Alex Zozos: Tokenized securities are classified as securities, the SEC’s evolving role in on-chain trading, and how blockchain enhances trading efficiency | Unchained

Key takeaways

• Tokenized securities are classified as securities under current regulatory frameworks.
• The SEC’s dual role in enforcement and policy is crucial for understanding its operations.
• Tokenization can enhance trading efficiency through modern technology.
• Decentralized systems can improve the resilience of capital markets.
• The market should determine the best approaches to tokenization, with transparency about risks.
• Blockchain technology is reshaping the networks of value, including payments and securities.
• Regulatory arbitrage is a strategy used to navigate different jurisdictions.
• The SEC has been slow to address on-chain trading challenges but may become more receptive.
• Self-custody in tokenization offers greater investor choice and mobility.
• The role of transfer agents is evolving with blockchain technology.
• Tokenized securities can provide economic exposure without direct governance rights.
• The distinction between crypto and traditional markets is blurring, leading to convergence.
• Broker-dealer regulations aim to mitigate risks from conflicts of interest.
• Wallets should be regulated as brokers only if they perform broker-like functions.
• Citadel is poised to become a major player in arbitrage between traditional and on-chain markets.

Guest intro

Alex Zozos is General Counsel at Superstate, a financial technology firm modernizing public capital markets through tokenized securities and onchain infrastructure. Previously, he served as Associate General Counsel at Coinbase, where he advised on tokenization and global expansion, and as Special Counsel in the SEC’s Division of Trading and Markets focusing on market structure and regulatory oversight. His background spans Wall Street at JPMorgan and law practice at Lowenstein Sandler advising fintech and crypto clients on securities and regulatory matters.

Understanding tokenized securities

• Tokenized securities are indeed securities.

  — Alex Zozos

• Commissioner Peirce emphasized that securities remain securities, reinforcing their regulatory classification.
• The regulatory landscape for tokenized assets fits into existing securities laws.
• Tokenized securities provide economic exposure but may not grant direct governance rights.
• Legal characteristics of tokenized assets can vary by jurisdiction.

• Most jurisdictions keep the legal characteristics of underlying assets once tokenized.

  — Alex Zozos

• The regulatory stance on tokenized securities is crucial for compliance.

• Commissioner Peirce’s statement highlights the consistent classification of tokenized securities.

  — Alex Zozos

The SEC’s role in market regulation

• The SEC’s operations are divided into enforcement and policy divisions.

• There’s the enforcement bucket and the policy divisions.

  — Alex Zozos

• Trading and markets focus on secondary trading of securities.
• The SEC has been slow to address regulatory challenges for on-chain trading.

• We’re still at step zero with tackling thorny issues.

  — Alex Zozos

• A more receptive SEC could address definitional challenges of on-chain securities.

• There’s potential for a more receptive SEC in the future.

  — Alex Zozos

• The SEC aims to create fair competition among tokenization models.

The impact of tokenization on financial systems

• Tokenization enhances trading efficiency by using modern technology.

• Speeds and efficiencies are derived from updated technology.

  — Alex Zozos

• Self-custody in tokenization allows for more investor choice.

• It allows for the ability of self-custody, creating more investor choice.

  — Alex Zozos

• Tokenization can derisk financial systems by updating settlement infrastructure.
• Decentralized systems can enhance resiliency in capital markets.

• Decentralized systems can help prevent systemic failures.

  — Alex Zozos

• Not all tokenized equities are the same, indicating diversity in approaches.

The evolving role of transfer agents

• The role of transfer agents is evolving with blockchain technology.

• Transfer agents’ roles are evolving to better track ownership.

  — Alex Zozos

• Tokenization could impact the role of transfer agents in managing records.

• Tokenization poses existential questions for transfer agents.

  — Alex Zozos

• Galaxy is creating a regulatory perimeter for tracking ownership of tokenized shares.

• Galaxy helps create a regulatory perimeter for eligible holders.

  — Alex Zozos

• Transfer agents face administrative burdens in evolving their roles.

• Issuers could serve as their own transfer agents, but it’s burdensome.

  — Alex Zozos

Blockchain’s transformative potential

• Blockchain will update networks of value across sectors like payments and securities.

• Blockchain updates networks of value, including payments and securities.

  — Alex Zozos

• The DTC’s involvement in tokenization marks a shift in traditional finance.

• DTC’s role in tokenization indicates a significant shift.

  — Alex Zozos

• The DTC’s sandbox allows for innovation but poses existential risks.

• The sandbox allows for experimentation but poses existential risks.

  — Alex Zozos

• Regulatory exemptions enable the DTC to innovate in tokenization.

• Exemptions allow the DTC to experiment in the tokenization space.

  — Alex Zozos

The future of financial systems

• New technologies won’t necessarily displace older systems immediately.

• New technologies don’t mean older systems will be displaced immediately.

  — Alex Zozos

• Parallel systems in finance will lead to increased competition and choice.

• There will be competition and increased investor choice.

  — Alex Zozos

• Different tokenization models will coexist, with the market deciding their success.

• The market will figure out which tokenization models succeed.

  — Alex Zozos

• The SEC’s role is to ensure fair competition among tokenization models.

• The SEC’s role is to create fair competition.

  — Alex Zozos

Rethinking regulation with blockchain

• Blockchain technology prompts a rethinking of regulation beyond crypto.

• Project crypto is about rethinking regulation more broadly.

  — Alex Zozos

• The distinction between crypto and traditional markets will blur.

• The distinction between crypto and traditional markets will blur.

  — Alex Zozos

• Broker-dealer regulations aim to control risks from conflicts of interest.

• Broker-dealer regulations control risks from conflicts of interest.

  — Alex Zozos

• The traditional broker model may be unnecessary with self-custody.

• Self-custody reduces the need for traditional brokers.

  — Alex Zozos

• Wallets should be treated as brokers only if they exhibit broker-like features.

• Wallets should be treated as brokers if they exhibit broker-like features.

  — Alex Zozos

Navigating regulatory challenges

• Regulatory arbitrage is used to navigate different jurisdictions.

• Regulatory arbitrage involves navigating different jurisdictions.

  — Alex Zozos

• Companies avoid US regulations through strategic jurisdiction choices.

• Companies avoid US regulations through jurisdiction choices.

  — Alex Zozos

• Citadel will become a major player in arbitrage between traditional and on-chain markets.

• Citadel will be a major arbitrager between traditional and on-chain markets.

  — Alex Zozos

• The SEC’s regulatory framework influences innovation in tokenization.

• The SEC’s framework influences innovation in tokenization.

  — Alex Zozos

• Understanding regulatory landscapes is crucial for navigating tokenization challenges.