Modern Markets, Enduring Protections: Protecting Investors in Tokenized Securities

• Robust investor protections are the foundation of the success of the U.S. securities markets, ensuring market integrity and investor confidence. While modernization and tailoring of existing rules will be necessary to accommodate new technologies, existing investor protections must be extended to any markets that issue and trade tokenized securities. Doing so is critical to establishing investor confidence in markets for tokenized securities, ensuring broad participation and their long-term success.
• It is particularly important that investor protections derived from the current broker-dealer, exchange and custody frameworks under the federal securities laws-including structural limitations on vertical integration and separation of core functions-be applied to tokenized securities markets in order to mitigate potential conflicts of interest. These long-standing conflicts of interest requirements have deep foundations, yet have also evolved as new technologies, market participants, and other market factors have changed.
• Investor protections also require a clear understanding of when a token is and is not a security. It is critical that policymakers adopt consistent taxonomies and definitions rooted in the underlying economic characteristics of an asset or transaction, rather than its technological form.
• A carefully designed innovation exemption or regulatory sandbox framework can help supplement, though not replace, a broader process of regulatory modernization across all asset classes to accommodate tokenized securities. Guardrails on such a framework and projects that operate under it are also necessary to protect investors and maintain market integrity.

The Foundational Role of Investor Protections in the U.S. Securities Markets

The U.S. securities markets are not only the largest but also the deepest, most liquid, and most efficient in the world. Their strength is built on broad investor confidence in the efficiency, resiliency, and integrity of the markets. This investor confidence derives from the well-established set of protections that both retail and institutional investors enjoy under U.S. securities laws and regulations. As business models and markets evolve with the introduction of new technologies and products, policymakers' commitment to protecting investors from conflicts of interest must remain paramount, so that the U.S. can maintain its competitive advantage among global markets. The core investor protections embedded in market structure for equities and other asset classes provide the baseline for digital markets in general and must be reflected in markets and platforms that facilitate issuance or trading of tokenized securities. Without these protections, it will be difficult for these markets to build long-term investor confidence in digital asset innovations and blockchain-based operating models, undermining the potential benefits offered to investors.

In a recent letter to the SEC's Crypto Task Force, we discussed the important benefits and protections that current securities regulation and market structures provide for investors, issuers, and other market participants. These protections are based on several key principles, including:

• Market Interconnectivity and Fair Access: trading venues should be linked within the same asset class to reduce market and liquidity fragmentation, and market services (e.g., listings and trading) should be open to all eligible participants on objective, non-discriminatory terms.
• Price and Market Transparency: investors must have real-time and post-trade transparency regarding the prices and sizes available to trade; there should also be transparency around order routing and execution quality, including any financial incentives related to investor orders or trades received from third parties.
• Proprietary Trading / Trading Ahead: platforms that permit proprietary trading by entities owned by or affiliated with the platform should disclose the nature, purpose, and timing of such trading activity and have procedures to prevent trading ahead of investor orders.
• Best Execution: investors should be able to obtain the most favorable overall terms reasonably available for orders they place with brokers or platforms that include broker functionality, based on factors such as price, transaction costs, speed and likelihood of execution and settlement, and market impact. Best execution should be demonstrated through public disclosures (e.g., around order routing and execution quality statistics that are based on common objective measures).
• Market Surveillance, Books-and-Records & Audits: market surveillance mechanisms, together with robust books-and-records and auditing requirements, are necessary to prevent market manipulation and other misconduct that could harm investors.
• Investment Recommendations: any recommended transactions or strategies must be in the best interest of retail customers and any entity making investment recommendations should clearly disclose the nature of its relationship with the investor.
• Conflicts of Interest/Separation of Functions: conflicts of interest that could harm investors should be mitigated through separation of core functions and limits on vertical integration, as well as other controls and investor disclosures.
• Customer Optionality: investors should be able to choose how and where their orders are handled and executed without being steered into a single broker, venue, order type or custody / clearing arrangement.
• Disclosure Requirements: issuers and intermediaries must disclose accurate, timely and material information to investors to allow them to make informed investing decisions.
• Custody, Financial Responsibility, and Clearing / Settlement: customer assets should be protected through the segregation of assets and financial activities from those of the custodian, and such assets should be subject to proper controls. Customer assets should be further protected through financial responsibility / prudential controls, such as capital and liquidity requirements (e.g., as provided for in the SEC's 15c3-3 rule), as well as requirements to mitigate clearing and settlement risk.
• Anti-Fraud/Financial Crimes: investors need to be protected against bad actors and financial criminals through anti-fraud and other requirements, such as AML / KYC rules.

