Tokenization—the process of converting financial assets into digital tokens on a blockchain—is transforming how markets exchange value. Industry forecasts suggest tokenized assets could swell to between $10 trillion and $16 trillion by 2030, fueled by promises of faster transactions and broader access. Yet the innovation clashes with legacy legal systems designed around centralized recordkeeping and intermediaries.
The technology’s strengths lie in its core features: programmable execution via smart contracts, asset fractionalization into tradable units, atomic settlement ensuring trades complete fully or not at all, and modular functionality that enables new financial products. These capabilities contrast with traditional book-entry systems, where ownership is centrally recorded and transactions require intermediary validation. Blockchain’s decentralized model introduces new risks—permanent loss from lost private keys and irreversible fraud due to immutability—while eliminating traditional recourse mechanisms.
SEC Reaffirms ‘Substance Over Form’ Doctrine
Regulators face the challenge of reconciling these innovations with existing rules. The U.S. Securities and Exchange Commission addressed the issue directly in its January 28, 2026, Statement on Tokenized Securities, reaffirming that the format of a security-whether physical, digital, or tokenized-does not alter its legal classification. The SEC emphasized that federal securities laws apply equally to blockchain-based and conventional ownership records. This “substance-over-form” doctrine allows tokenization to proceed without changing the underlying legal status of assets.
The SEC’s position reflects ongoing debate about whether tokenization should eliminate intermediaries entirely or integrate them into blockchain systems. The SEC’s no-action letters to major players like the Depository Trust & Clearing Corporation (DTCC) and Franklin Templeton suggest a middle path: permitting tokenization within a regulated structure.
DTCC’s Pilot Tokenization Service Program, approved in December 2025, enables participants to convert securities entitlements into digital twin tokens (DTTs) on approved blockchains while maintaining a primary record in traditional book-entry form. The program operates across two layers: a definitive ownership layer managed by DTCC and a peer-to-peer transaction layer executed on-chain. This hybrid approach preserves the benefits of central securities depositories while incorporating blockchain efficiency. The SEC granted DTCC a three-year regulatory sandbox to test the model, positioning it as the first major institution to bridge traditional and tokenized markets.
UCC Amendments Modernize Digital Asset Custody
Beyond securities, tokenization is reshaping commercial law. The Uniform Commercial Code (UCC), particularly Article 8, governs custody and transfer of securities. Recent amendments, adopted by 32 jurisdictions, introduce controllable electronic records, a category that could apply to tokenized assets. These changes modernize legal frameworks for digital custody but leave unresolved questions about aligning blockchain’s decentralized nature with traditional concepts of ownership and liability.
Legislative progress has stalled with the Digital Asset Market Clarity Act (CLARITY Act), passed by the House in July 2025 but stalled in the Senate. Without full legislation, the SEC has taken the lead through interpretive guidance and rulemaking. Its March 2026 Interpretive Release categorizes crypto assets into five types, digital securities, commodities, collectibles, tools, and stablecoins, and clarifies when they qualify as securities under the Howey test. More recently, the SEC proposed rules for crypto asset custody under the Investment Advisers Act, aiming to update requirements while maintaining investor protections.
In practice, issuers and investors must work within a fragmented regulatory system of guidance documents, no-action letters, and proposed rules. The SEC’s substance-over-form principle provides flexibility, but the absence of definitive legislation creates uncertainty. Current efforts focus on testing hybrid models, such as DTCC’s pilot, that combine blockchain efficiency with traditional safeguards. The next phase will determine whether tokenization can reduce intermediary reliance or if a balanced approach emerges.
The SEC’s October 1, 2026, proposal for modernizing custody requirements under the Investment Advisers Act represents another step in this evolution. The rules permit advisers to self-custody crypto assets or use state trust companies, adopting a substance-over-form approach that evaluates whether custody structures meet statutory objectives rather than mandating specific forms. The proposal explicitly allows blockchain-based vaults as functional equivalents to traditional custodians. This reflects the SEC’s acknowledgment that decentralized systems can achieve the same investor protections as centralized ones when properly structured.
These changes address gaps in commercial law by defining legal ownership and transfer rights for digital assets, including those stored on blockchains. For example, a tokenized security issued as a digital twin token (DTT) remains subject to UCC governance, even when ownership is tracked on a decentralized ledger. This ensures traditional concepts like securities intermediation and financial market utility designations remain applicable regardless of the underlying technology.
However, challenges remain in aligning blockchain’s decentralized features with UCC principles. The Code’s reliance on centralized intermediaries, such as transfer agents and custodians, conflicts with tokenization’s goal of reducing intermediary dependency. The 2022 UCC amendments attempt to bridge this gap by recognizing electronic signatures, smart contracts, and decentralized consensus mechanisms as valid recordkeeping methods. Yet disputes may arise over liability for lost private keys, smart contract errors, or blockchain protocol forks, areas where UCC precedent is still developing. Courts will likely apply substance-over-form principles, assessing whether tokenized transactions meet the UCC’s core objectives, such as clear title transfer and investor protection, rather than adhering strictly to traditional forms.
Hybrid Models Bridge Legacy and Blockchain
These regulatory actions demonstrate a pragmatic approach: rather than blocking innovation, the SEC is testing hybrid models that integrate tokenization with existing infrastructure. Similarly, the NYSE’s tokenized securities platform (announced January 2026) and Nasdaq’s rule change (March 2026) enable 24/7 trading and instant settlements, showing how exchanges are adapting. The SEC’s no-action relief for Franklin Templeton’s tokenized money market funds (August 2026) further signals that decentralized recordkeeping can meet traditional custody standards when aligned with regulatory goals.
SEC Guidance on Custody of Tokenized Securities and Broker-Dealer Compliance
The SEC’s Division of Trading and Markets clarified in December 2025 that broker-dealers holding customer assets in tokenized form remain subject to Rule 15c3-3 under the Exchange Act. This applies specifically to crypto asset securities, where the obligations of custody, such as segregation, safekeeping, and recordkeeping, must align with traditional securities standards. The guidance does not alter the legal classification of these assets but confirms that blockchain-based custody arrangements fall within existing regulatory expectations.
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