- The SEC is the single most consequential regulatory body for US tokenized assets — its jurisdiction determines which tokens are securities, who can custody them, and how they may trade
- Staff Accounting Bulletin 121, reversed in January 2025, had imposed punitive balance sheet treatment on custodied crypto assets; its reversal unlocked bank participation in tokenized asset custody
- Regulation D Rule 506(c) remains the dominant legal pathway for tokenized security offerings — used in 80%+ of US STOs — enabling unlimited raises from accredited investors without SEC registration
- 12+ Alternative Trading Systems have received SEC registration for digital securities as of Q1 2026, providing the secondary market infrastructure that Reg D offerings require
- FIT21, the Digital Asset Market Structure Act, passed the House 279-136 in May 2024 — Senate action pending — and would bifurcate digital asset jurisdiction between the SEC and CFTC
No single institution shapes the landscape of tokenized finance in the United States more decisively than the Securities and Exchange Commission. The SEC does not merely regulate the secondary trading of tokenized assets — it determines, through its interpretation of eight-decade-old securities law and newly issued guidance, which digital instruments constitute securities at all. That determination controls who can issue them, who can hold them, where they can trade, and what disclosures must accompany their sale. For an industry projecting $16 trillion in tokenized assets by 2030, the SEC’s posture is the single largest variable in the adoption equation.
This analysis provides institutional-grade coverage of the SEC’s full regulatory framework as it applies to tokenization in 2026: the foundational legal tests, the exemption pathways, the secondary market requirements, the staff accounting guidance that nearly derailed institutional custody, and the political dynamics shaping the next chapter of digital securities regulation.
The Foundational Question: When Is a Token a Security?
Every analysis of tokenized asset regulation begins with the same question: is this thing a security? The answer determines everything downstream — registration requirements, investor eligibility, custody rules, and trading venue limitations. The SEC has answered this question the same way for 80 years, using the framework established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946): the Howey Test.
The Howey Test holds that an instrument constitutes an investment contract — and thus a security — when it involves: (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits; (4) derived from the efforts of others. All four prongs must be satisfied. The beauty of the test, and its frustration, is its flexibility. Applied to digital assets, it produces answers that vary by asset type, token structure, and how courts interpret “efforts of others.”
Tokenized real estate almost invariably constitutes a security. An investor pools capital to purchase fractional ownership of a commercial property, with profits flowing from the manager’s efforts in leasing and maintaining the asset. All four Howey prongs are satisfied. This does not make tokenized real estate investment illegal — it means it must comply with securities law: Reg D offering, SEC-registered transfer agent, ATS or broker-dealer for secondary trading. The tokenization layer is neutral; the underlying economic substance determines the classification.
Tokenized US Treasuries present a different analysis. US Treasury securities are explicitly carved out from the definition of “security” under the Securities Act in some contexts, but the analysis is more nuanced for tokenized representations. What the SEC has implicitly accepted — through its non-action in allowing BlackRock BUIDL and Franklin Templeton FOBXX to operate as registered investment funds rather than as securities offerings — is that tokenized fund shares in those funds are securities subject to the Investment Company Act, not novel digital assets requiring new treatment.
Utility tokens occupy the most contested territory. The SEC under Gary Gensler took the position that “most tokens are securities” — a stance that swept aggressively at DeFi governance tokens, protocol tokens, and even staking rewards. The post-Gensler SEC has taken a more nuanced approach, acknowledging that genuinely decentralized network tokens may fall outside Howey’s “efforts of others” prong. The SEC’s April 2019 Framework for “Investment Contract” Analysis of Digital Assets, while non-binding, remains the most detailed guidance available.
NFTs occupy an even more ambiguous space. The SEC has brought enforcement actions against NFT issuers who sold NFTs with express promises of profit — applying Howey directly. NFTs marketed purely as digital collectibles, with no profit expectation, may fall outside securities law. For institutional tokenization purposes, NFTs used to represent fractional ownership of real assets — an NFT representing 1% of a commercial building — will almost certainly satisfy Howey and be treated as securities.
