Last month, the Tokenization Report Act of 2024 (HR 8464) was introduced into Congress. The House legislation is sponsored by Representative William Timmons, a Republican from South Carolina.
The bill, as it stands today, compels multiple federal authorities to review the potential of taking traditional assets and “tokenizing” them or turning them into digital securities.
While just about everyone accepts the inevitability of digital securities, the US has been slow to embrace the transition from the analog past. By leveraging technology, perhaps distributed ledger technology (DLT), traditional assets can be turned into digital assets, which can streamline the process of custody, transfers, trading, and provenance. As blockchain technology can incorporate “smart contracts,” activities such as dividends or other activities may be automated.
At the same time, certain asset classes that have been elusive for Main Street investors may become available as intrinsic friction is removed from the investing and trading process. This could mean more opportunities for retail investors to put their money to work.
Regulators can benefit too, as they can improve their ability to ensure compliance with rules by utilizing “Suptech” or supervisory technology as part of the equation.
Tokenization, or digital securities, can create a win-win situation for issuers, investors, and regulators.
This past week, CI reported on a firm in France that was approved by the Fench Autorité des Marchês Financiers to offer “tokenized” money market funds.
The company, Spiko, explained that its goal is to “transform the backbone of financial markets by facilitating the issuance of securities on much more powerful databases than those currently used by incumbents.” Spiko allows any investor to easily access US Treasury Bills, which safely generate a rate of return of 5.13% (at current rates). Credit Agricole provides custody while Twenty First Capital manages the assets, and everything is audited by PwC. Spiko is offering a regulated digital security that complies with the law but enables investment in an asset that was previously difficult to access.
You can expect Spiko to pursue other tokenized assets in the future.
Based in Luxembourg, Tokeny is another European tokenization platform that reports having tokenized over $28 billion in assets so far. Tokeny has focused on private markets, but it is well-positioned to improve public markets as well. Tokeny explains:
“… capital markets are underpinned by many fragmented and siloed networks with barely any interoperability between them. This leads to an industry that is analogue and fraught with slow, inaccurate and costly processes… the digitisation of financial assets will benefit all stakeholders in the value chain by offering tremendous improvements in transparency of information, automation, distribution and ultimately liquidity.”
There are other European providers seeking to turn securities into digital securities.
While the EU has approved MiCA, or Markets in Crypto Assets regulation, which applies to various digital assets such as stablecoins and utility tokens, the European Securities Market Authority (ESMA) is working on “the conditions and criteria for the qualification of crypto assets as financial assets” or digital securities.
The feedback deadline for a consultation launched earlier this year on digital securities was April 29, 2024. ESMA is expected to publish a final report by the end of 2024 at the latest, providing guidance to member states. The guidance should help advance the transition to digital securities across the European Union.
The US Tokenization Report Act legislation will require the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the National Credit Union Administration Board to jointly submit to the House Financial Services Committee and the Senate Committee on Banking, a report on trends in the use of blockchain technology to tokenize traditional assets. The report must be completed no later than 180 days after the bill is signed into law.
The legislation makes a lot of sense as regulators, mainly the Securities and Exchange Commission (SEC), have been hesitant to advance digital securities. Instead, the SEC has focused on the regulation of digital assets by enforcement, missing out on a unique moment to lead the way in the transformation of the securities sector. Under the leadership of Chairman Gary Gensler, an individual who taught Fintech classes at MIT, the SEC has chosen to pursue social issues and political ambitions over the chance to redefine markets – a historic opportunity.
The Tokenization Report Act of 2024 should easily gain bipartisan support in both the House and Senate as it is simply a study on the potential benefits of blockchain technology for regulated securities. This includes a review of the current global regulatory environment for tokenization and what guidance may be needed to enable tokenization in the US.
If Congress continues to play politics and buries the bill – as it has done with other Fintech legislation, it will be a lost opportunity for all Americans.