HOUSE FINANCIAL SERVICES COMMITTEE
HEARING ON TOKENIZATION & THE FUTURE OF SECURITIES
For questions on the note below, please contact the Delta Strategy Group team.
On March 25, the House Financial Services Committee held a hearing entitled “Tokenization and the Future of Securities: Modernizing Our Capital Markets.” Legislation noticed for the hearing were the Modernizing Markets Through Tokenization Act of 2026, and the Capital Markets Technology Modernization Act of 2026. Witnesses in the hearing were:
- Kenneth Bentsen, Jr., President and Chief Executive Officer, SIFMA
- Summer Mersinger, Chief Executive Officer, Blockchain Association
- Christian Sabella, Managing Director and Deputy General Counsel, DTCC
- John Zecca, Executive Vice President and Global Chief Legal, Risk and Regulatory Officer, Nasdaq
- Salman Banaei, General Counsel, Plume Network
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Chairman French Hill (R-AR) highlighted the need to evaluate tokenization’s impact on market integrity, capital formation, transparency, and efficiency, including how it can upgrade complex compliance functions. He discussed how placing a traditional security on a blockchain does not change the underlying nature of the asset or the goals of investor protection. He framed how tokenization raises important legal and regulatory policy questions, and that policymakers must ensure existing securities laws are equipped to govern emerging technologies without stifling progress, alongside the need to identify regulatory gaps and inefficiencies that could create risk or hinder investor protection and orderly market objectives.
- Witnesses detailed how tokenization provides expanded access to capital markets by reducing reliance on intermediaries, lowering transaction costs, alongside enabling 24/7 trading, continuous market access, and near real-time settlement that reduces counterparty risk. Sabella outlined how bridging traditional infrastructure and Distributed Ledger Technology (DLT) can optimize asset mobility and liquidity, with increased efficiencies across clearing, settlement, and other financial market infrastructures, particularly in U.S. equities and Treasury markets. Participants commended bipartisan efforts, such as the Digital Asset Market Clarity (CLARITY) Act, to provide statutory guidance and clear rules of the road.
- Mersinger emphasized that tokenized markets should be regulated with a framework calibrated to how tokenized securities markets operate and called for greater clarity to maintain strong oversight without holding back efficient market structure. Bentsen reiterated that tokenized securities are securities, and that technology does not change the underlying definition of the instrument, with tokenized securities subject to the same investor protection and market integrity rules as other securities. He stated how it requires technology-neutral, functional regulation that protects investors and preserves market quality, but cautioned against importing market practices from the non-securities world into the securities world.
- Bentsen noted that where the current regulatory framework is fundamentally incompatible with DLT technology, carefully tailored exemptive relief may be necessary, but that exemptions must be narrow, transparent, time-bound, and aligned with the intent of the underlying regulations. He added that they should not serve as a substitute for notice and comment rulemaking. Banaei urged for exemptions and no-action relief to lead formal rulemaking and durable solutions, not deregulation by exemption. He recommended extending the same protections for customers using broker-dealers to the retail apps that use DeFi technology, ensuring accountability and consistent protections across platforms.
- Bentsen discussed how tokenization must be evaluated as part of broader market structure reforms, including extended hours trading or 24/7, review of Rule 611 trade-through prohibitions, and other areas of Regulation National Market System (Reg NMS), and that tokenized securities should be integrated into the existing federal securities regulatory framework. He stated that tokenized securities could live in a Rule 611 world, but that changes would require rethinking other parts of Reg NMS, including best execution (BestEx). He warned of the same security trading in parallel, unlinked markets if not reported to the SIP, raising concerns that investors may not be getting the best displayed price. Banaei highlighted the need to bridge connectivity between the SIP and U.S.-regulated liquidity pools and integrate on-chain and off-chain data.
- Mersinger referenced how the Securities and Exchange Commission (SEC) has provided definitional clarity that a tokenized security is still a security and has engaged through guidance and no-action relief, but that uncertainty remains, particularly when rules designed for intermediaries are applied to disintermediated systems. She highlighted notice and comment rulemaking as the gold standard, but noted that it takes time, and how regulators may use no-action relief or exemptive authority as part of an iterative approach. She outlined how regulation should focus on function over the technology, distinguish between intermediaries and infrastructure, and reflect changes in settlement risk where assets and payments can move together in a single transaction.
- Sabella stated that tokenization should be pursued within the existing legal and regulatory framework, ensuring tokenized assets maintain the same bundle of rights and privileges as traditional assets, rather than upending current structures. He highlighted that a surgical and principles-based regulatory approach can enable competition, choice, and innovation, while ensuring responsible policy development and tokenization deployment.
- Zecca delineated that tokenization should reflect a change in how ownership is recorded, not what is owned, as he highlighted how Nasdaq’s SEC-approved proposal for securities to trade in electronic or tokenized form under existing exchange rules ensures that tokenized securities remain fungible, share the same Committee on Uniform Securities Identification Procedures (CUSIP), and convey the same rights. He stated how Nasdaq’s plan to develop an equity token design that treats the digital representation and the underlying share as a single security maintains core investor protections and governance frameworks while reducing friction in settlement and corporate processes. He cautioned that tokenization can be done poorly, creating parallel pools of liquidity, inconsistent rights, or uneven safeguards, and emphasized that avoiding fragmentation requires integrating tokenization into regulated markets.