The practical implication for issuers: when in doubt, structure your tokenized asset offering under a securities exemption. The cost of Reg D compliance is a few weeks of legal work and a Form D filing. The cost of an SEC enforcement action for an unregistered securities offering — as Telegram learned with a $1.7 billion settlement and product shutdown — is existential.
SAB 121: The Accounting Rule That Nearly Killed Institutional Custody
To understand the significance of Staff Accounting Bulletin 121’s reversal, you must first understand what it required. SAB 121 was issued by the SEC’s Office of the Chief Accountant in March 2022, ostensibly as guidance to help public companies think through the accounting treatment for crypto assets held in custody on behalf of clients.
The guidance reached a startling conclusion: companies that hold crypto assets in custody for clients must record those assets as both an asset and a corresponding liability on their own balance sheets. For banks subject to capital requirements under Basel III and its US implementation, this was catastrophic in its implications. If a bank custodies $1 billion in tokenized assets for institutional clients, SAB 121 required that bank to hold $1 billion in additional balance sheet liabilities — which in turn required additional regulatory capital. The economics of offering crypto custody became prohibitively expensive for regulated financial institutions.
SAB 121’s effect was immediate and severe. JPMorgan, State Street, and other major custodians either suspended plans for crypto custody expansion or limited their offerings to narrow circumstances that minimized balance sheet impact. BNY Mellon’s digital custody program, which launched in 2022 as the first bank-approved digital asset custody service, operated under the shadow of SAB 121 — with BNY receiving a specific non-objection from the SEC’s Office of the Chief Accountant that effectively granted an exception for BNY’s specific program structure.
Congress voted in May 2024 to overturn SAB 121 under the Congressional Review Act — the first time in decades Congress had used that authority against an SEC staff bulletin. President Biden vetoed the resolution, maintaining SAB 121 in force through the end of the Biden administration.
New SEC leadership reversed SAB 121 in January 2025 via SAB 122, rescinding the original guidance entirely. Banks no longer face balance sheet liability recognition for custodied digital assets. The reversal had two immediate practical effects: JPMorgan, Goldman Sachs, and State Street resumed aggressive planning for tokenized asset custody services, and the regulatory moat that had protected early-mover digital asset custodians (Coinbase Custody, Anchorage Digital, Fireblocks) from bank competition began to narrow.
The broader significance of SAB 121’s reversal is that it represents the first major regulatory action specifically designed to integrate tokenized assets into the existing bank custody framework — rather than treating them as a separate, quarantined category. The message from the new SEC leadership was explicit: tokenized assets are financial assets, regulated financial institutions should be able to hold them, and the regulatory framework should facilitate rather than obstruct that participation.
The Exemption Pathways: Reg D, Reg S, Reg A+, and Full Registration
For tokenized asset issuers, the choice of securities exemption is among the most consequential structural decisions they will make. Each pathway involves different tradeoffs on investor access, raise limits, compliance costs, and secondary market liquidity.
Regulation D is the workhorse of tokenized securities offerings. Adopted by the SEC in 1982 to reduce the burden of capital formation for smaller issuers, Reg D exempts certain offerings from the full SEC registration process. Rule 506(b) permits sales to up to 35 non-accredited but “sophisticated” investors plus unlimited accredited investors, with no general solicitation permitted. Rule 506(c) permits unlimited accredited investors with general solicitation (advertising the offering publicly) but requires the issuer to take “reasonable steps” to verify each investor’s accredited status.
For tokenized security offerings, 506(c) has emerged as the dominant pathway because it permits digital marketing of the offering — essential for reaching institutional investors who may discover tokenized opportunities through industry publications, conference presentations, or online platforms. The required accreditation verification has become standardized through platforms like Securitize’s compliance stack, which handles verification as part of the onboarding workflow.
