Wall Street vs. Web3: The Battle for Tokenized Asset Regulation Intensifies
Tokenized Real-World Assets (RWA) are at the forefront of a global digital transformation, rapidly moving assets onto blockchain networks. This surge in capital and asset diversity has transformed the RWA sector from a nascent crypto-native experiment into a fiercely contested battleground for traditional finance giants on Wall Street.
Yet, as the RWA landscape expands, a fundamental divergence persists between Traditional Finance (TradFi) and the cryptocurrency industry. Wall Street prioritizes regulatory stability, systemic risk mitigation, and established order, while the crypto sector champions rapid innovation, decentralization, and fears that existing frameworks could stifle progress.
Months ago, the U.S. Securities and Exchange Commission (SEC) signaled a groundbreaking shift, announcing a comprehensive package of crypto innovation exemptions slated for January implementation. This progressive, pro-crypto policy, however, has encountered significant resistance from Wall Street. Influenced by the legislative pace of the broader crypto market structure bill, the anticipated effective date for these exemptions now faces an indefinite delay.
Wall Street Closes Ranks Against Crypto Exemptions
This week marked a pivotal moment as key Wall Street players—JPMorgan Chase, Citadel, and the Securities Industry and Financial Markets Association (SIFMA)—convened a closed-door meeting with the SEC’s crypto working group. During this high-stakes discussion, these traditional finance representatives voiced explicit opposition to any broad regulatory exemptions for tokenized securities, advocating instead for the strict application of existing federal securities law frameworks.
The SEC’s proposed crypto exemption mechanism was designed as a “green channel” for tokenized securities and decentralized finance (DeFi) products. It aimed to fast-track innovative offerings by temporarily waiving cumbersome full securities registration requirements, provided certain investor protection criteria were met.
However, Wall Street institutions issued a stark warning against the SEC’s attempt to create regulatory shortcuts for tokenized assets. They argued that such a move could inflict significant damage on the overall U.S. economy, urging regulators to implement stringent, “penetrative” oversight rather than simply granting broad waivers. They emphasized that any innovation-focused exemptions must be narrowly defined, grounded in rigorous economic analysis, and fortified with strict safeguards, never serving as a substitute for comprehensive rulemaking.
A core tenet of their argument was that regulatory treatment should be determined by economic characteristics, not by the underlying technology or categorical labels like “DeFi.” They championed the “same business, same rules” principle, vehemently opposing the creation of dual regulatory standards. Broad exemptions that circumvent long-established investor protection frameworks, they contended, would not only erode safeguards for investors but also lead to market fragmentation and disorder.
The meeting notably referenced the October 2025 flash crash and the collapse of Stream Finance as cautionary tales. These incidents underscored the potential for immense systemic risk to the U.S. financial market if tokenized securities are permitted to operate outside the protective ambit of existing securities laws.
Concerns also extended to the SEC’s inclination to exclude certain DeFi projects from compliance obligations. SIFMA highlighted that many so-called DeFi protocols effectively perform core functions of brokers, exchanges, or clearing agencies, yet operate in a “regulatory vacuum.” The DeFi environment, they noted, presents unique technical risks, including predatory trading facilitated by Maximum Extractable Value (MEV), inherent pricing mechanism flaws in Automated Market Makers (AMM), and opaque conflicts of interest. Interestingly, despite these concerns, major DeFi advocates reportedly remained unaware of this crucial meeting, according to Decrypt.
Furthermore, discussions touched upon wallet providers involved in tokenized asset activities. It was stressed that wallets performing core brokerage functions and generating transaction-based revenue must register as broker-dealers, necessitating a clear distinction between non-custodial and custodial wallet models.
Ultimately, Wall Street’s message was unequivocal: embracing innovation does not necessitate abandoning established regulatory frameworks. Rather than constructing parallel, independent regulatory systems, tokenized assets should be integrated into the robust, mature compliance structures already in place.
As a direct consequence of this pushback, the highly anticipated crypto exemption mechanism now faces significant uncertainty. SEC Chairman Paul Atkins has withdrawn the timeline for the crypto exemption policy, originally slated for release this month. During a recent joint meeting with the CFTC, Atkins cited uncertainties surrounding the crypto market structure bill’s legislative progress as a direct factor influencing the exemption mechanism’s effective pace, stressing the need for careful deliberation. When pressed for a specific implementation date, he declined to commit to releasing a final rule in the coming months.
SEC Guidance: Tokenized Products Fall Under Existing Securities Law
Beyond the immediate regulatory debate, the legal classification and regulatory applicability of tokenized securities have remained a critical unresolved issue. To address this, Paul Atkins announced in November last year a plan to establish a comprehensive token taxonomy, utilizing the Howey Test to clarify which crypto assets qualify as securities, thereby defining a clear regulatory framework for digital assets.
On January 28, the SEC officially unveiled its guidance on tokenized securities. This directive aims to complement the ongoing market structure bill being advanced by U.S. legislators, offering market participants a clearer compliance pathway for conducting business involving digital assets.
The document unequivocally states that the regulatory status of a security is determined by its legal attributes and economic substance, not by its tokenized form. Tokenization itself does not alter the scope of securities law applicability. In essence, simply placing an asset on a blockchain or tokenizing it does not change its classification under federal securities laws.
According to the SEC’s definition, tokenized securities are financial instruments presented as crypto assets, where ownership records are maintained either entirely or partially through a cryptographic network.
The guidance further categorizes tokenized securities models into two primary types, outlining specific regulatory requirements for each:
- Issuer-Sponsored Tokenization Model: This involves the issuer (or their agent) directly leveraging blockchain technology to issue and record holder information, regardless of whether records are maintained on-chain or off-chain. These tokenized securities are subject to the same legal obligations as traditional securities, including registration and information disclosure requirements.
- Third-Party Tokenization Model: This category is further divided:
- Custodial: Token holders possess indirect ownership of custodied securities through their tokens.
- Synthetic: These products merely track the price performance of underlying securities without transferring any substantial ownership or voting rights. Such offerings may be classified as security-based swaps, incurring stricter regulatory oversight.
The SEC’s document particularly highlights the potential risks associated with third-party tokenized products, noting that this model introduces additional counterparty and bankruptcy risks. Consequently, certain products within this category will be subjected to more stringent security-based swap regulatory rules.
In a conciliatory gesture, the SEC affirmed its “open door” policy, expressing readiness to engage actively with market participants to discuss specific compliance pathways. This proactive approach aims to assist companies in developing innovative businesses within the established framework of federal securities laws.
As the SEC moves towards a more granular and comprehensive regulatory approach for RWA, the risk of regulatory arbitrage is expected to diminish significantly. This clarity and structured oversight are crucial steps in paving the way for broader participation and investment from traditional financial institutions in the burgeoning tokenized asset market.
