Tokenized Securities Explained: Examples and Regulation
Jul 21, 2025
·
12 min read
Wondering what tokenized securities are and how they’re reshaping the way financial assets are issued, traded, and managed? Well, you’re not alone. Despite the extra rules, tokenized securities are opening up new possibilities for fintech founders and compliance professionals.
That’s why we’re breaking down the essential aspects of tokenized securities in this article. Whether you’re seeking out practical examples, limitations, or regulatory expectations across the globe, you’re in the right place. Let’s explore how tokenized securities are transforming traditional finance compliance. But first:
At InnReg, we work with fintechs developing tokenized securities and other blockchain-based products. Our team provides practical compliance services, including registration support, policy design, and outsourced compliance operations. Contact us to learn more.
What Can Be Tokenized?
Tokenized securities are just digital representations of traditional financial assets. Almost anything with defined ownership rights can be tokenized and issued on a blockchain, provided the legal and regulatory framework supports it.
Here are some common examples of what can be tokenized:
Equity: Shares in private or public companies
Debt instruments: Bonds, notes, or other fixed-income products
Real estate: Ownership interests in residential, commercial, or fractionalized properties
Investment funds: LP interests, hedge funds, REITs
Commodities: Gold, oil, and other tangible assets backed by real-world reserves
Revenue streams: Royalties, lease payments, or other cash flows
In many of these examples, tokenizing the asset results in a tokenized security, particularly when the token grants investors ownership rights, profit participation, or voting power. That includes tokenized stock, debt, and most fund structures.
Each of these use cases has its own regulatory requirements. For example, tokenizing real estate often involves securities laws and state-level real property rules. Tokenizing equity typically involves navigating registration exemptions or investor accreditation rules.
What’s an Example of Tokenization in Practice?
Let’s say a fintech startup wants to raise capital. Instead of issuing traditional shares, they issue digital tokens, each one representing one share of the company. Investors receive tokens in their wallets, which carry the same rights and obligations as standard equity.
Or take a real estate investment platform. Instead of pooling money and issuing fund units, the platform fractionalizes a building into 10,000 tokens. Investors can purchase as few as one token and receive rental income, as the smart contract distributes payments.
In both cases, the token is just the packaging. The regulatory, tax, and investor protection obligations don’t disappear. They just move with the token.
What Are Tokenized Securities?
Tokenized securities are securities (as defined under U.S. federal securities laws) that are formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks. They’re created using blockchain technology, but they function just like traditional securities from a legal and regulatory standpoint.
In other words, if you tokenize a share of stock, it’s still a stock. If you tokenize a bond, it’s still a bond. The token changes how it’s issued, tracked, and traded, but not the nature of the asset.
That means the same securities laws still apply. Tokenized securities don’t sidestep compliance. They bring it with them into a new format. For fintech companies, this presents new opportunities for innovation, while creating a clear need to get the regulatory side right from day one.
Categories of Tokenized Securities According to the SEC’s Framework
The SEC staff distinguishes between two common categories of tokenized securities, based on who is doing the tokenizing and what the token represents:
Issuer-Sponsored Tokenized Securities: The issuer (or its agent) tokenizes its own security, either by integrating blockchain records into the issuer’s official ownership record or by using on-chain activity to support transfers recorded in the issuer’s off-chain systems.
Third-Party-Sponsored Tokenized Securities: A third party that is not affiliated with the issuer of the security tokenizes another issuer’s security. These models vary significantly (custodial tokenized securities, where a crypto asset is issued representing the underlying security, and the underlying security is held in custody, or synthetic structures, where a crypto asset is issued representing its own security, providing synthetic exposure to the underlying security but would not confer shareholder rights as provided to equity holders of the security).
This distinction matters for compliance because the investor’s rights, the custody model, and the applicable regulatory obligations can differ depending on whether the token is issuer-sponsored or third-party-sponsored.
Where Are Tokenized Securities Held?