Reg D offerings carry one significant constraint for tokenized assets: resale restrictions. Securities sold under Rule 506 carry a 12-month holding period before resale to other investors is permitted (6 months if the issuer is an SEC reporting company). This lockup fundamentally limits secondary market liquidity for Reg D tokens during the restriction period — an investor who purchases BUIDL tokens must hold them for 12 months before the transfer restrictions lift, unless trading on a registered ATS that has implemented the appropriate compliance protocols to verify holding periods. Many ATS platforms have built systems to track token vintage and enforce these restrictions automatically via smart contract, aligning the legal requirement with the technical architecture.
Regulation S addresses offerings to non-US investors. Securities sold exclusively offshore, to non-US persons, in compliance with Reg S are exempt from US registration requirements. For tokenized asset issuers with global institutional investor bases — hedge funds in Cayman Islands, sovereign wealth funds in Singapore, family offices in Switzerland — Reg S provides a pathway to raise capital from international investors without triggering US registration. The compliance requirement centers on ensuring no US persons purchase in the Reg S offering, which permissioned token transfer systems can enforce programmatically.
Regulation A+, the “mini-IPO” pathway updated by the JOBS Act, permits raises of up to $75 million from both accredited and non-accredited investors, with simplified but real disclosure requirements. The advantage for tokenized assets: no resale restriction, broader investor access, and regulatory approval that confers legitimacy. The disadvantage: the SEC must qualify the offering, adding months and significant legal costs compared to a Reg D Form D filing. Several tokenized real estate platforms have used Reg A+ to enable retail investor participation at $100 minimums — accepting the higher compliance cost in exchange for access to a retail investor pool.
| Exemption | Max Raise | Investor Type | Resale Lock | SEC Review | Relative Cost |
|---|---|---|---|---|---|
| Reg D 506(b) | Unlimited | Accredited + 35 sophisticated | 12 months | None (Form D only) | Low |
| Reg D 506(c) | Unlimited | Accredited only (verified) | 12 months | None (Form D only) | Low |
| Reg A+ Tier 1 | $20M | Accredited + non-accredited | None | State qualification | Medium |
| Reg A+ Tier 2 | $75M | Accredited + non-accredited | None | SEC qualification | Medium-High |
| Reg S | Unlimited | Non-US persons only | None (offshore) | None | Low-Medium |
| Full S-1 Registration | Unlimited | Any investor | None | Full SEC review | Very High |
Full S-1 registration — the pathway used by traditional IPOs — theoretically provides the broadest investor access and eliminates resale restrictions. In practice, no purely tokenized security offering has completed a full S-1 registration as of early 2026. The time (12-18 months typical), cost ($3-10 million in legal and accounting fees), and disclosure burden make full registration impractical for most tokenized asset issuers. The exception may be a tokenized version of an existing public security — a scenario where SEC-registered tokenized shares of a publicly traded REIT would inherit the parent entity’s existing disclosure infrastructure.
ATS Registration: The Secondary Market Infrastructure
The liquidity promise of tokenized securities cannot be delivered without a functioning secondary market. In the US, that secondary market requires one of two structures: broker-dealer registration plus market-making, or Alternative Trading System registration.
An ATS is a trading system that matches buyers and sellers of securities without a traditional exchange’s full regulatory burden. ATS registration requires: SEC registration as a broker-dealer, ATS-specific notice filing with the SEC, FINRA membership, and ongoing compliance with Regulation ATS. As of Q1 2026, the SEC has issued 12+ ATS registrations to platforms specifically designed for digital securities trading.
The significance of this number is context-dependent. Twelve ATS registrations represents enormous progress from zero registrations in 2018 — demonstrating that the regulatory pathway exists and that multiple platforms have navigated it successfully. But it also reflects how thin the infrastructure remains compared to traditional markets. The US equity market operates through thousands of broker-dealers, two primary exchanges (NYSE and Nasdaq), and dozens of ATS platforms. The digital securities market has 12 ATS platforms serving assets worth approximately $36 billion — a ratio of infrastructure-per-asset that explains why secondary market liquidity for tokenized securities remains thin.
tZERO was the first to receive ATS registration for digital securities in 2019 and remains the most established platform for secondary trading. INX Limited followed, and Securitize Markets — the ATS arm of the dominant transfer agent — has become increasingly important given its integration with the Securitize issuance platform. The SEC’s willingness to approve these ATS registrations established the precedent that tokenized securities can be traded on a regulated platform without requiring the full exchange registration process — a significant reduction in barrier to entry for secondary market infrastructure.