- Representative Sherman (D-CA) cautioned against creating a two-tiered market where tokenized securities and blockchain platforms are exempted from core securities regulations. He referenced how exchanges and broker-dealers are subject to transparency, BestEx, and disclosure requirements, and stated that unregistered DeFi intermediaries are not, raising risks of opaque fees, conflicts of interest, and manipulation of transaction ordering. He also noted how it is a threat to the Consolidated Audit Trail (CAT) and could create an open system for insider trading, with no equivalent surveillance.
SUMMARY
Opening Statements and Testimony
Chairman French Hill (R-AR)
As tokenization becomes more prevalent in capital markets, it raises important legal and regulatory policy questions. We must ensure that existing security laws are equipped to govern these modern emerging technologies without stifling the very progress they offer. We must consider the broader impact of tokenization on market integrity and capital formation, while examining how it can enhance transparency, efficiency for investors, regulators, and market participants by upgrading the very certain complex compliance functions themselves. Evaluating this impact will help the Committee better understand both the opportunities and the risks associated with this emerging technology. It is essential that the U.S. continues to pave the way for future advancements responsibly and supported by clear, effective regulatory frameworks. In doing so, we can help ensure innovation serves the broader public interest, strengthens market integrity, and reinforces the U.S.’s continued leadership around the globe and capital markets and capital formation. More here.
Ranking Member Waters (D-CA)
New technologies that convert security into digital tokens on a blockchain might be able to make stock trading more efficient and faster in settlement, with more transparency and increased participation from global investors. The first priority should be to ensure that any innovation actually serves investors and businesses, not the middleman looking to take advantage. While creating new types of middlemen may sound innovative, in practice, it appears that tokenization also adds new fees, complexities, and risk for investors in the financial system. I have concerns about the gamification of investing and gambling associated with these technologies. This Committee has already examined how trading apps use behavioral designs to turn investing into a game. Tokenizatio could make those trades faster, always on, and with fewer guardrails. It is impossible for this Committee to ignore the blatant corruption from this administration and profits from their crypto ventures. Innovation must be used to strengthen, not weaken investor protections, and to learn from past mistakes, not repeat them on a greater scale. More here.
Chair of Capital Markets Subcommittee Ann Wagner
Tokenization is revolutionizing finance, yet regulatory uncertainty threatens to push this technology offshore. To ensure U.S. markets continue to set the global standard, we must provide legal clarity to foster innovation without compromising investor protection. By modernizing outdated rules, the SEC can encourage innovation within our existing securities law. Modernization must never come at the expense of rigorous oversight.
Ranking Member of the Capital Markets Subcommittee Brad Sherman (D-CA)
Now the people trying to create a payment system or stock exchange without KYC or AML know they cannot pass it through Congress or a regular SEC rulemaking, so they have gone to the SEC for a blanket exemption, scarcely more than a no-action letter. If this approach took place, it would be perfect for insider trading, would doom CAT, and there would be account activity without knowing who was behind it or what inside information they had. It is a bad idea.
Kenneth Bentsen, Jr., President and Chief Executive Officer, SIFMA
Tokenized securities are securities. Technology does not change the underlying definition of the instrument. Like any securities, tokenized securities should be subject to the same robust investor protection and market integrity rules. Benefits from DLT and tokenization will be realized on a scalable and durable basis only through technology neutral, functional regulation that protects investors and preserves market quality. There may be areas where the current regulatory framework is fundamentally incompatible with DLT technology, making existing requirements infeasible. In these instances, carefully tailored exemptive relief may be necessary to allow innovation while maintaining the spirit of the regulations and the protections they offer. Even then, bespoke exemptions must be narrow, transparent, time bound and aligned with the intent of the underlying regulations, and should never serve as a substitute for notice and comment rulemaking. Congress and the SEC must ensure regulations are calibrated to actual risk, avoiding workarounds that undermine investor protection or market integrity. Tokenization must be evaluated as part of a broader set of market structure reforms that also includes extended hours trading or 24/7, the ongoing review of Rule 611 trade-through prohibitions, and other areas of Reg NMS. Congress can play an important role, as it always has, in supporting the responsible development of tokenized securities markets by reinforcing that tokenized securities are securities, and they should be integrated into the existing federal securities regulatory framework, not placed outside of it. Tokenization offers real promise across the securities industry, but those benefits will only be realized if tokenization develops through a durable approach built on existing regulatory frameworks that preserves investor protection and market integrity and builds on, rather than undermines, the strength, depth and efficiency of U.S. securities markets. More here.
