- Improving DRS/FAST makes a ton of sense and is necessary.
- I think the letter misses the point on third party tokenization. It is permitted but there are requirements based in investor protections and market integrity that must be followed.
- Most 3rd party tokenization models are creating a new security, as the STA letter points out these have distinct characteristics and risks. The comparison is ADRs, these are separate securities that are registered under section 5. You can't just create a token and call it the same thing as the underlying (even though it's not). The pathway exists to register these.
- The alternative is to have the investor protection of being a registered clearing agency or having a direct relationship with the issuer of the entitlement (e.g. broker-dealers). DTC's entitlement model works because it is a clearing agency and bound by those investment protections. Broker-dealers also create security entitlements for their customers all the time. What isn't permitted is a bearer security entitlement. The guidance provided by the SEC pretty clearly outlines there is a proper way to create security entitlements and there's a proper way to support issuer sponsored tokenization. Creating bearer 3rd party unregistered security tokens and then mislabeling them isn't and shouldn't be permitted because it does not protect investors.
I appreciate the comments! Thanks for reading this and thinking through it. Maybe I didnt make my point clearly enough if you think that I do not understand what is and what isn't a security. I think they are ALL securities.
However, the people at the SEC understand what i wrote. Take me on my word if you would like, if you don't I understand your skepticism.
As a Transfer agent who tokenizes, I am very familiar with the differences between 1st and 3rd party. Vertalo supports all of these models. We obv believe issuer-sponsored is the 'best' approach.
3rd party wrapping is fine with me as a concept, but the investors in those need some form of transparency. That is not a crazy proposal.
DTC is a canonical issuer of 3rd party wrapped tokens, and possibly worse than the SpaceX SPVs. They are issuing wrapped entitlements - they are the ones creating internal bearer instruments. They are the ones creating 3rd party tokens where there is no recourse for issuers or investors.
And they are using their market power in a clearly anti-competitive fashion.
Broker-dealers do not manage Cap Stacks. They don't have the technology, for one thing, and it's not their mandate. The same goes for Clearing Firms and Custodians. They do not enforce restrictions, and they only see one small part of the picture.
If the DTC has their way, tokenization as envisioned by early builders like me (10 years in) - as well as tradfi, and transfer agents, and even issuers themselves - is dead.
I was appointed to the DTC's digital securities modernization working group by the Chief Legal Officer at FINRA. I know the team at DTC very well and what they are building
They cannot be permitted to side-step SEC regulations. It's bald-faced.
Dave- I also help run a digital transfer agent and have tokenized NMS stock through the issuer sponsored model, integrated within DeFi protocols and helped manage >$1 billion in tokenized private funds. I also previously worked at the SEC and have had significant engagement with the staff on the subject including participating in the CTF's tokenization roundtable. I think we both have strong backgrounds and knowledge in the space. I'm not sure where or why my comments were taken to intimate some diminishing your understanding of matters.
My point was that your letter conflates a few things. I don't think the SEC is seeking to "pretend these products [3rd party tokenization] do not exist. What they have said in the cited guidance and in Hester's tweets thereafter that 3rd party tokenization can be done through entitlements (by a clearing agency or a broker-dealer) or as a separately registered security. A broker-dealer that creates an entitlement is limited to only its customers and cannot allow for a bearer entitlement. To the extent the broker-dealer created entitlement is facilitated through the broker-dealer, its activity of facilitating settlement would fall into clearing agency territory or it otherwise would be a new separate security- that would require registration. I've never seen "heightened conditions" for 3rd party tokenization.
I'm not in favor of the design or execution of what DTC is doing- but it's within the construct of the permitted forms of tokenization that the SEC has outlined.
Investor protection remains paramount- a clearing agency provides these existing investor protections/oversight. I don't think many of the existing 3rd party tokenization efforts provide transparency or accurately describe the risks their "wrapped" tokens present. I think this is the main argument that STA is making in their letter- but is not the same point you're trying to make.