The Gensler Era and Its Legacy
Gary Gensler’s tenure as SEC Chair from April 2021 through January 2025 was the most consequential period in the SEC’s history for digital asset regulation — not because of what it built, but because of the enforcement posture it established and the market behavior it shaped.
Gensler took the position from his first weeks in office that the vast majority of cryptocurrency tokens were securities under the Howey Test, and that the failure of crypto exchanges and issuers to register with the SEC was not a regulatory gray area but a clear violation of existing law. This enforcement-first approach produced a series of high-profile actions: the SEC sued Ripple Labs in December 2020 (Gensler inherited this case) and reached a $125 million settlement in August 2024 after partial wins on both sides. The SEC sued Coinbase, Binance, Kraken, and other major crypto platforms for operating unregistered securities exchanges. The SEC charged Genesis, Gemini, and BlockFi for offering unregistered securities products.
For institutional tokenization — as opposed to retail crypto — the Gensler era’s legacy is more nuanced. The SEC approved multiple Reg D filings for tokenized fund offerings without objection, implicitly accepting the regulatory pathway that BUIDL, FOBXX, and others now use. The SEC’s no-action staff did not pursue enforcement against the structured tokenized fund market. The tacit approval of the Reg D tokenized fund model — while aggressively pursuing crypto exchanges — created a two-track regulatory environment: tokenized traditional assets in regulated fund structures were implicitly permitted; native crypto products on unregistered platforms were not.
The change in SEC leadership that took effect with the new administration in January 2025 has shifted the posture significantly. The new SEC chair created a dedicated crypto task force, reversed SAB 121, dropped the Coinbase lawsuit, and signaled a more industry-collaborative approach to digital asset regulation. For institutional tokenization, this means clearer guidance is forthcoming rather than enforcement-by-ambiguity. For the broader digital asset industry, it marks a fundamental realignment of the SEC’s role from antagonist to architect.
FIT21: The Legislative Battle Over Jurisdictional Lines
The Digital Asset Market Structure Act — known as FIT21 — passed the US House of Representatives on May 22, 2024, with a surprisingly bipartisan vote of 279-136. The bill would create the first comprehensive statutory framework for digital asset classification and jurisdiction, resolving a decade-long turf war between the SEC and CFTC.
FIT21’s core mechanism is a bifurcation test based on decentralization. Digital assets associated with a blockchain network where no single person controls 20% or more of the voting power, or where the network is sufficiently decentralized, would be classified as digital commodities under CFTC jurisdiction. Digital assets associated with centralized networks or centralized issuers would be classified as digital securities under SEC jurisdiction.
For the institutional tokenization market, FIT21’s jurisdictional test has significant practical implications. Tokenized funds like BUIDL — centrally issued by BlackRock through Securitize — would clearly fall under SEC jurisdiction as digital securities. Ethereum-native DeFi protocols built on the Ethereum network — decentralized by FIT21’s test — would fall under CFTC jurisdiction. The most contentious cases involve semi-decentralized protocols and newly launched networks that start centralized and plan to decentralize.
As of early 2026, FIT21 has not passed the Senate. The Senate Banking Committee has held hearings but has not advanced a companion bill. The new administration’s supportive stance toward digital asset legislation increases the probability of some form of market structure legislation passing in 2026 — but whether it will be FIT21 as written or a substantially modified bill remains uncertain. For institutional tokenization practitioners, the key provision to watch is the treatment of tokenized real-world assets: FIT21 as written would classify tokenized securities (tokenized Treasuries, tokenized equity funds) under SEC jurisdiction, providing the regulatory clarity that institutional allocators need before committing large capital.