Summer Mersinger, Chief Executive Officer, Blockchain Association
Tokenization can help modernize U.S. financial markets, but we must provide clear rules that help innovation grow here at home. Tokenized markets should be regulated. The question is whether our existing capital markets framework is appropriately calibrated for how tokenized securities markets actually operate. Regulation should focus on function, not the technology itself. A security does not stop being a security because it is recorded on a blockchain, consistent with how financial regulation has always operated. The law regulates the activity taking place, not the technology used to carry it out. Regulation should distinguish between intermediaries and infrastructure. Blockchain systems can handle record keeping, transfer, and settlement without any one party taking custody or control of the customer’s assets. Regulations should reflect changes in settlement risk. Traditional market rules were designed for delayed settlement and multiple intermediaries, but when assets and payments can move together in a single transaction, those legacy risks are reduced. A modernized framework should match the risks that are actually present. The SEC provided helpful definitional clarity on the treatment of tokenized securities that makes clear that a tokenized security is still a security. The SEC has also shown a willingness to engage with tokenized technology through staff guidance, no-action relief, and other tools. That is the right approach but uncertainty remains, especially when the rules written for financial intermediaries are applied to disintermediated systems. More clarity is needed so that oversight remains strong without holding back better, more efficient market structure. The question is whether the U.S. will lead this transition or allow it to take shape somewhere else. The next generation of market infrastructure should be built under the U.S. rules with robust U.S. investor protections in a way that strengthens U.S. leadership, supports U.S. innovation, and keeps the future of finance anchored in the U.S. More here.
Christian Sabella, Managing Director and Deputy General Counsel, DTCC
In 2024, DTCC played a pivotal role in facilitating the transition of the U.S. equities market to its T+1 standard settlement cycle and is presently spearheading the implementation of expanded central clearing in the U.S. Treasury market. These efforts accelerated in 2024 with the acquisition of Securrency, which operates as DTCC Digital Assets (DDA), to provide institutional-grade infrastructure and products that facilitate end-to-end lifecycle processing for tokenized traditional financial assets. Following this acquisition, DTCC’s tokenization efforts have intensified, as evidenced by a no-action letter approval from the SEC’s Division of Trading and Markets last year, which allows for limited and targeted relief that will enable the launch of the DTCC preliminary base tokenization service using DDA tokenization technology. If successful, this bridging of the traditional infrastructure and DLT offers market participants the potential to optimize asset mobility and liquidity, with increased efficiencies and interoperability across clearing, settlement, and other FMIs. Unlocking the potential benefits of tokenization for critical markets like the U.S. Public Equities Market and the U.S. Treasury Securities market is a tremendous opportunity equal to, if not greater than, the opportunities presented by the transition to T+1 and the expansion of central clearing for Treasuries. Financial entities and policymakers should ensure that a responsible regulatory approach, one based upon and derived from the historical approach used for traditional assets, is applied. In practice, this means resisting calls to upend the prevailing legal and regulatory framework. Properly tokenized assets still must constitute the same bundle of rights and privileges that holders of traditional assets enjoy today. The existing legal and regulatory approach is core to ensuring tokenized assets deliver this outcome. Tokenization does raise the potential for asset holders to expand upon or experience their existing rights and privileges in more efficient and flexible ways. An advisable and responsible approach is surgical and principles-based to ensure competition and choice for market participants. This is the approach that informed our December 2025 no-action request and will continue to inform the innovation and deployment that we plan to unveil. More here.
John Zecca, Nasdaq Executive Vice President, Global Chief Legal, Risk and Regulatory Officer
Tokenization should reflect a change in how ownership is recorded, not what is owned. A tokenized share is still a share, and changing the technology used to represent a security should not alter its legal status, the rights it conveys, or the protections that apply under U.S. securities laws. Used responsibly, tokenization can modernize market plumbing by reducing reconciliation, streamlining settlement and corporate actions, and improving shareholder engagement while preserving the investor protections and market integrity that make the U.S. public markets the global standard. Tokenization can also reduce real costs in the system. Today, processing corporate actions is estimated to cost the industry $58 billion annually, and that cost is ultimately borne by investors. Tokenization can also be done poorly, creating parallel pools of liquidity, inconsistent rights, or uneven safeguards. Avoiding that outcome is essential, which is why Nasdaq’s approach is focused on integration, bringing tokenization into regulated markets rather than creating parallel systems. This March, the SEC approved Nasdaq’s proposal to enable securities to trade on our markets in either electronic form, as they do now, or tokenized form, applying existing exchange rules so that tokenized securities remain fungible with their counterparts, share the same CUSIP and convey the same rights. Building on that framework, Nasdaq recently announced our intention to develop an equity token design, designed to treat the digital representation and the underlying share as a single security. Investors would keep the same core protections, and companies continue to operate under the same governance framework while using modern technology to reduce friction in areas like settlement workflows or productions and proxy voting. It is upgrading the rails underneath the stock, not creating a new kind of stock. Congress also has an important role to play. Nasdaq supports this Committee’s bipartisan work on the CLARITY Act because clear statutory guidance can protect investors, strengthen confidence in the U.S. markets, and support capital formation by ensuring innovation reinforces rather than fragments public markets. Tokenization should be about building on the strength of our public markets, responsibly modernizing infrastructure and ensuring the U.S. continues to lead. More here.