A few quick reactions:
- Improving DRS/FAST makes a ton of sense and is necessary.
- I think the letter misses the point on third party tokenization. It is permitted but there are requirements based in investor protections and market integrity that must be followed.
- Most 3rd party tokenization models are creating a new security, as the STA letter points out these have distinct characteristics and risks. The comparison is ADRs, these are separate securities that are registered under section 5. You can't just create a token and call it the same thing as the underlying (even though it's not). The pathway exists to register these.
- The alternative is to have the investor protection of being a registered clearing agency or having a direct relationship with the issuer of the entitlement (e.g. broker-dealers). DTC's entitlement model works because it is a clearing agency and bound by those investment protections. Broker-dealers also create security entitlements for their customers all the time. What isn't permitted is a bearer security entitlement. The guidance provided by the SEC pretty clearly outlines there is a proper way to create security entitlements and there's a proper way to support issuer sponsored tokenization. Creating bearer 3rd party unregistered security tokens and then mislabeling them isn't and shouldn't be permitted because it does not protect investors.
I appreciate the comments! Thanks for reading this and thinking through it. Maybe I didnt make my point clearly enough if you think that I do not understand what is and what isn't a security. I think they are ALL securities.
However, the people at the SEC understand what i wrote. Take me on my word if you would like, if you don't I understand your skepticism.
As a Transfer agent who tokenizes, I am very familiar with the differences between 1st and 3rd party. Vertalo supports all of these models. We obv believe issuer-sponsored is the 'best' approach.
3rd party wrapping is fine with me as a concept, but the investors in those need some form of transparency. That is not a crazy proposal.
DTC is a canonical issuer of 3rd party wrapped tokens, and possibly worse than the SpaceX SPVs. They are issuing wrapped entitlements - they are the ones creating internal bearer instruments. They are the ones creating 3rd party tokens where there is no recourse for issuers or investors.
And they are using their market power in a clearly anti-competitive fashion.
Broker-dealers do not manage Cap Stacks. They don't have the technology, for one thing, and it's not their mandate. The same goes for Clearing Firms and Custodians. They do not enforce restrictions, and they only see one small part of the picture.
If the DTC has their way, tokenization as envisioned by early builders like me (10 years in) - as well as tradfi, and transfer agents, and even issuers themselves - is dead.
I was appointed to the DTC's digital securities modernization working group by the Chief Legal Officer at FINRA. I know the team at DTC very well and what they are building
They cannot be permitted to side-step SEC regulations. It's bald-faced.
Dave- I also help run a digital transfer agent and have tokenized NMS stock through the issuer sponsored model, integrated within DeFi protocols and helped manage >$1 billion in tokenized private funds. I also previously worked at the SEC and have had significant engagement with the staff on the subject including participating in the CTF's tokenization roundtable. I think we both have strong backgrounds and knowledge in the space. I'm not sure where or why my comments were taken to intimate some diminishing your understanding of matters.
My point was that your letter conflates a few things. I don't think the SEC is seeking to "pretend these products [3rd party tokenization] do not exist. What they have said in the cited guidance and in Hester's tweets thereafter that 3rd party tokenization can be done through entitlements (by a clearing agency or a broker-dealer) or as a separately registered security. A broker-dealer that creates an entitlement is limited to only its customers and cannot allow for a bearer entitlement. To the extent the broker-dealer created entitlement is facilitated through the broker-dealer, its activity of facilitating settlement would fall into clearing agency territory or it otherwise would be a new separate security- that would require registration. I've never seen "heightened conditions" for 3rd party tokenization.
I'm not in favor of the design or execution of what DTC is doing- but it's within the construct of the permitted forms of tokenization that the SEC has outlined.
Investor protection remains paramount- a clearing agency provides these existing investor protections/oversight. I don't think many of the existing 3rd party tokenization efforts provide transparency or accurately describe the risks their "wrapped" tokens present. I think this is the main argument that STA is making in their letter- but is not the same point you're trying to make.