On‑chain Stocks, Off‑chain Keys: SEC Says Brokers Must Hold Tokenized Shares

The U.S. Securities and Exchange Commission has effectively drawn a line in the sand: yes, companies can have tokenized versions of their stock on blockchains, but the digital keys that represent ownership are expected to live with regulated brokers, not with self‑custody users. That stance keeps the new token models inside the old custody rules and narrows the way crypto platforms can offer actual securities.

What changed and why it matters right now

The SEC’s message matters because it decides who can legally hold and move tokenized securities. If brokers must hold custody, tokenized stocks become more like traditional book entries at a brokerage — only now they can also exist on a public ledger. For investors, that means faster, 24/7 settlement and easier fractional ownership in theory, but also more counterparty and regulatory risk in practice.

For firms that build token trading systems, this is a pivot from the dream of pure, user‑controlled onchain ownership toward a model where licensed middlemen keep the keys. The change lowers some operational barriers for regulators, but it raises questions about who actually controls a token once it leaves an exchange or platform.

How the SEC’s custody stance links to existing securities rules

The regulator isn’t inventing a new rulebook. It is applying long‑standing custody and broker‑dealer requirements to a new form of record keeping. Under U.S. securities law, when something functions like a share — conveys economic rights, dividends or voting — regulators treat it as a security. Custody rules then kick in to protect investors and ensure records are accurate.

That means tokenized shares are likely to fall under the same rules that govern traditional brokerages: proof of custody, reconciliation, audit trails, customer protections and segregation of client assets. The SEC’s push for broker custody forces token platforms to either partner with licensed custodians or to become broker‑dealers and meet a heavy compliance burden.

Put simply: tokenization changes the plumbing for settlement, but it doesn’t erase the legal plumbing that defines who can hold securities and how those holdings must be safeguarded.

How tokenized shares would actually work under broker custody

Think of tokenized shares as two linked records. One record is the traditional ledger: the broker’s books that show you own X shares. The other is a token on a blockchain that mirrors that ownership. The SEC’s approach pushes the broker to be the gatekeeper of the token’s private keys — the cryptographic proof that lets anyone move the onchain token.

There are two main models that could survive this framework. First, a broker‑led model where licensed firms like Coinbase (COIN) or Robinhood (HOOD) — or third‑party custodians working with them — hold keys and issue onchain tokens to represent positions they maintain offchain. Users interact with the token in a wallet, but the broker controls the ability to change underlying legal ownership.

Second, a hybrid where a custodian issues tokens to represent custody receipts. These tokens are tradeable on certain platforms, but only the custodian can convert them into settlementable shares. That preserves fast onchain trading while keeping settlement and legal ownership with regulated entities.

Neither model gives full, uncompromised ‘self‑custody’ of securities. The moment tokens stand for real shares, the legal system requires regulated custody, and that changes the tradeoffs for investors who value true self‑custody today.

Market consequences: liquidity, trading venues and listed issuers

One upside: tokenized stocks under broker custody could improve settlement speed and workplace for liquidity. Trades could clear in seconds rather than days, which reduces counterparty risk and could unlock new strategies across time zones. Exchanges that integrate token rails could offer round‑the‑clock trading without rewriting securities law.

But there are limits. If brokers must be the custodians, token trading may remain concentrated in a small number of regulated venues. Big players with deep compliance teams — think BlackRock (BLK), Nasdaq (NDAQ), Coinbase (COIN) — are best placed to build the systems and win listings. That centralization undercuts one of crypto’s founding promises: decentralizing control.

For issuers, tokenization still offers benefits: cheaper fractionation, programmable corporate actions, and broader access. Yet they must accept that tokenized shares won’t free them from the same listing rules and shareholder identity requirements that govern current markets.

How exchanges, token platforms and brokerages reacted — and where the risks lie

The industry response is predictably mixed. Traditional brokerages welcome clarity; it gives them a roadmap to offer tokenized products without flouting securities law. Crypto platforms see both opportunity and constraint: they can participate, but only by ceding custody or by building expensive compliance shops.

Operationally, the risks are real. Concentrating custody reintroduces single points of failure: hacks, insider threats, or errors at a custodian can now affect onchain tokens that retail investors can trade instantly. Legal risks are also thorny. If a custodian incorrectly represents ownership, disputes over onchain vs offchain records could lead to complex litigation.

Finally, international fragmentation is likely. Other regulators may take different stances, meaning tokenized stocks could behave differently across borders, complicating cross‑border trading and settlement.

What investors should watch and how portfolios might be affected

Investors should track three things. First, which firms decide to act as custodians or to partner with custodians. Public players like Coinbase (COIN), Robinhood (HOOD), market infrastructure firms and big asset managers will set early norms. Second, whether trading venues roll out true settlement finality onchain or merely use tokens as a near‑term ledger while keeping final ownership in traditional systems. Third, any regulatory updates that define record‑keeping and dispute resolution for token transfers.

From a portfolio angle, this is mixed news. Tokenization can lower trading friction and open new retail products that increase liquidity for some stocks. But the mandatory broker custody model increases counterparty exposure and keeps much of the control with regulated firms — which is safer in some ways and limiting in others.

For investors who want exposure to the trend without taking custody risks, look to platforms and firms that combine strong compliance with modern token rails. For those who prize pure self‑custody, tokenized securities are unlikely to deliver that experience anytime soon.

The SEC has not killed tokenized shares. It has folded them into the existing safety net. That preserves investor protections but also preserves the intermediaries. Which side of that tradeoff you prefer will shape how you engage with tokenized securities going forward.

Sources

• cointelegraph.com