Salman Banaei, General Counsel, Plume Network
Congress, the SEC, and the administration should act because most tokenized markets are outside the U.S. Hong Kong subsidized bond tokenization after finding it lowered yield spreads. Singapore does the same and leads Project Guardian, a coalition of over forty institutions including the IMF and World Bank and seven other countries, not including the U.S. Singapore, the UAE and the EU are advancing as well. Section 505 of the Senate CLARITY bill gets it right in that the format of a security should not change the regulatory outcomes. CLARITY also implements this principle in Section 108, directing the SEC to update its rules around market infrastructure, but not outcomes in response to digital asset technology. Congress should ensure retail investors have the same protections regardless of which app they use, including DeFi apps as well as super apps. Such accountability is essential for customer protection and confidence. Bonds are particularly suitable products. Global competitors are providing subsidies to promote bond tokenization, but here in the U.S., these products are effectively banned under the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA). As Chairman Atkins indicated, tokenized finance is incompatible with the existing well-functioning Reg NMS framework. It will be a complex multi-year effort to incorporate tokenization benefits for public equities. If exemptions or no- action relief is temporarily offered, these should be milestones on a clear path toward formal lasting rulemaking or legislation. The SEC’s goal should not be deregulation by exemption, but instead durable, modernized regulation. The EU’s DLT pilot presents a cautionary tale. Scale the safeguards to the risks on-chain. Some risks associated, like intermediary abuses, are reduced, while others are higher, such as the risks of hacks and scams. Apply these principles to guide recommendations for the safe integration of tokenization into capital markets. More here.
DISCUSSION
Chairman Hill (R-AR): Is updating technology rails important to our competitive position while maintaining market integrity regardless of the technology? Bentsen: This industry is constantly investing in new technology and it is essential that we are constantly evolving. At the same time, we want to do it on the basis of the legal and regulatory framework that we have. Some of the things happening outside the U.S. are in products that are not traditional securities and products that Congress and others have suggested are not retail products. There are issues that Congress will have to think about, such as security-based swaps.
Chairman Hill (R-AR): What role can DeFi play in the broader tokenization ecosystem and what do DeFi tools provide to markets and investors? Mersinger: DeFi, as a non-custodial, non-discretionary code, provides a way for the market and assets to move, and to settle trades. It is the plumbing and infrastructure of the market, and it takes away a lot of intermediaries, which adds efficiencies by reducing costs, and it allows for broader access to the markets.
Ranking Member Waters (D-CA): Should legislation include provisions prohibiting senior government officials and their immediate families from holding financial interests in tokenized securities platforms? Banaei: There are laws and regulations intended to prohibit conflicts, or the perceived conflicts of interest, involving public officials. The question is whether current oversight and enforcement, as well as legislation, are adequate to address concerns and ensure public confidence. Public confidence in institutions is also eroding because of a perception that Congress and the executive branch are not adapting to new realities, digital asset legislation being among them. Congress should look at the merits of advancing market structure legislation, and not let concerns around ethics get in the way of making incremental progress.
Ranking Member Waters (D-CA): Do you agree the principle in Section 505 of the Senate CLARITY Act should be preserved in any crypto or tokenization legislation Congress advances? Banaei: Section 505 does a great job of expressing congressional intent that the format of a security does not change the substantive requirements around it.
Ranking Member Waters (D-CA): Why does the distinction between a regulatory framework for tokenized securities established through formal notice and comment rulemaking over no-action letters or broad exemptive relief matter? Why is the process as important as the substance itself? Bentsen: It is prudent that material changes or exemption requests be put out for notice and comment because they will affect the broader securities market. The SEC puts out numerous proposals throughout the year on rulemaking, and this should fall into that category. We should be paying attention to any efforts, either through exemptive relief or no-action relief, that would create material exemptions under securities laws, like Reg NMS, for certain market participants that do not apply across the entire ecosystem.
Representative Huizenga (R-MI): How can the SEC balance the need for technological flexibility with the rigorous oversight required to maintain market integrity? Bentsen: The SEC is doing what they should be doing by creating a task force and inviting the public to comment on how they think the rules should apply and what a security is. As the SEC looks within its authorities on where a rule for securities will not work for something on DLT or in DeFi, as well as intermediaries, which I think are infrastructure, they have to consider whether they need to go in and do rulemaking or come to Congress and ask for additional authority. They are doing the investigative work now, and that is the right approach.
Representative Huizenga (R-MI): Is there a risk to maintaining the status quo? Should we view tokenization as the next natural evolution of capital markets? Are there aspects of tokenization that create novel problems? Bentsen: I would not say our markets have been static or at the status quo as they are constantly evolving. We did not have electronification of the equities markets thirty years ago and we can talk about what we like and do not like about Reg NMS, but today retail investors, in most cases, pay no commissions. They have the cheapest execution they have ever had before. We have gone from T+5 to T+1. The adoption of DLT has taken longer than people thought, and that is the scary part, but it is happening. It is absolutely possible to maintain innovation and protection; Mersinger: Yes, it is an evolution versus rewriting the system. We are headed toward it as a natural evolution. There are going to be challenges as with any change in technology, but the SEC has the tools to overcome any challenges that they face and put into place a system that will provide appropriate customer protections while allowing this new infrastructure to take root.
Representative Huizenga (R-MI): Do we want to go in the direction that Chinese government agencies did in issuing a joint notice reiterating the domestic ban on cryptocurrencies and restricting real world asset tokenization? Zecca: No. If we think about it as a technology evolution and not a new product, things flow much more consistently. We are still worried about fragmentation of liquidity and want to make sure that capital formation is not impacted. If investors are not getting the full rights of a stock, there should be disclosure. If you are trading the same instrument, you should be regulated in a similar way. We are seeing products developing overseas and they tend not to be full equity, but a synthetic product that is not ownership. It is not always clear if investors fully understand what they are buying. There is some bleed where U.S. investors find ways to invest there. We must get a regulatory structure here in the U.S., make sure investors understand what they are buying, and try to have interoperability so retail investors can still take advantage of trading in markets they know.