Any modernization of the securities markets and rulebooks to accommodate blockchain technology and tokenization must reinforce these core investor protections, not remove them. While blockchain networks can support new models of securities issuance and trading, and while tailoring of certain requirements will be needed to reflect the unique features of these assets, it should not come at the cost of sacrificing investor protection. Failure to incorporate these core protections would pose significant and unnecessary risks to investors, issuers, and market quality.

By contrast, incorporating these core protections in markets that trade digital securities (including those that may trade digital securities alongside other types of assets) provides for the long-term viability of new operating models. It is therefore in the interests of all market participants, including both new and existing market entrants, that digital asset markets include these protections, albeit with tailoring as necessary to reflect the unique features of blockchain technology.

Broker-Dealers Play a Critical Role in Protecting Investors and Other Market Participants

The core investor protections identified above originate in large part from the regulatory responsibilities broker-dealers are required to undertake. For example, broker-dealers are responsible for ensuring best execution and appropriate disclosures to clients about investor risks and conflicts of interest, thereby giving customers sufficient information to confidently make choices about how to direct their investments, typically at the touch of a button and with very little, if any, transaction fees. Broker-dealers are also bound by customer protection and safekeeping rules that ensure client assets are held securely, and other requirements that deter bad actors and financial criminals from exploiting investors and disrupting markets.

Broker-dealers as underwriters also provide important protections to issuers in capital markets. These protections arise from having to meet due diligence and offering conduct standards; underwriting and distribution responsibilities; responsibilities for orderly trading in the secondary market; and conflict management to ensure fair treatment for individual issuers and investors. More broadly, participation of issuers in capital markets is supported by a range of requirements governing their ongoing disclosures to investors.

It has been posited by some that broker-dealers, alongside other types of intermediaries, are unnecessary for distributed or decentralized operating models that are often found in markets for natively issued digital assets.¹ Leaving aside the question of whether all these operating models are truly "decentralized" and intermediary-free, these critiques fail to establish how the investor protections associated with broker-dealer regulation, which have facilitated decades of successful economic growth, market performance, and widespread investor participation in the U.S. securities markets, would be replicated in these markets. It is crucial that policymakers consider these implications before providing exemptions from current broker-dealer registration requirements or shifting broker-dealer responsibilities to other actors with more limited capacities (such as transfer agents, a subject we discuss at greater length in our recent letter to the SEC).

The Importance of Custody Protections for Investors

Another set of core investor protections relates to the safekeeping of customer assets. Custodial services offered by banks and other qualified institutions have been critical to the success of modern capital markets for over 80 years, helping to manage conflicts of interest, ensure high levels of investor protection, and promoting the efficiency and stability of the markets. The custody function is premised on three key principles:

• Segregation of Client Assets: client assets, other than cash, must be segregated from the custodian's proprietary assets and the assets of other clients at all times;
• Separation of Financial Activities: the safekeeping function must be separately maintained and operated from trading, asset management, and other similar market-facing activities; and
• Proper Control: the custodian must have control over the assets of its clients and the ability to transfer assets held for its clients based on the receipt of proper instructions.

These principles are technology agnostic, meaning that the manner in which safekeeping is provided will continue to evolve with new technologies, as it has done over the past several decades. They also do not preclude new entrants or new business models from offering these services, nor does this prevent "self-custody" of digital assets by clients (though, as we have noted elsewhere, self-custody is likely to be impractical and inefficient for the vast majority of investors, and should also be narrowly defined as referring to situations in which clients truly hold both their own assets and keys²).

It is critical that any entity offering digital asset safekeeping services adhere to these principles in order to protect customers and ensure the long-term stability of these markets. These protections are critical to preventing the types of customer losses seen when these structural protections do not exist, as seen in the cases of FTX and Voyager.