The Enforcement Record and Its Implications for Tokenized Assets
Any assessment of the SEC’s regulatory posture must reckon with its enforcement history. The SEC’s enforcement actions in the digital asset space since 2018 total over $10 billion in fines, settlements, and disgorgements — making it one of the most active enforcement areas in the agency’s history.
The cases most relevant to institutional tokenization are those that tested the boundaries of securities registration. SEC v. Telegram Group (2020): the SEC sued Telegram for conducting an unregistered securities offering of its GRAM tokens, which had raised $1.7 billion from investors including major venture capital firms. Telegram settled by refunding $1.2 billion to investors and paying a $18.5 million fine. The lesson: even sophisticated institutional investors participating in a token offering cannot cure an underlying registration failure.
SEC v. Ripple: after four years of litigation, Ripple Labs settled with the SEC for approximately $125 million in August 2024. The court had found that institutional sales of XRP to sophisticated investors constituted unregistered securities offerings — while XRP sales on secondary markets to retail investors did not. This finding has direct implications for tokenized asset issuers: the manner of sale (direct institutional placement) matters as much as the asset’s nature.
BlockFi, Genesis, and Gemini Earn: the SEC’s actions against yield-bearing crypto products — where customers deposited crypto assets to earn interest — established that interest-bearing crypto arrangements can constitute investment contracts under Howey. For tokenized asset products that accrue yield, this precedent reinforces the necessity of proper securities registration or exemption.
For tokenized securities operating under Reg D, these enforcement actions are largely not cautionary tales but competitive differentiators. The platforms and managers who structured their offerings under proper exemptions — Securitize-issued tokens, Reg D Form D filings, ATS secondary markets — have operated without SEC enforcement attention precisely because they followed the framework.
What Institutional Tokenization Practitioners Must Know
The actionable regulatory checklist for institutional tokenization in the US as of 2026:
First, perform the Howey analysis before structuring. Most tokenized financial assets — fractional real estate, tokenized fund interests, tokenized private credit — will be securities. Design the legal structure with that assumption. If uncertain, engage a securities counsel with specific digital asset experience (Skadden, Dechert, Latham & Watkins have built practices in this area).
Second, select the appropriate exemption. For institutional-only raises, Reg D 506(c) is the fastest, lowest-cost pathway. For broader investor access (including non-accredited), Reg A+ requires months of lead time and SEC review but opens the retail market.
Third, engage a SEC-registered transfer agent. This is non-negotiable for tokenized securities. Securitize, Broadridge, and American Stock Transfer have SEC transfer agent registration; most blockchain-native platforms do not.
Fourth, build transfer restriction compliance into the token architecture. Permissioned ERC-20 tokens that enforce Reg D resale restrictions programmatically eliminate a category of compliance failure that cannot be easily remediated after the fact.
Fifth, plan the secondary market before launching the primary. An illiquid Reg D token has limited investor appeal. Confirming the ATS partnership and trading timeline before the offering launches is essential to investor confidence.
The regulatory landscape for institutional tokenization in the United States is not simple, but it is navigable. The frameworks exist. The precedents are being set. The infrastructure — transfer agents, ATS platforms, custodians, compliance stacks — is operational. The regulatory uncertainty that paralyzed institutional capital between 2020 and 2024 has given way to a period of cautious but accelerating clarity.
For related analysis, see our BlackRock BUIDL deep dive, which examines how the world’s largest asset manager structured its tokenized fund under this exact regulatory framework. Our Wyoming blockchain regulation analysis covers the state-level regulatory innovations that are complementing federal frameworks. For the platforms building the compliance infrastructure that makes all of this work, see our Securitize platform analysis.
External regulatory references: SEC.gov — Regulation D overview and SEC.gov — Investment Contract Framework for Digital Assets.
Donovan Vanderbilt is the founder of The Vanderbilt Portfolio, an independent intelligence network covering institutional finance and digital asset markets. This analysis is for informational purposes only and does not constitute legal or investment advice.