One of the main questions asked is where these tokenized securities are held. Technically, there are two main ways to hold your tokenized security. Each method carries distinct compliance and operational implications as follows:
1. Private Wallets
Holding tokenized securities in non-custodial wallets (e.g., MetaMask, Ledger) gives investors direct control, with benefits like:
Peer-to-peer transfers
Greater asset transparency
No reliance on intermediaries
However, this introduces compliance risks. The issuer must embed transfer restrictions, KYC/AML logic, and jurisdictional limits directly into the smart contract. Without proper controls, tokens could be transferred to unverified or prohibited users.
2. Qualified Custodian Models
Tokenized securities can be held through qualified custodians, including broker-dealers, banks, trust companies, and other regulated financial institutions authorized to hold client assets.
These custodians typically:
Enforce regulatory safeguards such as segregation of assets and capital reserve requirements
Manage KYC, AML, and transaction monitoring processes
Facilitate investor onboarding and offboarding
Simplify audit trails, tax reporting, and compliance documentation
Support integration with traditional back-office systems (e.g., clearing and settlement)
This model offers greater regulatory clarity and aligns well with established securities infrastructure. It’s especially attractive for fintechs targeting institutional or high-net-worth investors, as it provides predictable investor protections, aligns with SEC custody expectations, and avoids the regulatory uncertainty of novel wallet or self-custody setups.
In addition, not all “custodied” tokenized securities represent direct ownership of the underlying issuer security. In some third-party tokenization models, the token represents a security entitlement rather than the underlying security itself.
In practice, this means the token holder’s rights may depend on the third party’s custodial and contractual structure, and the holder may be exposed to risks related to the third party (such as operational failures or bankruptcy) that a direct holder of the underlying security would not necessarily face.
How Do Tokenized Securities Work?
Tokenized securities follow a similar lifecycle to traditional securities, but use blockchain to issue, manage, and record them.
On Jan. 28, 2026, SEC staff from the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets issued a statement describing how federal securities laws apply to tokenized securities and outlining common tokenization models.
The staff emphasized that securities law obligations continue to apply regardless of whether ownership records are maintained on-chain or off-chain, and distinguished between issuer-sponsored tokenized securities and third-party-sponsored tokenized securities.
This framework is useful for fintech teams assessing how tokenized securities are structured, held, and traded in compliant ways.
Asset Selection and Legal Structuring
First, you identify the asset to be tokenized. It could be equity in a company, a debt instrument, a real estate interest, or something else with defined ownership or cash flow.
Next comes legal structuring. If the token qualifies as a security (and most do), you’ll need to plan around registration or a valid exemption. That means determining whether you’re doing a private placement, a Reg A+ offering, or something else. You’ll also need to define what the token represents: voting rights, dividends, ownership, or just exposure to value.
This is where most of the regulatory complexity starts. Fintechs often require external assistance to navigate this stage without getting tripped up. Regulatory specialists like those at InnReg can streamline the process and help avoid costly missteps.
Token Creation on Blockchain
Once the legal framework is defined, tokens are created through smart contracts deployed on a blockchain like Ethereum or Polygon. Each token represents a unit of the underlying asset.
The token might embed certain restrictions directly in the code, such as:
Who it can be transferred to,
How it behaves after resale, or
How income gets distributed.
The tech here is flexible. Some companies build their own smart contracts. Others use third-party tokenization platforms. Either way, this is the point where a traditional security becomes a tokenized security.
How tokenized securities “work” in practice depends on what the token actually represents and how ownership is recorded:
Issuer-Sponsored Model (direct tokenization): The issuer (or its agent) integrates blockchain records into the systems it uses to record owners of the security (the “master securityholder file”), so that transferring the token on a crypto network results in a corresponding transfer of the security on the master securityholder file (or in a tightly integrated hybrid onchain/offchain recordkeeping system).
Issuer-Sponsored Model (off-chain security + on-chain transfer mechanism): The issuer issues the security off-chain, while issuing a crypto asset to security holders that they may use indirectly to effect transfers of the security on the master securityholder file. In this model, the crypto asset may function as the transfer mechanism that prompts updates to the issuer’s off-chain records, even though the crypto network itself is not the official ownership record.