Representative Sherman (D-CA): Are you concerned that granting exemptive relief for tokenized securities would open the door for illicit finance by lacking KYC and AML requirements? How can we ensure that the introduction of tokenized securities does not raise new BestEx, investor protection, or market manipulation concerns? Bentsen: If we are thinking about tokenization, DLT, any exemptive relief, or DeFi, policymakers need to understand where KYC and BSA rules can apply and, if there are gaps, how they are going to deal with them. Applying the existing rules for a security, whether it is tokenized, book entry, or paper, is very important. With the infrastructure serving as intermediaries and the infrastructure doing the same thing that a broker-dealer does, like routing, being compensated, acting as a custodian as opposed to a purely selfless custodian, and providing order selection and order routing, that is the same thing. How you draw those lines of definition is what the SEC, and maybe Congress, has to figure out?. If you are doing the same thing as somebody else and you are being compensated for it, then you should be regulated as such.
Representative Lucas (R-OK): How do you anticipate DLT enabling the tokenization of a subset of U.S. Treasury securities affecting the broader Treasury market? Sabella: While Treasury securities are being contemplated as part of the suite of potential assets to tokenize, how this will spread to the broader Treasury market structure remains to be seen. We are very focused on the Treasury clearing mandate in terms of regular-way transacting. At some point in the future, there may be a convergence between what we do at FICC and the tokenization of Treasuries at DTCC, but it is still a little too early to tell.
Representative Lucas (R-OK): How many market participants are already using it, with Nasdaq’s survey showing that fifty percent of firms plan to manage tokenized collateral by the end of this year? Zecca: Regulatory certainty will help adoption. What we are focused on is drawing those products and that innovation into the regulated space, creating products that are available for retail investors and that retail investors understand, and that meet the expectations for the protections that they expect. You will see an acceleration of that, but there are still some things that need to be worked out. We were talking about where settlement goes in the long run and timing, and that is a real question. There are also questions on netting and the value chains that are important. On the issuer side, the real value from a tokenized security can be that corporate actions can be digitized on the record, and the proxy process can also be handled through the blockchain as a real cost save.
Representative Lucas (R-OK): What is the benefit of diverse industry input as regulators and Congress seek to apply investor protections and marginal integrity principles? How can the SEC and the Commodity Futures Trading Commission (CFTC) be good partners to industry stakeholders? Bentsen: It is very important to hear from all stakeholders and find out where there may be instances where the rules are not going to work. If you are going to change those rules, do it through notice and comment, and change it for the entire marketplace; Mersinger: Sometimes you must have an iterative approach to regulating. It is not unusual for the agency to use things like no-action relief or exemptive authority to create the appropriate regulatory structure that will then go to rulemaking. Notice and comment rulemaking is the gold standard, but it takes time to get there. This is how we have done this in the past. On SEC and CFTC cooperation, they recently signed an MOU, working hand in hand, and issuing items together. That is what we need in the market.
Representative Lynch (D-MA): In a tokenized market with unaffiliated issuers and fragmented pricing across traditional and blockchain systems, how would BestEx and price discovery work? Do you see the SEC moving toward an exemption for tokenized trading? Bentsen: Tokenized securities, if they are treated as securities under the rules we have today, could live in a Rule 611 world. No question. If you are going to change Rule 611, you are going to have to change a lot of other things in Reg NMS and think about how BestEx works. That is not to say you cannot do it, but you must consider the concerns. A key concern, particularly for retail-oriented members, is how to show clients their execution quality. Another is that we end up with the same security trading in parallel, unlinked markets. Under NMS today, equity markets all have to be reported to the SIP and if you do not have that, even as we talk about 24/7 trading, we could have the same security trading in different pools of liquidity with different price transparency. That raises a significant issue as an investor may not be getting the best displayed price.
Representative Wagner (R-MO): How can exchanges and regulators ensure price discovery and liquidity do not become fragmented between traditional and tokenized securities? Zecca: One is in the product itself, to try to avoid the risk of synthetic products and things that are not really securities trading out there, because they are going to trade at different prices. Make the disclosure very clear. The second is to avoid parallel markets and walled gardens where some securities are trading, but a retail investor cannot access them. Make sure all markets are subject to the same rules.
Representative Wagner (R-MO): How can the SEC craft an innovation exemption that provides the legal clarity needed by major firms to stay in the U.S. without creating a permanent two-tier system where tokenized assets have different investor protections than traditional assets? Bentsen: We have conveyed to the Chairman and his staff that we think the best approach is for them to put it out for notice and comment so stakeholders can see what the impact would be. The ball is in their court, but we have weighed in considerably.
Representative Beatty (D-OH): What challenges does law enforcement face in investigating illicit activities using tokenized assets? Bentsen: If you follow the rules on the books, there are multiple avenues through reporting requirements, oversight, and specific protections for investors, including KYC and AML. If something goes wrong, there is somebody on the other side of that transaction who can be held accountable. That is why we think a security is a security, and tokenization is just the next iteration; Banaei: One recommendation is to extend the same protections for customers using broker-dealers to the retail apps that use DeFi technology, which would provide an additional touch point for regulation and transparency for the regulator. Right now, we do not have that layer of regulation and addressing that should get the core of Congress’s consideration on market structure legislation. There is some case law, like how the SEC lost on its authority to regulate the Coinbase wallet and its trading functionality as a broker.
