SEC targets ownership gaps in tokenized stocks

Key Points

The SEC proposal involves blockchain ownership records.
Token transfers may not complete the ownership change.
Agencies are required to disclose the blockchain system they use.
The rules are still in the proposal stage and have not yet taken effect.

The SEC focuses on legal records of tokenization

Since the era of paper certificates, the U.S. Securities and Exchange Commission has proposed for the first time a major reform of the transfer agency system. This reform will take blockchain records and tokenized securities into consideration. In the SEC's announcement, Chairman Paul Atkins said the changes reflect "the use of electronic communications and blockchain technology in securities issuance and share transfers." The proposal does not approve any tokenized stock platforms, nor does it consider wallet balances as decisive evidence of share ownership. The focus is on the mechanisms behind the balance: the records the issuer uses to identify investors and the transfer agent responsible for maintaining the accuracy of those records.

This focus is important because the way tokenized stocks operate is not one size fits all. Some tokenized shares are intended to represent shares on the issuer's official register, while others provide indirect interests associated with securities held elsewhere. In either case, the transfer of tokens and the change of legally recognized shareholder identities could be two separate events.

Token types, underlying mechanisms and legal relationships

Issuer-backed tokens: are designed to directly represent shares on the issuer's official register and enjoy direct interests as recognized shareholders.
Third-party tokens: provide indirect interests associated with traditional securities held elsewhere, acquired through a custodian or derivative structure.

One token transfer, two sets of ownership records

Transfer agents operate behind the scenes in the market where investors buy and sell securities. It maintains the issuer's official ownership record, handles transfers, and may support dividends, voting, redemption and other corporate actions. Tokenization creates a blockchain record that must be synchronized with the issuer's master security-holder file when the currency is intended to represent the shares themselves.

What happens after a token is transferred to another wallet?

Investors send tokenized shares to another wallet.
The blockchain records the receiving address.
The wallet is associated with the identity information of the new holder.
The transfer agent checks whether the transfer can be recorded.
Official ownership files reflect accepted changes.
If the process stops after the second step, the recipient may control the token but may not enjoy the same legal status as shareholders recognized by the issuer. This mismatch may arise later, such as when the holder expects to receive a dividend, votes, requests redemption, or attempts to transfer again.

The SEC's proposed rules explore how on-chain information (including wallet address, number of securities, issue date) should be connected to off-chain information (such as holder names and addresses). The committee also hopes to seek feedback on whether on-chain transfers should be required to make corresponding changes in the files of major securities holders.

Transfer agents are required to disclose their blockchain technology stack

The proposed changes to Form TA-2 will reveal how registered transfer agents use distributed ledgers in practice. Companies are required to report which issues use blockchain technology to maintain all or part of the master security-holder files, as well as the tokenized securities they serve. These disclosures will distinguish between tokens backed by issuers and products created by third parties. Transfer agents also need to identify the external tokenized agents and distributed ledger platforms involved in their work.

These details can show whether blockchain has become an official ownership record or is still an additional layer to traditional databases. At the same time, when multiple companies participate in issuance, custody, record-keeping, and token transfers, this information helps regulators position responsibilities. The proposal allows the use of distributed ledgers, but does not mandate them for issuers or agencies.

Tokenized shares do not enjoy equal rights

The difference between issuer backed tokens and third-party tokens is not just a reporting category. Issuer-backed tokens may serve as the company's own digital share record. Third-party products may represent custody interests, derivatives or contractual interests associated with the underlying securities. Therefore, two tokens displaying the same ticker symbol may have different rights in terms of voting, dividends, redemption and bankruptcy. As our previous analysis of tokenized stocks on a platform stated, tracking the value of U.S. listed stocks does not necessarily make the buyer a direct shareholder in the underlying company. The proposed disclosure would not equate these models, but would give a clearer view of which products are directly connected to regulated ownership records and which products add another issuer or custodian between investors and stocks.

Wallet Identity and Restricted Transfers

Draft views wallet addresses as a possible identifying detail of a tokenized security position. It still expects the record to include the full name of the holder and other information needed to identify the registered owner. Commissioner Hurst Pierce asked in a separate statement supporting the proposal whether future rules should allow the use of identifiers such as email and wallet addresses rather than requiring names and physical addresses. This difference is important because the wallet identifies where the token is located, not necessarily the person who legally owns the security.

Identity is only part of the check. Even though smart contracts for tokenized securities can move freely between compatible wallets, the securities themselves may have resale restrictions. The proposed rule 17ad-31 will govern how transfer agents place and remove restrictive markings. Before facilitating a transaction, the agent needs to have reasonable grounds to believe that the transaction does not violate federal registration requirements. This leaves developers with an important design choice: a licensed smart contract can reject non-compliant wallets before the transfer occurs; and a less restrictive token can be transferred first and then rejected by the transfer agent in the legal register. Make corresponding changes in the register. The second approach retains more on-chain flexibility, but also carries the risk of differences between the token and the official ownership document.

Blockchain records must withstand offline review

Even if compliance checks are built into the token, transfer agents must maintain a record that can be independently inspected by regulators. Under the proposal, agents using third-party electronic or distributed ledger systems need to have continuous access to current, complete copies without provider intervention. Transactions may be public, but the blockchain does not show the verified identity behind the wallet, nor does it show the reason why the transfer agent accepted or rejected the change. These records still need to be retained in an accessible form. This requirement also raises a practical problem for permissionless networks: Agents may not be able to control the blockchain, but are still responsible for the ownership information they extract from it.

The proposal combines access to records with written safeguards of funds and securities, significant risk monitoring, and business continuity procedures. Smart contracts and untamperable ledgers do not solve the problem of stolen credentials, software flaws, or erroneous identity data. When some technology fails, transfer agents still need to retain a way to maintain operations and rebuild accurate registers. DTCC is already testing a way to keep blockchain representations connected to the traditional securities behind them. Its regulated infrastructure is still responsible for custody and settlement, while blockchain has changed the way positions are recorded and transferred, as reported in relevant reports.

The true legal source remains unresolved

The proposal improves the SEC's view of tokenized securities, but still leaves several questions in the rule-making process:
Can blockchain become the only ownership record?
Who corrects unauthorized on-chain transfers?
What happens when the holder loses wallet access?
Should compliance occur before or after the transfer?

The most critical question for the SEC is not whether shares can be transferred along the chain-they already can. It is whether the transfer agent is still the legal true source when the records of contemporary coins, wallet holders and issuers no longer match. The proposal is still open to public comment and has not approved any tokenized stock platforms. The final rules will determine how much of the existing ownership system can be transferred to the blockchain and what legal responsibilities will remain offline.