Third-Party-Sponsored Models: A third party that is unaffiliated with the issuer of the security tokenizes another issuer’s security. These models vary significantly (custodial tokenized securities, where a crypto asset is issued representing the underlying security, and the underlying security is held in custody, or synthetic structures where a crypto asset is issued representing its own security, providing synthetic exposure to the underlying security but would not confer shareholder rights as provided to holders of the equity security).
Investor Onboarding and Transfer Restrictions
If you’re selling tokenized securities, investor onboarding matters. That includes:
Verifying identity
Determining accreditation status (if needed)
Collecting any required disclosures or signatures
Most teams utilize a whitelist model to mitigate regulatory risks. That means only approved wallets, i.e., those tied to verified investors, can receive or hold the token. It’s a key step in enforcing resale restrictions or preventing tokens from being sold in jurisdictions where they’re not permitted.
Smart contracts can automate much of the onboarding, but you still need a well-documented process, especially if regulators ever ask for it.
See also:
Trading, Settlement, and Record-Keeping
Once issued, tokenized securities can be traded on a secondary platform or private bulletin board. Now, there are three ways to make a trade happen:
Peer to peer: Investors trade tokenized securities directly with each other, usually through private agreements or smart contract-enabled transfers.
Broker-dealer partners: These are licensed firms that help execute trades, handle custody, and maintain compliance with securities laws. Many fintechs rely on broker-dealers to handle the regulated aspects of the process that they can’t manage in-house.
Alternative trading systems: ATS are SEC-regulated platforms that match buyers and sellers of securities outside of traditional exchanges. They’re commonly used for secondary trading of tokenized securities in a compliant environment.
Trades settle directly on-chain. That means faster settlement times, reduced reconciliation work, and a clear audit trail. Every transaction is timestamped and verifiable, making regulatory record-keeping a lot more straightforward if the process is set up correctly.
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Why Tokenized Securities Matter in Financial Services
Tokenized securities aren’t just a new tech trend. They solve real pain points in how financial assets are issued, traded, and managed. Here are two ways they matter in financial markets and services:
Benefits for Fintechs, Investors, and Markets
Benefit | Fintechs | Investors | Markets |
Capital flexibility | Can raise funds through tokenized equity or debt offerings | Gain exposure to private or early-stage assets | New issuance models beyond traditional IPOs or listings |
Ownership management | On-chain records make cap tables easier to update and audit | Can hold fractional ownership with clear digital records | Simplifies tracking and reporting of ownership structures |
Access and liquidity | Easier to create liquidity pathways via secondary trading platforms | Access high-value assets at lower entry points (e.g., $500 vs. $100,000) | Helps unlock trading for traditionally illiquid assets |
Efficiency gains | Reduces overhead by automating compliance and transactions with smart contracts | Potential for faster settlement and reduced reliance on certain intermediaries | Cuts friction in post-trade processes and can support 24/7 transferability |
Transparency | Blockchain creates an audit trail of all transactions | Greater visibility into where assets are held and how they’re managed | Enhances trust, mitigates operational risk |
Opportunities for Innovation and Efficiency
Tokenized securities create room for smarter automation and fewer intermediaries. In other words, less room for error and better efficiency.
Smart contracts can handle things like:
Dividend payouts
Lock-up periods
Investor eligibility checks
Automated compliance with transfer restrictions
Cap table updates and real-time ownership tracking
Resale conditions based on jurisdiction or investor status
Scheduled distributions tied to asset performance
Voting mechanisms for tokenized equity holders
They also create optionality. A startup might issue tokenized equity, let it trade on an ATS for accredited investors, and later open up to retail under a different framework. Some tokenized structures offer more flexibility to evolve alongside business and regulatory strategy, but changes often require new approvals or legal work.
Can Public Equities Be Tokenized?
While tokenized securities have largely focused on private markets, new structures are emerging that bring publicly traded stocks (like Apple) onto the blockchain. These efforts differ in how they handle ownership, compliance, and legal classification.
