Tokenization Debate Intensifies as Transfer Agents Warn of Market Structure Risks

The Securities Transfer Association (STA) has urged the U.S. Securities and Exchange Commission to prioritize issuer-approved tokenized securities as regulators develop a framework for bringing traditional assets onto blockchain infrastructure.

The push comes as Wall Street firms and crypto companies accelerate efforts to tokenize stocks, bonds, and other financial products, creating a growing debate over how blockchain-based securities should be structured and regulated.

In a letter to the SEC, the STA argued that tokenized shares should represent real securities authorized by the issuing company and recorded within official shareholder records. The organization warned that tokens created by third-party platforms may expose investors to additional risks, including custody challenges, operational failures, counterparty exposure, and weaker ownership protections.

The group said issuer-sponsored tokenization can provide major benefits for companies, investors, and U.S. capital markets, but only if regulators establish the appropriate legal framework from the beginning.

The discussion centers on a fundamental question for the future of tokenized finance: whether blockchain-based stocks should maintain a direct connection to the companies that issue them or rely on intermediaries that create digital representations of ownership.

Tokenization has become one of the fastest-growing areas of digital assets, drawing attention from financial institutions, asset managers, brokerages, and blockchain companies. Supporters argue that blockchain rails could improve securities settlement, enable 24/7 trading, reduce market friction, and expand access to financial products.

Citigroup has projected that tokenized securities could grow into a $5.5 trillion market by 2030, with tokenized equities accounting for a significant portion of that expansion.

Competing Tokenization Frameworks

Transfer agents serve a vital role in traditional securities markets by maintaining official shareholder records, processing ownership changes, managing corporate actions, and confirming legal ownership of securities.

As tokenized assets have evolved, several competing models have emerged.

The issuer-sponsored model allows companies to directly authorize digital versions of their shares and record ownership in their official shareholder registries. Investors receive rights similar to those attached to traditional stocks.

Third-party tokenization models rely on outside platforms. In custodial structures, regulated entities hold the underlying shares and issue blockchain tokens representing ownership claims. Synthetic models, meanwhile, provide exposure to a stock’s price performance without giving investors direct ownership of the underlying shares.

The SEC acknowledged these differences in a January staff statement on tokenized securities, separating third-party approaches into custodial tokenized securities and synthetic products. Although the statement does not represent formal agency guidance, it offered insight into how regulators are evaluating different tokenization structures.

The current tokenized stock market, estimated at around $2 billion, is largely dominated by third-party synthetic models, including products from Ondo Finance and Kraken’s xStocks. These offerings generally remain unavailable to U.S. retail investors.

By contrast, firms such as Figure and Securitize have issued their own shares directly on blockchain networks through issuer-sponsored structures.

Dinari has followed a custodial model and became the first U.S. tokenized equity platform to obtain broker-dealer registration. Ondo has also moved toward a custodial approach through its licensed transfer agent and partnership with Broadridge Financial Solutions for proxy voting, shareholder communication, and regulatory services.

STA Calls for Issuer-Backed Standards

The STA is asking the SEC to create clear regulatory differences between issuer-sponsored tokenized securities and third-party stock tokens.

The group said digital shares should only be considered true tokenized securities when they are approved by the issuing company and entered into official shareholder records.

It warned that third-party token products could create uncertainty for investors, weaken shareholder rights, and increase reliance on external platforms.

The STA recommended that future SEC exemptions, pilot programs, and regulatory frameworks apply specifically to issuer-backed tokenization models. It also called for platforms to obtain issuer approval before promoting products as tokenized versions of public company shares.

Executives at Computershare backed the proposal, saying innovation must develop alongside strong investor protections and market integrity.

The company stressed that regulators should clearly distinguish between genuine issuer-authorized securities and products that only replicate stock price exposure.

Equiniti also supported the STA’s position, arguing that tokens without issuer authorization and transfer-agent registration should not be classified as true tokenized shares.

The STA further urged regulators to update the Direct Registration System (DRS), saying current processes for transferring securities between broker-held accounts and transfer-agent records are too slow for blockchain-based markets.

The group recommended cooperation between regulators, transfer agents, and the Depository Trust & Clearing Corporation (DTCC) to modernize settlement systems as digital securities become more widely adopted.

Tokenized Equity Market Draws Greater Attention

The debate surrounding synthetic stock tokens has intensified as more companies introduce blockchain-based equity products.

A previous controversy involving OpenAI and a tokenized product linked to its shares highlighted the risks of creating digital assets without direct involvement from the underlying issuer.

The issue is expected to become increasingly important as major financial players expand tokenization initiatives.

Coinbase has announced plans to offer tokenized U.S. stocks, while Robinhood has expanded stock token availability internationally.

Nasdaq has received SEC approval to explore tokenized securities trading and partnered with Kraken to distribute tokenized stocks globally. The New York Stock Exchange has also partnered with Securitize to develop blockchain-based securities infrastructure.

The DTCC is preparing to test a tokenized securities platform designed to allow blockchain-based versions of traditional assets while preserving existing ownership rights and legal protections.

Industry Divided Over the Best Approach

Some industry participants believe blockchain technology should modernize transfer-agent systems rather than replace them.

Joris Delanoue, CEO of Fairmint, said blockchain can make ownership records faster, programmable, and globally accessible, but legal ownership should continue to rely on issuer-approved shareholder registries.

Securitize CEO Carlos Domingo warned that synthetic tokens could increase market fragmentation and investor confusion. He argued that regulators should separate true tokenized ownership from products that only offer exposure to price movements.

However, other industry leaders believe multiple compliant models should be allowed to develop.

Gabe Otte, CEO of Dinari, said many concerns raised by the STA are mainly related to synthetic products and should not apply equally to regulated custodial structures. He argued that both issuer-sponsored and custodial models can provide genuine ownership rights.

Alan Konevsky, CEO of tZERO, said issuer-backed tokenization has clear advantages but expects multiple compliant approaches to emerge as the market matures.

Eli Cohen, chief legal officer at Centrifuge, suggested the STA’s proposal also reflects concerns about preserving the role of traditional transfer agents as blockchain-based alternatives gain traction.

He added that existing market infrastructure must evolve quickly if traditional systems are to compete with blockchain-based solutions.

The SEC has not yet introduced formal regulations specifically covering tokenized securities. While the agency is expected to create an innovation framework for the sector, the timeline and details remain uncertain.

As financial institutions, brokerages, and crypto companies continue developing tokenized markets, the SEC’s approach to issuer-backed and third-party models will play a major role in determining the future of blockchain-based equities and the rights available to investors.