Tokenized securities need competition, not gatekeepers

Tokenized securities need competition, not gatekeepers

Innovation thrives when investors have choices. For tokenized securities, Washington shouldn't pick winners before the market has a chance to learn what works, argues Patrick McHenry, vice chairman at Ondo Finance and former Chairman of the House Financial Services Committee.

America’s capital markets lead the world because they adapt. Paper certificates gave way to book-entry records. Trading floors gave way to electronic markets. Manual processes gave way to faster settlement, automated clearing, and global access. Each step raised fair concerns. Each step required guardrails. But America stayed ahead because we did not treat every new tool as a threat to the old system. Tokenization is the next step in that history.

Patrick McHenry is the vice chairman of the advisory board at Ondo Finance, and a former U.S. Representative who chaired the House Financial Services Committee.

The current debate over tokenized stocks has centered on a basic question: what is the proper form for securities in the U.S. market? Some argue tokenization should happen primarily through existing market infrastructure: broker-dealers, custodians, securities intermediaries, DTC, and related records. Others have introduced products in various forms backed by U.S.-listed securities designed to meet the needs of the fast-growing cohort of investors that prefer to invest onchain. Still others point to issuers and transfer agents as the preferred pathway.

That debate is worth having. But it should not be reduced to one approved model. A better question is whether different models can compete on substance while preserving investor protection and the strength of U.S. markets.

Tokenized securities are not one thing. They can and do take different forms, and carry different rights. They can sit in different parts of the market structure. Treating them all the same will lead to bad policy and worse products for investors and issuers alike, ultimately putting the U.S. capital markets at a competitive disadvantage globally.

Three models to consider

There are at least three models to consider.

Model 1: Market infrastructure tokenization

The underlying securities remain within the existing legal and operational framework: broker-dealers, custodians, securities intermediaries, DTC, and related records. Blockchain can then be used for recordkeeping, reconciliation, collateral monitoring, transfer controls, and operational efficiency. This approach does not require abandoning the existing U.S. securities market system. It uses technology to improve specific parts of it.

Model 2: Customer-driven tokenization

These products start from a different place: what does the investor want to accomplish? Some products may be notes or other instruments designed to track the performance of U.S.-listed stocks or ETFs, supported by underlying securities and collateral. Others may use tokenized records for entitlements held through intermediaries.

These products are not the same as directly registered shares. They should not be marketed as if they are. But familiar forms of market exposure, including brokerage-held securities, ETFs, depository receipts, structured notes, and other equity-linked instruments, are well-established parts of the market today. Tokenization alone does not make them more or less legitimate. Their economic and legal structures should dictate their regulatory treatment.

Model 3: Issuer-sponsored tokenization

A company and its transfer agent support tokenized ownership directly. This may be the right model for many issuers. It can connect tokenized records to shareholder systems and support familiar processes for corporate actions, recordkeeping and communications.

Brokerage held securities, depository receipts, structured notes, and direct registration all coexist in today’s market. They do not provide identical rights. Investors choose among them because they serve different needs. The important questions are whether the structure is clear, the risks are disclosed, the backing is real where promised, and the product does what it says it does. That is the right standard for tokenized markets as well.

Avoiding wrong outcomes

One wrong outcome of the current tokenization debate would be a market where products borrow the language of stocks without telling investors what they actually hold or misleading investors altogether. That would harm investors and undermine confidence in the technology.

Another wrong outcome would be a market where tokenization becomes a set of private walled gardens. That would convert a promising new technology into a tool that narrows competition before the market has had a chance to learn what works. America should avoid both mistakes.

Open markets and regulated markets are not opposites. The U.S. has the deepest securities markets in the world because it combines investor protection with competition, capital formation, and adaptability. That balance is hard to maintain. But it is the reason companies raise capital here, investors around the world seek access here, and innovation happens here rather than offshore.

A more customer-centric approach to tokenization can support that strength. It can connect global demand back to U.S. assets and U.S. liquidity. It can give investors clearer records and more portable products. It can make collateral and entitlements easier to monitor. It can improve transparency without discarding the legal protections embedded in the current system.

This is not theoretical. Market participants are already experimenting with different models. Some are built around existing securities infrastructure. Others are onchain products directly and indirectly backed by U.S.-listed securities and ETFs. Still others are issuer-led. Those differences matter. They are evidence that the market is working through the right questions.

For years, I argued in Congress that digital asset policy needs clear rules of the road. That remains true. Clarity protects consumers and investors. It also keeps innovation in the United States. But clear rules should not mean forcing emerging new products into a legacy framework. Nor should they mean letting any one group decide which model is allowed to exist.

The point is not to pick a single winner at the starting line. The point is to let different models compete on substance and provide optionality to meet the varying needs of investors and issuers. That is how American markets work best.

Tokenized securities markets do not need more gatekeepers. They need clear distinctions, strong controls, and room for responsible competition. That is how America has led, and how it can continue to lead, financial markets into the future.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.