Navigating the SEC’s Perspective on Securities in the Age of Tokenization
Over the last couple of years, the United States Securities and Exchange Commission (SEC) has been involved in numerous lawsuits against major players in the crypto space — such as Binance and Coinbase — claiming violations of their existing securities laws. As a result, the regulatory body has ended up labeling at least 68 cryptocurrencies as securities, including major tokens like Solana’s SOL, Cardano’s ADA, and Polygon’s MATIC.
The implication of such a classification has been significant, leading to the creation of a more complex landscape for investors and exchanges, with potential legal and liquidity implications for these tokens. Despite this broad classification approach, there are still some cryptocurrencies (such as Bitcoin) that the SEC does not view as securities.
This conversation has also significantly influenced the tokenization industry, a sector that has been witnessing substantial growth and expansion over the past year and a half. To put things into perspective, earlier in October, renowned digital asset management company 21.co stated in a report that the market for tokenized assets could reach a valuation of $10 trillion in the near term.
Tokenized assets: Are They Securities?
The debate around whether tokenized assets should be classified as securities is nuanced and involves various regulatory considerations. Tokenization, a process that creates blockchain representations of underlying real-world assets (RWAs), has the potential to significantly impact the financial services sector since it offers benefits such as faster transaction settlement, operational cost savings, the democratization of access, and enhanced transparency through the use of smart contracts.
That said, the SEC has made it abundantly clear that existing federal securities laws apply to tokenized securities, especially tokenized stocks, equities, bonds, etc. To this point, the government agency has been actively monitoring the space and has enforced actions against various blockchain-related projects. According to the SEC, all tokenized securities must be registered, or they are liable for illegal issuances.
However, amid all this chaos, a growing number of investors are beginning to realize the potential of tokenized real estate — which uses blockchain tech to represent fractional ownership of real property. This is because these assets offer a blend of traditional real estate investment benefits with the modern advantages of blockchain technology. Notably, when structured and offered correctly, tokenized real estate can align with the SEC’s regulations, thus offering a secure investment option that minimizes legal risks.
For instance, Regulation D 506(c) facilitates the marketing of securities to accredited investors under specific conditions while Regulation Crowdfunding (Reg CF) and Regulation A+ (“mini IPO”) provide frameworks for broader marketing and trading of these assets, each with its own set of requirements and limitations.
One company at the bleeding edge of this revolution is Blocksquare. The project offers a comprehensive real estate tokenization protocol alongside a white-label marketplace. The protocol involves creating a ‘PropToken’ smart contract on the Ethereum blockchain, which represents a specific real estate property. This smart contract integrates unique information about the property and sets transactional rules as per the issuer’s requirements. Similarly, Blocksquare’s white-label solution allows clients to launch their own branded tokenized marketplaces where investors can browse, invest, and trade in tokenized real estate.
Furthermore, Blocksquare has made immense strides in integrating real estate tokenization with the decentralized finance (DeFi) market — via its Oceanpoint.fi platform. The offering helps establish a bridge that allows real estate owners to access decentralized financial markets via tokenization, representing a significant advancement in the field. Oceanpoint.fi operates as an open-end DAO (Decentralized Autonomous Organization), potentially owning an unlimited pool of real estate assets where participants can engage without legal restrictions, thus fostering a secure investment environment.
In addition to these innovations, Blocksquare’s business model includes a compelling integrated fee structure. A 1.5% fee in Blocksquare Property Tokens (BSPT) is applied to each transaction on the platform. This fee structure benefits various stakeholders, including platform operators, issuing companies, and the broader DeFi ecosystem. Moreover, Blocksquare’s ability to seamlessly trade tokenized properties through a peer-to-peer (P2P) secondary market, which is typically not permissible for tokenized securities, sets it apart from the rest of its contemporaries.
As the debate around crypto securities and tokenization gains momentum, the trend towards tokenized Real World Assets (RWAs) is expected to intensify. In this evolving landscape, platforms like Blocksquare seem poised to play a pivotal role, leading the charge in transforming how people invest in and interact with real estate assets. By offering a seamless, secure, and regulatory-compliant way to tokenize real estate, Blocksquare stands at the forefront of this shift, attracting a growing number of investors who seek the benefits of blockchain technology without the legal complexities often associated with crypto investments.