Separation of Functions and Limits to Vertical Integration are also Critical to Protecting Investors

Separation of core functions is another cornerstone of investor protection and market quality. By assigning distinct roles and responsibilities to broker-dealers, exchanges, custodians, and clearinghouses, today's regulatory framework disperses financial, operational, and default risks and manages conflicts through a system of checks and balances. While there are some limited use cases in which broker-dealer and trading venue functions operate in adjacent structures (e.g., broker-dealer-affiliated ATSs), protections for investors are achieved in those cases through procedures, controls, and obligations that address investor suitability, manage conflicts and operational risks, and ensure robust disclosures.

By contrast, permitting broad vertical integration that combines all these core market functions in a single "one-stop-shop" would strip away protections that are currently achieved through separation, effectively re-introducing major risks and undermining investor trust-as illustrated by some integrated models in native digital-asset markets (e.g., FTX).

A better approach in our view would be to expand existing programs and requirements for the trading and issuance of tokenized securities to allow market participants to take advantage of efficiencies offered by new technologies, while utilizing the protections for investors that the existing separation of functions structure provides.

The Need to Ensure Investor Clarity Around Tokenized Securities: The Technology used Does Not Change the Fundamental Characteristics of the Underlying Asset

All the protections discussed above help to ensure that investors clearly understand what they are buying when they enter a securities transaction. Moving forward, it will be critical that investors in tokenized securities markets continue to enjoy this same level of understanding and confidence. Here, we wholeheartedly agree with Commissioner Peirce that "tokenized securities are still securities"³ ; that is, a security whose ownership is recorded using a blockchain-based token should be regulated in a manner that is consistent with other securities. The technology used does not change the fundamental characteristics of the underlying asset. Where specific requirements prove impractical when applied to tokenized securities, the SEC should consider narrow, carefully tailored adjustments that incorporate the core investor and market protections discussed above.

Moreover, as Commissioner Peirce noted in her statement entitled "Enchanting but Not Magical: A Statement on the Tokenization of Securities," it must be clear to investors that they are purchasing a tokenized security with legal and beneficial ownership of an operating or investment company and not, as is the case in certain models, a token that mirrors the value of the underlying security but does not grant those legal and economic rights (i.e., essentially a specific type of derivative known as a "security-based swap"). This highlights the importance of policymakers adopting a standard industry taxonomy that clearly and consistently classifies digital assets according to their underlying economic characteristics, thus allowing for the correct regulatory treatment to be applied to those assets.⁴

A Carefully Designed Innovation Exemption or Regulatory Sandbox Can Support Innovation Without Harming Investors or Markets

In our recent letter to the SEC, we noted that a carefully structured "innovation exemption" or "regulatory sandbox" framework could offer important benefits. A properly designed framework would allow firms and other innovators to test novel digital-asset products and business models in a flexible yet controlled environment, giving the SEC real-time visibility into these products and services. These insights could, in turn, be used to better design tailored regulatory regimes that foster innovation while maintaining existing investor protections and market integrity.

However, it is critical that any innovation exemption or regulatory sandbox framework act as a supplement to a broader policymaking process and not as a backdoor mechanism for rewriting key elements of the existing market structure regime. Major structural changes to market structures or core investor protections should be addressed through a normal notice-and-comment rulemaking process, not through the granting of exemptive, no-action or safe harbor relief from existing rules - or through an innovation exemption framework. In addition, as Commissioner Peirce has stated⁵ , it is critical that any framework should be open to all market participants; that is, it should not result in a single institution or group of firms gaining effective monopolies over a specific innovation.

It is also critically important that any innovation exemption or regulatory sandbox framework operate within clear guardrails to avoid potential harm to investors or disruptions to the markets. Absent clear guardrails, an innovation exemption could become a way to issue and trade tokenized securities outside the core protections of the federal securities laws and regulations, increasing exposure to fraud, manipulation, and conflicts of interest, especially if issuance, trading, and settlement functions were to be vertically integrated within a single intermediary. Operating tokenized markets on platforms decoupled from the existing regime would also fragment liquidity, degrade price transparency, and impair execution quality-with knock-on negative impacts on overall market liquidity and investor outcomes.

