In brief

  • SEC Chair Jay Clayton is open to a tokenized ETF.
  • This would be a tokenized stock that represents an index.
  • But recent clampdowns on crypto companies suggests that current offerings don't cut it.

Though the US Securities and Exchange Commission has struggled to keep up with the pace of innovation in the decentralized finance space, its chairman, Jay Clayton, is open to its potential.

In a webinar with the Chamber of Digital Commerce yesterday, Clayton said, “It may very well be the case that [...stocks] all become tokenized.” Tokenized stocks form one of a slew of financial products that fall under the DeFi umbrella; others include non-custodial loans and decentralized stablecoins.

Clayton’s even open to a tokenized exchange-traded fund, or ETF—essentially, a stock whose price tracks an index. “We're willing to try that; our door is wide open. If you want to show how to tokenize the ETF product in a way that adds efficiency, we want to meet with you, we want to facilitate that,” he said. 

Recent SEC actions suggest that this day has not yet come. 

In July, the SEC, along with another US regulator, the Commodity Futures Trading Commission, took Abra, a company offering tokenized stocks to the cleaners. The SEC alleged that its tokenized stocks constituted “security-based swaps subject to US securities laws.” The California-based startup had to pay a $300,000 fine and stop offering such products.

And the SEC has rejected several attempts for Bitcoin ETFs—regular (non-tokenized) ETFs that track the price of Bitcoin—on the grounds that Bitcoin's price is prone to manipulation. 

Without referencing Abra or the proposals for Bitcoin ETFs, Clayton said, ”we got off on the wrong foot in this innovation. There was the theory that because it was so efficient, because it could have had so much promise, we could toss aside some of those principles of responsibility and transparency.”

The SEC Chairman added, “you have to stay true to the principles, which is people who are distributing stock. People who are insiders of the companies for which the stock has been issued—they have responsibilities.”

His main advice: Don’t try and pull the wool over his eyes. The SEC has chased after many cryptocurrency companies that ran ICOs, claiming that they were exempt from securities regulations because they were setting up payment systems, not offering speculative investments.

“What we don't like is when someone says, ‘you know, the function is payments,’” he said. “Don't pretend that it's a payment system when it's actually a financing vehicle.”