Representative Barr (R-KY): Is there a disagreement between views? Do you acknowledge that tokenization may eliminate some intermediary risks such that regulation should evolve accordingly? Bentsen: It depends. On settlement, if the issue is that at any time you reduce the settlement cycle, there is no question that you are reducing risk in the system to a point. We reduced a lot when we went from T+2 to T+1. Real-time settlement can reduce some risk, but it may introduce other risks in terms of things like securities lending and issues affecting prime brokers. Those are things we talked about when we were doing T+1. On intermediaries, infrastructure providers are often intermediaries. If it is pure autonomous code then because there are no humans, there is no risk to mitigate or no risk of malfeasance, but there is risk that the code does not work. There is also a risk if the code is being paid to order route, to do the same functions, to act as a custodian, then they are basically doing the same thing. That is where the tension is; Mersinger: There are a lot of areas where I agree with Bentsen, which is that a security is a security, even if it is on-chain, and those rights and responsibilities and consumer protections that are baked into a security will continue as they go on-chain. Where I think a little differently is questions around how the risk shifts and what happens if something goes wrong. That is why we need an iterative approach to regulating in this space and why it is important for the SEC to use their no-action tools and exemptive authority to take an iterative approach to regulating this space. Notice and comment rulemaking will come once that is established.
Representative Vargas (D-CA): Is there going to be the same level of trust or a diminution of trust in a tokenized system? Zecca: It is in the way tokenization is done. If done right, it draws it into the existing market with the same regulatory structure and set of rights. In that context, all the protections and the way the capital markets function would exist. Where there could be concerns are in other ways to do it where you start to create synthetic instruments, which are certain rights but not ownership. People may not realize whether or not they get dividends or voting rights in that context. That is largely overseas right now. In that context, it is a different instrument, and so an investor, at a minimum, needs to have full disclosure of that as a different instrument.
Representative Vargas (D-CA): Are we overlooking risks that could be problematic because of increased velocity from reduced settlement frictions and potential for rapid outflows? Zecca: From a trading perspective, you want to have deep, liquid markets that can withstand shock. If you keep that liquidity pool together, then the experience, whether it is a tokenized security or a traditional security, should be the same; Bentsen: In the securities market, you have things like equity markets with limit up–limit down, circuit breakers, and other mechanisms for when there are confidence issues in the market. You have segregation of assets through Rule 15c3-3.
Representative Williams (R-TX): How can we create a regulatory environment that encourages tokenization in the U.S., but also ensures transparency, integrity, and investor confidence is not compromised? Bentsen: I would argue that this is happening now. Many of our members offer fractional shares, a market innovation that exists in the U.S. today. 24/7 exists today and most people do not take advantage of it. DTCC made an investment ten years ago in digital partners and is now advancing that work. Nasdaq is doing a partnership with Kraken, and the New York Stock Exchange is doing the same. Firms that are digital-native, like Kraken and Coinbase, registered as broker-dealers so they can do tokenized securities, while incumbent Wall Street firms have been looking at tokenization across equities and fixed income for years. We have done an analysis of the securities laws, and in most cases, we believe almost all can fit for purpose for tokenization. A couple of areas may need adjustments.
Representative Foster (D-IL): How are regulators addressing challenges, like enforcing position limits, with tokenized assets traded on private permissioned blockchains versus public blockchains with anonymous wallet participation? Is there a uniform KYC approach? Can a regulator see the identity of participants to identify wash trades? Zecca: We are working in the permissioned world, with the KYC information, the controls, and the corporate governance, and everything embedded and cannot be overridden, with essentially no anonymous participants; Sabella: Imposing some degree of identifiability onto the activity could also potentially happen on a permissionless chain, particularly within the tokenization protocol itself. You embed the identification and compliance features for KYC and AML; Banaei: We are embedding AML and sanctions screening at the token level. Regardless of where a particular tokenized asset may trade or transfer, it can be frozen if flagged. Wash trades are a market surveillance issue. We are working with FINRA and commercial vendors to extend on-chain native surveillance capabilities to be augmented through regulated DeFi brokers, which would capture KYC information to enhance the attribution of wallet owners. There is not a regulator who can right now but there are vendors, including those that provide services into traditional markets, capable of ingesting on-chain data, as well as on-chain native vendors. Our proposal would include FINRA operating a surveillance system, that whould have the capability of extending surveillance to on-chain activity.. They would not necessarily know who owns that wallet but would be able to identify it.
Representative Loudermilk (R-GA): To the extent there are gaps in the SEC’s authority needed to oversee tokenized securities, how much can be addressed through exemptive relief, no-action letters or guidance versus what requires Congress to act? Bentsen: The SEC probably has the authority it needs. With one exception, there has been discussion of products that are not true underlying securities, tokenized products that are reference products, which, by law, may not be allowed in the U.S. In that instance and as a caveat, Congress would have to take that up.