As of now, public equities can be tokenized and can take different forms. However, the compliance posture depends on who tokenizes the security and what the token represents:
Issuer-Sponsored Tokenized Securities
In an issuer-supported model, the issuer (or its agent) can tokenize a security by issuing it in the format of a crypto asset. Under this approach, a transfer of the crypto asset on the crypto network corresponds to a transfer of the security on the master securityholder file with the issuer maintaining the master securityholder file on one or more crypto networks (onchain database records).
An issuer can also allow security holders to convert the security from one format to another (traditional and tokenized). Importantly, the format does not change the application of securities laws, and an issuer must still rely on registration or an applicable exemption for offers and sales.
Third-Party-Sponsored Tokenized Securities
Third parties unaffiliated with the issuer may also tokenize public securities. These models vary widely, and the token may or may not convey the same rights and protections that come with holding the underlying stock directly.
1. Custodial Tokenized Securities (Tokenized Security Entitlements)
In a custodial model, the third party can tokenize a security issued by another person by creating a security entitlement formatted as a crypto asset.
The token can function as the transferable “wrapper,” while the underlying stock remains held through a custody chain. This structure can introduce additional counterparty and operational risk tied to the third party’s custodial and legal arrangements.
2. Synthetic Tokenized Securities (Linked Securities or Security-Based Swaps)
In a synthetic model, the third party issues a token that provides price exposure to a referenced public stock without conferring shareholder rights from the issuer of the referenced stock.
These structures may resemble linked securities (such as structured-note-like exposure) or, depending on the economics and legal form, security-based swaps. In general, these instruments are designed to provide economic exposure rather than direct ownership, voting rights, or issuer-provided dividends.
Indirect Exposure via SPAC-Linked Tokens
Some platforms offer tokenized exposure to publicly traded stocks using third-party structures, such as trusts or SPVs that hold the underlying shares. The platform then issues tokens designed to track the stock’s value.
In these models, token holders typically do not receive direct shareholder rights (such as voting rights or issuer-provided dividends). Instead, the token is structured to provide synthetic exposure, and depending on the design, it may be treated as a linked security or even a security-based swap under federal securities laws. Investors may also face additional counterparty risk tied to the third party issuing the token.
Blockchain-Based Registered Securities
A more advanced model uses regulated transfer agents to track actual ownership of real shares on-chain. In this case, the token is a true digital security that reflects legal ownership of the underlying stock, not just economic exposure.
These tokens must comply with full securities regulations, including registration or valid exemptions. The first SEC-compliant example of this model emerged recently, showing the potential for blockchain-native cap tables in public equity markets.
See also:
How US Regulations Apply to Tokenized Securities
If a token represents a security, US securities laws apply. It doesn’t matter if it’s on a blockchain, if it uses smart contracts, or if it’s called a utility token. What matters is how the token functions and what it promises to investors.
The SEC relies on the Howey Test to determine if something is a security. If someone invests money in a common enterprise with the expectation of profit from the efforts of others, it likely qualifies. That’s true whether it’s a traditional stock certificate or a token on Ethereum.
So, if your token gives investors ownership rights, profit participation, or the ability to benefit from someone else’s work, it’s probably a security. That means it’s subject to registration requirements or must fall under a valid exemption.
There are a few common exemption paths:
Reg D for private placements to accredited investors
Reg A+ for smaller public offerings
Reg S for offerings made outside the US
Reg CF for regulated crowdfunding
Each option comes with its own limits, disclosure rules, and compliance obligations. Choosing the right path depends on your product, investor base, and growth plans.
Trading is also regulated. You can’t list tokenized securities on just any crypto exchange. Secondary trading has to happen on a registered national exchange or a FINRA-approved ATS. If you’re matching buyers and sellers of securities, even with tokens, you’re in regulated territory.
The same goes for handling customer assets. If your platform holds tokens on behalf of users, helps move them, or manages custody keys, you may need to register as a broker-dealer and comply with SEC custody rules.
