPOs are well-regulated, safe, accessible, and broadly available.

Of course, we recognize that this comment, like tokenization itself, is not without its detractors. Per Reuters, “A group representing the world's biggest stock exchanges has called on securities regulators to clamp down on so-called tokenised stocks, arguing that the blockchain-based tokens create new risks for investors and could harm market integrity.” This fear is misplaced. Putting equities on the blockchain will allow for greater transparency, better recordkeeping, faster settlement, and additional competition to these existing exchanges.

We understand that change can be frightening, especially to large incumbents. But we believe the benefits of tokenized stocks will accrue to not merely the vast majority of market participants, but the vast majority of Americans. To delay the transition to tokenized stocks would ultimately harm the very consumers and investors the SEC is most duty-bound to protect. We will keep advocating for the SEC and all regulators to embrace the promises of crypto and find new ways to bring competition, liquidity, new choices, and new technologies to consumers and investors.

Read our full comment letter here.