Representative Loudermilk (R-GA): If Congress acts in conjunction with the SEC and CFTC on tokenization, where can we be most productive? Mersinger: The support of the agencies is very important. Section 507 of the CLARITY Act, which requires a study between the agencies to look further into tokenization and see what kind of regulations need to be developed to ensure these markets maintain safety, soundness, and customer protections. Congress has done some good work here. Pass market structure legislation, CLARITY or something else, to provide clear rules of the road for the industry; Bentsen: Where Congress should be acting is for non-security products and non-commodity products. In some cases, the CFTC does not have the authorities, particularly with retail investor protections for spot commodities, that the SEC has. That is where Congress needs to act. There are clearly some gaps for these new products that are not securities and may not be commodities, and where the law is not clear. Even for traditional finance, the law is not clear in how firms might engage in those activities.
Representative Casten (D-IL): If an innovation exemption is pursued in the DeFi space, what guardrails are needed to prevent price differences, arbitrage opportunities, and risks to investors? Bentsen: There should be guardrails, which could include time limitations, who could have access to it, whether it is limited to high-net-worth participants, and whether it applies broadly or to a limited group. Some groups asking for exemptions have figured out they can register as broker-dealers, which shows they can operate under the existing framework. We do not want to import some of the market practices from the non-securities world into the securities world.
Representative Davidson (R-OH): If we move from a market structure reliant on intermediaries and delayed settlement creating counterparty risk to a model with atomic or real-time settlement, do you agree that a core risk of counterparty exposure that the system is built around is significantly reduced? Sabella: I agree that in an atomic, or T+0, settlement environment, market risk is reduced. What you still must contend with is heightened operational risk, because you are relying on that technology to be there, perform accurately and consistently, and scale when you need it. The second is liquidity risk, which still exists, and intermediaries can still play a role in helping to ensure there are no breaks in the transmission of assets from one party to another. You need to ensure you have enough resources in the system in the right place at the right time. Technology can help do that, but intermediation, the coordination of that technology, remains important.
Representative Davidson (R-OH): How do you see the rulemaking process playing out, including potential changes to the accredited investor rule even after passage of the CLARITY Act? How does this period of uncertainty affect markets awaiting final rules? Mersinger: These entities need certainty while they are awaiting rulemaking, which can take a very long time. That is why there are other tools available at the SEC and the CFTC to guide markets and activity, and to ensure they are following the law while they get to rulemaking. This is why we have no-action relief and exemptive authority. Exemptive authority is not an exemption from everything. You are getting certain tailored rules, still under the SEC’s regulation and rules.
Representative Pressley (D-MA): How could regulators, particularly the SEC, have exercised oversight of emerging technologies earlier? Banaei: The same decisions that the current SEC is thinking about could have been exercised under the last administration. The hardest thing for the SEC to do right now is looking at the whole range of rules under Reg NMS, including the order protection rule, and conducting industry outreach and roundtables to understand how to bridge the gap between the public price feed, the SIP, and on-chain-based trading. Integrating data both on-chain and off-chain through connectivity between the SIP and U.S. regulated liquidity pools are issues that can be addressed but require extensive fact-finding. The SEC should engage in fact-finding alongside other efforts it is undertaking.
Representative Steil (R-WI): Does Nasdaq and DTCC’s proposed rule change and SEC no-action relief appropriately address regulatory gaps needed to undertake these tokenization market upgrades? If not, what does Congress and the SEC need to do? Zecca: In the immediate term, yes. In the longer term, there are areas where CFTC coordination will be needed. I also think the sandbox question that has come up has been critical; Sabella: The no-action relief is a base version of the tokenization. We are doing it under a no-action approach because it is technical and targeted, such as being limited to a number of equities, limited to our members and their customers, and runs on a three-year period. During that period, we will be looking to support stakeholders like Nasdaq and others to provide choice and competition. We are trying to get a minimum viable version off the ground so we can build into more technical requirements that apply to our operations as a clearing agency. At the end of that three-year period, we are hopeful we will be able to provide more comprehensive answers on solutions.
Representative Steil (R-WI): How can decentralized exchanges complement or coexist alongside the traditional market structure, and what are the benefits of decentralized trading? Mersinger: DeFi is going to bring faster settlement and reduce costs because there are fewer intermediaries. Just like with electronic trading, these technologies can operate side by side in a regulated space. Eventually, you will see the evolution of the markets moving toward more efficient systems, with lower costs, and less risk because of the settlement time.
Representative Kim (R-CA): When innovation moves offshore, where is it going? How critical is the innovation exemption from the SEC that is coupled with the CLARITY Act? Mersinger: Often it is going to jurisdictions with clear rules of the road. That is the best-case scenario. Other times, it is going to jurisdictions where they do not have the same protections available for consumers. That is why it is important that we have the ability to support these markets in the U.S., with strong consumer protections available. It is critical that the SEC be able to use that authority that Congress gave them. This is about tailoring the rules to apply to the technology. It is not avoiding the rules, and it is not being exempt from the rules. It is still under the SEC’s jurisdiction, and there are conditions around exemptions. What it does is help these markets move forward. Even when CLARITY passes, it is going to take a while to get rulemaking in place.