For fintechs, this gets complicated fast. Some work with licensed broker-dealer partners. Others consider getting licensed themselves or buying a broker-dealer. Either way, these rules aren’t optional. They’re foundational to building a compliant tokenized securities offering in the US.
Key Compliance Challenges for Fintechs
Tokenized securities bring opportunity, but they also entail a long list of compliance tasks. For early-stage fintechs, this often means balancing speed with regulatory risk, especially when building in a space that wasn’t designed for blockchain-native products.
1. Licensing and Structuring Hurdles
Deciding whether to register or use an exemption is just the start. You should also consider how the token is structured, what rights it represents, and how it will behave post-sale. Missteps here can lead to classification issues or SEC scrutiny down the road.
If you plan to let investors trade your token, you may need to register as a broker-dealer or partner with one. If you’re matching trades, you might be considered an exchange or ATS. Each designation carries different obligations and costs.
2. KYC, AML, and Investor Verification
Most exemptions come with investor restrictions. That means you'll need to verify who your investors are, whether they’re accredited, and where they’re based.
Setting up a KYC/AML program is a baseline. Many startups use third-party vendors for onboarding, sanctions screening, and transaction monitoring. But you still need to design and maintain a program that meets regulatory expectations and aligns with your model.
Learn how Regly’s KYC/KYB module helps client onboarding using AI-powered tools →
3. Handling Restricted Securities and Resale Rules
Tokens issued under private placements can’t just trade freely. They're considered restricted securities, which means transfers must be limited for a certain period, usually 12 months under Reg D. This limitation can be enforced through smart contracts or wallet whitelisting.
The challenge is building liquidity without breaking the rules. You’ll need policies and technical controls to prevent unlawful resales, even if the tech allows transfers.
Regly’s Blockchain Analytics module enables businesses to monitor wallet activity and review asset holdings with tools designed for blockchain oversight →
4. Cross-Border Compliance and Jurisdiction Risks
Blockchains don’t care about borders, but regulators do. If your token is accessible to users in other countries, you may need to comply with foreign securities laws, even if you're US-based.
Some fintechs geofence jurisdictions or restrict access based on investor residency. Others register in multiple countries or limit offerings to known safe regions. Either way, you need a cross-border compliance strategy from the start.
5. Managing Custody, Smart Contracts, and Recordkeeping
If you're holding digital assets on behalf of users or managing wallets, you’re likely subject to custody rules. That includes technical controls, audit trails, and regulatory reporting.
Even if you're not holding funds, your smart contracts need to reflect real-world compliance constraints. That means coding in transfer restrictions, dividend logic, and ownership limits. And because tokens don’t live in spreadsheets, your audit trail has to live on-chain and off-chain in a way that satisfies regulators.
At InnReg, we help fintechs design compliance programs that account for both regulatory and technical complexity. That includes licensing, policy development, and structuring compliance workflows that can align with your product development.
See also:
6. Third-Party Tokenization Risk
If a third party is tokenizing an unaffiliated issuer’s security, the token may represent a security entitlement or a synthetic exposure rather than direct ownership of the underlying security.
This can create gaps between what investors assume they own and what they legally hold, and it can introduce additional risks tied to the third party, such as operational failures or insolvency that direct holders of the underlying security would not face.
7. Synthetic Structures and Security-Based Swap Constraints
Some tokenized “stock exposure” products are structured to provide synthetic returns linked to a referenced security rather than direct ownership.
Depending on the structure, a tokenized instrument may be treated as a linked security or, in certain circumstances, a security-based swap. Where a tokenized instrument is a security-based swap, there can be additional limits and execution/trading constraints, especially when offered to persons who are not eligible contract participants.
Common Misconceptions About Tokenized Securities
Tokenized securities often get misrepresented or misunderstood, especially in early-stage fintech circles. Misconceptions can lead to compliance gaps, wasted development time, or worse… regulatory action.
1. If It’s a Token, It’s Not a Security
Some founders believe that if an asset is “on-chain,” it’s not a security. That’s not how regulators see it. In fact, SEC Commissioner Esther Peirce has said in a statement that “As powerful as blockchain technology is, it does not have magical abilities to transform the nature of the underlying asset. Tokenized securities are still securities.”
