SEC Crypto Working Group Roundtable: Tokenizing Our Dreamland?
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SEC Crypto Working Group Roundtable: Tokenizing Our Dreamland?
SEC commissioner questions its feasibility.
Navigating Web3 tides with focused insightsAuthor: Commissioner Caroline A. Crens
Translation: Baicai Blockchain
Today's topic is extremely broad—perhaps the broadest subject we've discussed to date in the crypto task force roundtable: tokenization. I understand that today’s discussion will focus primarily on potential regulatory efforts to advance tokenization.
This topic reminds me of a famous line from the movie Field of Dreams: “If you build it, they will come.” You may recall the film stars Kevin Costner as Ray Kinsella, a farmer who, inspired by a mysterious voice, plows over his cornfield to build a baseball field, believing great things will follow.
I think this resonates with the current enthusiasm around tokenization. Blockchain technology has existed for a long time. Despite some limited use cases introduced recently, it hasn't been widely adopted for issuing and trading registered securities. Some believe that if we "build"—or more accurately, "rebuild"—a financial system adapted to blockchain, market participants ("they") will flock to embrace tokenized securities. Investors would benefit from greater participation and choice, and markets would thrive due to improvements brought by blockchain.
To that, I first want to ask: What exactly are we trying to build? What is tokenization? Even within the SEC’s domain, this term defies a simple definition. Does tokenization mean issuing securities directly on a blockchain? Or does it mean creating digital representations of securities on a blockchain? This may seem like a subtle distinction, but from a regulatory standpoint, it could have significant implications. Moreover, should tokenization encompass post-issuance distribution, trading, clearing, and settlement? In other words, will the entire lifecycle of a security move "on-chain," or only parts of it?
No matter how we attempt to answer these definitional questions, it's clear that a tokenized financial system would be unlike anything we’ve seen before. It isn’t as familiar or easily understood as the baseball field Ray Kinsella built. Many envision a fully tokenized system where any security—including high-volume, liquid products such as stocks of Fortune 500 companies—could be issued, traded, cleared, and settled on a blockchain.
Is this technically feasible? If we're talking about public, permissionless blockchains, at least under today’s conditions, the answer appears to be no. Transaction volume limits and other scalability issues are well known. The very concept of public, permissionless blockchains—designed to provide trust without government oversight—seems ill-suited for complex, legally regulated domains like securities markets.
If we instead consider private or permissioned blockchains, does that improve scalability potential? Even if so, how does it qualitatively differ from other database technologies already in wide use? Would this require any regulatory adjustments?
There seems to be broad agreement that the SEC should maintain a "technology-neutral" regulatory stance. Then why are we assessing specific forms of blockchain as candidate technologies for industry adoption? Why focus on blockchain in particular, rather than other types of distributed ledger technologies? Regulatory efforts aimed at promoting blockchain—or worse, specific variants of it—appear to amount to government picking winners and losers. And we seem to be doing so before the technology has proven itself fit for purpose.
Beyond the question of what we’re trying to build, why are we building it? Proponents argue that tokenization can accelerate trade settlement and make markets more efficient. The current settlement cycle is T+1 (one day after the trade), and tokenization might push us toward instant settlement or "T+0." It's also argued that instant settlement could reduce counterparty risk because trades would be pre-funded. Yet while the settlement cycle has shortened compared to the past, it remains a design feature, not a flaw. The intentional delay between trade execution and settlement supports core market functions and safeguards.
For example, the settlement cycle enables netting. Simply put, netting allows counterparties to settle their daily transactions on a net basis rather than on a transaction-by-transaction basis. Complex multilateral netting in our national clearing and settlement systems dramatically reduces the number of transactions requiring final settlement. On average, 98% of transaction obligations are eliminated through netting. This allows the current system to handle massive transaction volumes. It's also one key reason why recent markets have remained stable even amid sustained record-breaking trading volumes.
Netting also enhances liquidity. Because the vast majority of transactions are netted out and don’t require actual settlement, no exchange of funds is needed. If A sells to B, B sells to C, and C sells to A, these trades can be matched and offset. A, B, and C can all retain their funds—unlike in bilateral, instantaneous blockchain settlements where each party must temporarily part with cash.
Another important consideration is that instant settlement often disadvantages retail investors, many of whom currently rely on the ability to submit payment after placing an order.
We must also remember that critical compliance activities occur during the settlement cycle. These include checks designed to identify and prevent fraud and cybercrime. The ability to pause transactions and conduct investigations when red flags arise is crucial not only for investor protection but also for broader concerns such as national security and counterterrorism.
For these and other reasons, it’s unclear whether shortening the existing settlement cycle is either desirable or feasible. Regulators and major market participants both domestically and internationally have raised compelling objections.
I believe, as a regulator, our statutory duty is to approach potential changes of this magnitude with extreme caution—changes that historically occur only in response to genuine market crises. While our markets certainly have room for improvement, I wonder whether the changes under discussion today would actually address any existing, concrete problems. In Field of Dreams, Ray Kinsella’s belief in “if you build it, they will come” ultimately worked out well for him. But Ray’s choices and risks were confined to his family and farm. The SEC oversees U.S. capital markets, and the systemic changes we’re discussing could affect every market participant—from Wall Street to Main Street.
Let us ensure that any measures we consider are appropriately limited to segments participating in crypto markets—recent estimates suggest less than 5% of American households—and do not harm traditional finance (TradFi) markets on which most Americans depend for their financial well-being.
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