Representative Rose (R-TN): What are potential benefits of a more tiered settlement structure, and how can such a framework improve market efficiency, risk management, and cost outcomes? Sabella: It may give market participants more flexibility in realizing a variety of settlement cycles. Today, you can settle a transaction T+0 at DTCC, but that is very limited based on technology and participation requirements. In a tokenized future, it may be possible for more parties to access T+0 settlement, which may suit their needs if they have a time-sensitive funding requirement or need to move in and out of an asset class quickly. These use cases exist today, but may be more available and seamless, with more choice and improved liquidity efficiency across markets.
Representative Rose (R-TN): How long do you think it will be before we see broad adoption? Mersinger: The timeline depends on how quickly the SEC can provide clarity to these markets and how securities transacting on the blockchain are subject to the rules of the securities laws. I know Chairman Atkins is moving very quickly, so I think it will be soon.
Representative Torres (D-NY): Do you have an estimate of how much capital tokenization could unlock? Sabella: At this point, we do not have an estimate. Market participants have a variety of views about what the next step is after T+1. Some may want to move to T+0 very quickly, while others may want a more nuanced approach. On what becomes the new standard settlement cycle after T+1, we cannot really determine what the savings would look like, but we agree that the savings are there if we can unlock collateral further.
Representative Torres (D-NY): How do we mitigate the risk that in a 24/7 tokenized financial system that enables more efficient collateralization and liquidation could also accelerate financial contagion, panic, and rapid bank runs? Sabella: We are partnering with organizations like Nasdaq and SIFMA members, as there is an extension of 24/7 trading in the equities markets, to provide the same risk protections. We reduce counterparty and market risk because we reduce exposure to each other and market value of the asset exchanged, but we still must keep in mind operational risk and liquidity risk. If things move quickly and there is a disruption, we need the resources in the system to be deployed and available to cover that disruption quickly; Zecca: To best protect against digital assets and tokenized securities becoming a separate risk exposure is by bringing them into the markets and deepest pools of liquidity so that they are available in times of stress.
Representative Liccardo (D-CA): If the standards of treating Layer 2 companies as brokers subject to anti-fraud, fair dealing, KYC and AML requirements were applied across the industry, would competitors be able to comply? Banaei: If the framework we have adopted includes consumer protections at the retail app level, and the SEC and Treasury work together on AML requirements at the token level, we can achieve a strong level of protection. Price discovery issues in tokenized markets can be addressed through the network effects that would be established once these markets move on-chain. That would move price discovery away from less liquid offshore trading centers with limited liquidity and poor-quality products, and toward markets overseen by the SEC, operating under the same transparency and regulatory controls.
Representative Timmons (R-SC): How should we think about practical steps to integrate tokenized securities into existing exchange infrastructure without disrupting market efficiency and integrity? Zecca: Most of it can be done through current processes. You are in the same order book, get the same priorities, and the experience is the same. A lot of this can be incorporated into existing systems, which is what retail investors expect. We already have equity forms trading 24/7, even if they are not as robust. The systems are largely ready, but as this becomes more of a regular session, we need to ensure we have the same data, information, safeguards, and surveillance as the key protection going forward. We will treat it like a regular trading session.
Representative Downing (R-MT): How much do you think Congress should be concerned about liquidity fragmentation inhibiting price discovery with digital assets trading across both securities exchanges and decentralized trading protocols, and should that be regulated in some form? Zecca: We are very concerned about fragmentation of liquidity as critical for capital formation and price discovery. It is something that we have to consider. That is why we are saying that if there are exemptions, which we do not necessarily favor, they should be time-limited and size-limited, to ensure liquidity is not broken up.
Representative Flood (R-NE): What conclusions did you draw from the regulated settlement network proof of concept exercise to explore the effects of tokenization on efficiency? Do you anticipate similar exercises in the future? Bentsen: That exercise was looking at other asset classes besides equity, such as Treasuries and other fixed income assets. The regulated settlement network, work done by exchanges, by DTCC, and by central banks in Europe, shows that this is already happening. We have tokenized securities today because of the pre-work that has been done and it is happening under the regulatory framework we have in place today. We may find over time that there are friction points, but to date we have found that we can adopt this upgraded technology.
Representative Nunn (R-IA): What does Nasdaq still need from the SEC to launch tokenized security trading? Zecca: The approval order got us most of the way there. There are still some technological pieces, but it is a pilot program and does not cover all securities yet. There will be other things we will likely need to go back to the SEC on.
Representative Stutzman (R-IN): Are there scenarios in which a broker-dealer would still play a role in a tokenized transaction that culminates in self-custody? If so, how should regulators think about those transactions and broker-dealers roles more generally? Bentsen: With a true self-custody wallet, it could engage through a DeFi application or another type of application that is routing orders and matching buyers with sellers. In that case, you could still be dealing with a broker-dealer or a registered ATS. I could see that concept, and the SEC is likely considering it. The key question is distinguishing when something is truly DeFi, with no control and no transaction fee, versus when there is control.
Representative Moore (R-NC): How does eliminating the settlement lag impact systemic risk, and how does it shift risk elsewhere in the system? Mersinger: Systemic risk will never be 100 percent eliminated, but instantaneous settlement certainly reduces overall risk by settling the transaction at the same time it takes place. The SEC has recognized that there is a correlation between settlement speed and counterparty risk, part of the reason settlement times were reduced from T+3 to T+1. As you bring down settlement times, you are moving payment with settlement and taking a significant amount of counterparty risk out of the system.