Why a new SEC plan could end the legal headaches of holding tokenized securities

Here is an awkward problem for companies that are putting stocks on a blockchain: The onchain data can show who owns the token, but the legal shareholder record sits somewhere else.

So, when it comes to which database to consider as the legal record for these tokenized stocks, lawyers will currently pick the one that isn’t on the blockchain, even if the actual data is more up to date on the digital ledger.

But that all might change now after the SEC put forward a new proposal last week that would overhaul five decades-old transfer-agent rules and, for the first time, explicitly allow electronic databases, including blockchain ledgers, to serve as the official record of securities ownership.

And this is a big deal.

If this gets approved, a blockchain could become the “master security file,” replacing the parallel offchain ownership records that tokenized securities often still rely on today.

Put simply, blockchain would move from being a technology layered on top of market infrastructure to potentially becoming part of the legally recognized infrastructure itself.

“The master securityholder file used to be paper in a filing cabinet,” said Joris Delanoue, CEO of SEC-registered onchain transfer agent Fairmint. “Today it is a database. The proposal recognizes that blockchain can be that database, not merely a copy of it.”

Why it matters

Today, many tokenized securities effectively run on two records: the onchain token ledger and the official shareholder register.

If the proposal is passed, blockchain can serve as the authoritative register, issuers and transfer agents may no longer need to maintain duplicate records and reconcile them after every transfer.

That could reduce operational friction and the risk of the onchain record saying one thing while the legally recognized ownership record says something else.

Eli Cohen, chief legal officer of fund tokenization specialist Centrifuge, said the proposal could turn today’s two-ledger setup into “a one-step process,” with the blockchain itself serving as the master security file.

This is important because the current “two-step” setup is more than just inefficient. It can create a major legal headache, particularly when something goes terribly wrong.

“If there was an insolvency or a bankruptcy, there would be just a mess,” Cohen said.

Transfer agents got some homework to do

There is a catch, however.

The proposal does not mean that tokenized securities become fully ‘permissionless’. The blockchain itself can remain open, Delanoue said, but the asset still has to follow the same rules on who can own it and how it can be transferred.