If the token grants investors ownership, income, or governance rights and is sold with the expectation of profit from someone else’s work, it's likely a security.
Blockchain doesn’t exempt you from securities law. It just changes the format. Regulators assess these products based on economic reality and the rights conveyed, not the label used or the technology stack.
2. Private Placements Don’t Require Compliance
Using Reg D or Reg S doesn’t mean you can skip compliance. You still need investor verification, transfer restrictions, Form D filings, and in many cases, state-level notice filings.
Smart contracts alone don’t cover this. You need workflows, documentation, and controls to make sure the exemption remains effective.
3. Smart Contracts Handle All the Compliance
It’s tempting to think compliance can be coded into a smart contract and forgotten. While smart contracts can help automate parts of the process, like enforcing lockups or whitelisting wallets, plenty still happens off-chain.
KYC, disclosures, investor support, incident response, and reporting still need human oversight. Code helps, but it’s not a substitute for a compliance department.
4. Jurisdiction Doesn’t Matter
Just because your token is accessible online doesn’t mean you can ignore where your users are. Regulators apply local laws based on investor location, not the location of your server or protocol.
Offering a token to someone in the US, EU, or Singapore can trigger different obligations in each. Even if your company is registered offshore, regulators can still come knocking if you’ve marketed to their citizens.
Clearing up these misconceptions early can save time, legal costs, and product pivots in the future. At InnReg, we often work with fintechs that began building before fully understanding the regulatory landscape. Fixing regulatory missteps after launch can be significantly harder (and riskier) than designing around them from day one.
What Do Tokenized Securities Look Like In Global Regulation?
Outside the US, regulators are also working to bring clarity to tokenized securities. While the principles are similar, the rules vary from country to country.
EU
In the European Union, tokenized securities are typically treated as “financial instruments” under MiFID II. That means they’re subject to the same rules as traditional stocks and bonds.
Germany’s BaFin has been especially active. It requires security token offerings to publish a full prospectus unless an exemption applies. The EU’s DLT Pilot Regime also lets authorized market participants test blockchain-based trading and settlement under a temporary, flexible framework.
United Kingdom
The UK’s Financial Conduct Authority (FCA) classifies tokenized securities as “security tokens.” These require authorization for issuance, custody, and trading.
The FCA has joined global efforts, such as Project Guardian with the Monetary Authority of Singapore (MAS) and other regulators, to explore use cases and help shape international standards.
Singapore
Singapore’s Monetary Authority takes a tech-neutral stance. If a tokenized asset falls under the Securities and Futures Act, it must follow the same rules as traditional securities.
MAS offers a regulatory sandbox, and its Project Guardian initiative has made Singapore a testing ground for tokenized bonds, funds, and cross-border transactions.
Switzerland, UAE, Japan, and Others
For fintechs operating across borders, it’s critical to map out where your investors are and which local rules apply.
Switzerland recognizes tokenized securities in law and permits their direct registration on blockchain-based ledgers. The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market and Japan’s Financial Services Agency (FSA) have both published detailed guidance and licensing regimes for security tokens.
In short, most major jurisdictions accept tokenized securities as valid, but they expect full regulatory compliance. That means prospectuses, licenses, KYC, custody rules, and audit trails still apply.
Key Takeaways for Fintech Founders
Tokenized securities offer powerful ways to rethink ownership, access, and liquidity. But they don’t come with a shortcut around regulation. Tokenizing equity, debt, or real estate still means dealing with securities laws and investor protections not designed for blockchain. That’s where many fintechs hit roadblocks: not with the technology, but with the regulatory execution.
InnReg works with fintech companies building exactly these kinds of innovations. We can help structure tokenized offerings, manage licensing and onboarding, and run day-to-day compliance operations as a dedicated partner while mitigating regulatory risks. If you're building in this space and want to move fast without skipping the regulatory heavy lifting, let's talk.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with blockchain compliance, reach out to our regulatory experts today:
Last updated on Jul 21, 2025
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