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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:
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
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 digital tokens that represent ownership in real-world financial assets. 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.
How Do Tokenized Securities Work?
Tokenized securities follow a similar lifecycle to traditional securities, but use blockchain to issue, manage, and record them. On May 15, 2025, the SEC clarified that tokenized securities must adhere to the same custody, disclosure, and registration rules as traditional securities, even when stored digitally.
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.
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: ATSs 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.
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.
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.
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.
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. Token Doesn’t Need Security
Some founders believe that if an asset is “on-chain,” it’s not a security. That’s not how regulators see it. 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.
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.
See also:
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:
Published on Jul 7, 2025
Last updated on Jul 7, 2025
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