To ensure that the appropriate guardrails are put in place, the innovation exemption itself should be subject to a transparent, substantive notice-and-comment process that allows for broad industry input and engagement on its design and operation. In addition, significant project applications should also be subject to public input prior to being approved. As part of this process, each project should make minimum public disclosures; such disclosures should include the identity of the issuer, key structural features of the project, the venue where tokenized securities will be traded, and the types of disclosures that will be available to investors. Allowing public input on both the innovation exemption itself and specific project applications, as well as public disclosures, will result in better policymaking and ensure an appropriate level of transparency in the process.

In terms of guardrails: there are three types of restrictions common in other jurisdictions with regulatory sandbox style regimes, such as the UK, that should apply to projects temporarily operating outside of the normal securities regulatory regime. First, there should be limits on the pool of investors that may participate in an innovation project, with an initial focus on more sophisticated institutional and accredited investors; this will help limit any potential adverse consequences for investors. Second, there should be caps on the size and volume of transactions and the number of customers that can participate, to mitigate against the possibility of regulatory arbitrage and market fragmentation. Third, there should be duration limits, which are essential to avoiding firms operating outside of the normal securities law framework for indefinite periods. The SEC should retain flexibility to adjust limits and phase up participation as systems demonstrate resilience; guardrails will also likely differ depending on which part of the securities lifecycle a particular project is focused, as discussed in our August 7^th letter.

Finally, it is also crucial that there be a "smooth exit ramp" into a permanent regulatory environment, though only once a project proves it can meet the full suite of investor-protection and market-operations requirements. Projects should not be transitioned into a temporary (or permanent), lighter-touch regulatory regime e.g., one subject to exemptive relief or no-action measures.

Conclusion

To ensure their long-term viability, it is critical that tokenized securities markets incorporate the robust investor protections that have helped to make the U.S. securities markets the largest, deepest, most liquid, and most efficient in the world. This includes ensuring that investor protections derived from the current broker-dealer and asset safekeeping frameworks are utilized in tokenized securities markets, and that the protections arising from limits on vertical integration and separation of core functions are included in these markets. It also means clearly defining what tokenized securities are and what they are not in order to provide greater certainty to investors.

At the same time, existing rules and market structures need to be modernized to accommodate the unique features of new technologies such as blockchain and tokenization. As discussed here, a carefully designed innovation exemption or regulatory sandbox framework can help supplement a broader process of regulatory modernization, a process that should involve widespread consultation with a diverse group of stakeholders to ensure that it is promoting innovation while also protecting investors and market integrity. If this approach is taken, the result will be a strong, durable U.S. tokenized securities market that fosters innovation and widespread investor confidence.

Authors

Peter Ryan is a Managing Director and Head of International Capital Markets and Strategic Initiatives at SIFMA.

Charles DeSimone is a Managing Director and Deputy Head of the Technology, Operations, and BCP group at SIFMA.

Footnotes

1. For example, see DeFi Education Fun and Andreessen Horowitz, "Recommendations Regarding a Safe Harbor from the Broker Registration Requirements of the Securities Exchange Act of 1934," August 13, 2025, available at: https://www.sec.gov/files/ctf-written-a16z-def-safe-harbor-proposal-applications-081325.pdf. [↩]
2. https://www.sifma.org/wp-content/uploads/2025/05/SIFMA-SEC-Crypto-RFI-Initial-Response-May-2025.pdf.[↩]
3. https://www.sec.gov/newsroom/speeches-statements/peirce-statement-tokenized-securities-070925.[↩]
4. As discussed in our May letter to the SEC's Crypto Task Force, a good example of such a taxonomy is the one developed by our global affiliate, the Global Financial Markets Association ("GFMA"), which was subsequently endorsed by the CFTC's GMAC Digital Asset Markets Subcommittee.[↩]
5. https://www.sec.gov/newsroom/speeches-statements/peirce-old-flames-071625.[↩]

Related Resources

• SIFMA Letter

  Request for Comment on Statement by Commissioner Hester M. Peirce Re: Crypto RFI (SIFMA and SIFMA AMG)

• Commissioner Hester M. Peirce Statement

  Enchanting, but Not Magical: A Statement on the Tokenization of Securities