Wall Street transfer agents lobby SEC, warning that third-party tokens pose risks to market integrity

As the competition to tokenize capital markets heats up, the debate over how stocks should move onto blockchain rails is making its way to U.S. regulators.

The Securities Transfer Association (STA), a trade group representing transfer agents and its members, which include major Wall Street institutions, is urging the Securities and Exchange Commission (SEC) to give preferential treatment to issuer-sponsored tokenized securities compared to tokens issued by intermediary firms as it develops rules for bringing traditional securities onto blockchain rails.

The STA argued in a letter to the agency that blockchain-based shares should be actual securities authorized by the underlying issuer and reflected in its official shareholder records rather than tokens created by unaffiliated platforms.

"The distinction is fundamental," the letter said. "An Issuer-Sponsored Token is an actual share or other security of the Corporation." Meanwhile, holders of third-party tokenized stocks instead face the credit, custody and operational risks of the platform issuing those tokens, the letter argued.

"Issuer-Sponsored Tokens can provide meaningful benefits to issuers, investors, and the U.S. capital markets, but only if the Commission establishes the foundational architecture correctly," the group said.

The group's request centers on one of the biggest questions facing tokenization: what legal structure should underpin blockchain-based stocks as Wall Street firms and crypto companies race to bring equities onchain.

The letter landed as tokenization has become one of the fastest-growing areas of digital assets that captivated Wall Street's attention. Asset managers, crypto firms and brokerages are competing to bring stocks, bonds and funds onto blockchain networks, arguing the technology can make securities easier to transfer, settle around the clock and embed into digital financial markets.

In fact, some argue that tokenized assets could become a massive market. Global bank Citi projected that tokenized securities could become a $5.5 trillion market by 2030 in its base case, with tokenized stocks growing to $2.6 trillion.

Competing tokenization models

Transfer agents occupy a critical layer of financial market infrastructure. They maintain companies' official shareholder records, process ownership transfers and corporate actions and determine who legally owns securities, putting them at the center of how tokenized equities may ultimately function.

As tokenization has evolved, multiple legal structures have emerged.

Under an issuer-sponsored model, a company authorizes tokenized shares and records them in its official shareholder register, giving investors the same legal rights as conventional stock. Third-party models, meanwhile, rely on intermediaries. In custodial structures, a regulated entity holds the underlying shares and issues blockchain-based tokens representing investors' ownership interests, while synthetic models provide only economic exposure to a stock's price.

The debate is likely to become more important as major financial institutions and exchanges are planning to expand tokenized securities offerings under clearer regulatory frameworks. Coinbase unveiled plans to introduce onchain shares of U.S. stocks, while Robinhood just expanded its stock token offering to users in 120 countries. Nasdaq was granted SEC approval to test tokenized securities trading and has tapped Kraken to distribute tokenized stocks globally, while the New York Stock Exchange has partnered with Securitize to develop tokenized securities infrastructure.

Meanwhile, the DTCC plans to begin testing its tokenized securities platform in July ahead of a broader rollout in October. The service will allow firms to issue blockchain-based versions of assets already held in custody while preserving the same ownership rights and legal protections as conventional securities.

'The real problem'

Joris Delanoue, CEO and co-founder of Fairmint, the first SEC-registered transfer agent operating natively onchain, said blockchains can help modernize transfer agents but cannot replace them altogether.

"The STA letter gets to the heart of what distinguishes real onchain equity from tokenized representations of equity," he said. "A blockchain isn’t the source of truth; the issuer-authorized shareholder register is."

What digital ledgers can do is make records programmable, real-time, and globally interoperable, he said, but they have to preserve the legal foundations of capital markets.

Carlos Domingo, CEO of tokenization firm Securitize, a member of STA, argued that the proliferation of synthetic tokens can make markets more fragmented and harder to police.

"That is a real problem for investors, issuers, and market integrity, and it is why regulatory frameworks should clearly distinguish Issuer-Sponsored Tokens from synthetic exposure," he said. "Synthetic tokens are not a shortcut to market modernization — they are a source of added risk and confusion.

Louis Froelich, a partner at law firm Womble Bond Dickinson and who spent nearly a decade at hedge fund Two Sigma Investments, said regulators should recognize that third-party stock tokens are different products from conventional shares, but not dismiss them outright.

"In some senses, third-party stock tokens are nothing new: regulated markets for options, futures and swaps have long offered price exposure to stocks without ownership," he told CoinDesk. "The novelty is that blockchain rails allow for efficient, broader distribution."

Because holders may lack voting rights, dividends and a direct legal claim against the issuing company, Froelich said such tokens could ultimately trade at a discount to the underlying shares. At the same time, he said custodial tokenization models that preserve voting rights and corporate actions may end up looking much closer to traditional securities than synthetic products.

"I'd encourage the Commission not to dismiss third-party stock tokens, but to treat them as what they are — a different class of financial instrument, with clear separation from real stocks."

Not everyone agrees

Some market participants, however, say the STA's proposal risks grouping together fundamentally different tokenization models.

"The key is whether the tokens represent true stock ownership or just economic exposure," Dinari CEO Gabe Otte told CoinDesk.

He said many of the STA's concerns are valid but apply primarily to synthetic tokenized products. He pointed to the SEC's January statement, which distinguishes custodial tokenized securities from synthetic structures, arguing that regulated custodial models should be evaluated separately.

"Both issuer-sponsored and custodial models offer true stock ownership and these should be distinguished from synthetic models for the benefit of the end investor," Otte said.

Alan Konevsky, CEO of digital securities platform tZERO, agreed that issuer-sponsored tokenization offers important advantages by preserving the direct relationship between companies and investors. But he argued the market is likely to support multiple compliant approaches.

"Innovation is accelerating, and we expect multiple compliant, non-misleading, economically and technologically meaningful models to emerge as the market matures," Konevsky said.

Eli Cohen, chief legal officer at tokenization platform Centrifuge that focuses on bringing funds onchain, said the letter reflects transfer agents' concerns that issuer-sponsored tokenization could lose ground if third-party models become more widely adopted.

"Here, the STA is protecting its market," Cohen told CoinDesk. "Transfer agents are paid by issuers, so if non-issuer securities become widely adopted, the existing transfer agent franchises will shrivel up."

Cohen said the more significant part of the letter is its call for the SEC to modernize the Direct Registration System. "The STA rightly notes that the current system relies entirely on DTC and is far too slow to compete with the synthetics," he said. "If DTC cannot adapt and develop a faster system soon, there is little chance the existing transfer agent system will be able to maintain their current position and role in the market."

The SEC has yet to propose formal rules specific to tokenized securities. The agency is expected to introduce its innovation exemption aimed at fostering tokenized securities, but the timeline and scope of that have not been specified.

But as brokerages, crypto firms and Wall Street institutions expand blockchain-based equity offerings, the agency's approach to issuer-sponsored and third-party models could determine how tokenized stocks develop in the U.S. and what rights investors ultimately receive.