Wall Street Goes Digital: DTC Receives SEC Nod for Tokenized Securities by 2026
The Depository Trust Company (DTC), a cornerstone of U.S. financial market infrastructure responsible for clearing and settling securities trades, has received a significant, albeit conditional, green light from the Securities and Exchange Commission (SEC) to move forward with a groundbreaking tokenization service. This pilot program, slated for rollout in the second half of 2026, promises to transform how securities are transferred and settled, potentially ushering in a new era of efficiency and accessibility. This isn't a full regulatory approval, but a “no-action” letter, meaning the SEC won’t pursue enforcement action – for now – under specific conditions. This development marks a crucial step towards the digitization of traditional finance (TradFi) and the integration of blockchain technology into the established financial system. The move is particularly relevant as the industry continues to grapple with the implications of T+1 settlement, making speed and efficiency paramount.
Understanding the SEC’s Conditional Approval
The SEC’s response, dated December 11th, outlines a carefully structured, time-limited rollout with ongoing reporting requirements. Crucially, the underlying securities will remain within DTC’s existing custody framework. This approach aims to minimize disruption while allowing for a controlled experiment in tokenization. The service, dubbed DTCC Tokenization Services, will operate within a “Preliminary Base Version” under existing regulations like Regulation Systems Compliance and Integrity (Reg SCI), Exchange Act Section 19(b), and Rule 19b-4, among others. The SEC staff emphasized that this position is based on the specific facts presented and is subject to modification or revocation.
Tokenization as an Alternative Entitlement Record
A key aspect of the SEC’s approval is its framing of tokenization. The SEC views tokenization not as a change to the fundamental ownership structure of securities, but rather as an alternative method for recording a participant’s entitlement to those securities. Securities will continue to be registered in the name of Cede & Co., DTC’s nominee, while participating firms can opt-in to represent their entitlement using tokens held in registered blockchain wallets. This approach avoids a complete overhaul of existing legal frameworks.
How the Tokenization Process Will Work
The proposed operational flow involves a series of steps:
- Debit & Credit: A DTC participant instructs DTC to tokenize their eligible book-entry entitlement. DTC debits the entitlement from the participant’s account and credits it to a “Digital Omnibus Account” on its centralized ledger.
- Token Minting: DTC then mints a token representing the entitlement and delivers it to the participant’s registered wallet.
- Token Transfers: Transfers will be restricted to registered wallets, with DTC implementing screening for OFAC compliance and requiring tokenization protocols that enforce distribution control and transaction reversibility (ERC-3643 is cited as an example).
- Off-Chain Tracking: DTC will utilize an off-chain tracking system, LedgerScan, to monitor underlying blockchains and create a record for its official books and records. A separate system, Factory, will handle token minting and delivery.
- De-Tokenization: Participants can revert to traditional book-entry form by having DTC burn the token and return the entitlement to their DTC account.
Key Parameters of the Preliminary Base Version
The SEC’s approval comes with specific limitations:
| Parameter | Details |
|---|---|
| Participant Eligibility | DTC participants on an opt-in basis, excluding those with tax withholding/reporting or Treasury International Capital reporting issues (approximately 11% as of October 31, 2025). |
| Eligible Securities | Initially, Russell 1000 constituents, U.S. Treasury bills, bonds, and notes, and index ETFs (S&P 500, Nasdaq-100 trackers). |
| Token Transfer Restrictions | Only to registered wallets, subject to OFAC screening and distribution control protocols. |
| Risk Controls | Tokenized entitlements will not have collateral or settlement value for internal risk calculations. Delivery-versus-payment settlement will occur outside of DTC. |
| Oversight | Quarterly reporting to the SEC on participating firms, tokenized shares, transfers, eligible securities, wallet counts, blockchains used, outages, and interventions. |
| Timeline | Proof-of-concept in Fall 2025, limited pilots in early 2026, broader rollout in the second half of 2026, with the SEC’s position withdrawn three years after launch. |
Distinguishing DTC’s Tokenization from ETF Approvals
It’s crucial to differentiate this SEC action from recent approvals related to spot Bitcoin ETFs. While DTCC (the parent company of DTC) plays a role in the post-trade infrastructure for ETFs, those approvals focused on listing and trading. The SEC’s letter to DTC addresses a different question: whether DTC can operate a tokenization layer *around* assets it already holds, under specific constraints. Operational listings are not the same as regulatory approvals, and this no-action letter is a distinct development.
Why This Matters: The Future of Digitized Finance
This pilot program represents a significant step towards the broader digitization of financial markets. DTCC CEO Frank La Salla highlights the potential benefits of tokenization, including increased collateral mobility, new trading modalities, 24/7 access, and programmable assets. The move acknowledges the growing demand for more efficient and transparent financial infrastructure. The fact that DTC, a custodian of over $100 trillion in securities, is actively exploring tokenization signals a growing acceptance of blockchain technology within the traditional financial world.
Potential Future Expansion
DTC’s request letter outlines potential future developments beyond the preliminary phase, including:
- Expanding the range of eligible securities.
- Allowing tokenized entitlements to carry collateral or settlement value.
- Exploring the use of stablecoins or tokenized deposits for corporate action distributions.
However, any expansion will require further engagement with the SEC.
Cautious Optimism and Ongoing Regulatory Scrutiny
The SEC’s approval is conditional and doesn’t represent a full endorsement of tokenization. The agency’s staff response explicitly states that the position is based on the facts presented, doesn’t constitute legal conclusions, and can be modified or revoked. This underscores the SEC’s cautious approach to this emerging technology. The quarterly reporting requirement will provide the SEC with valuable data and insights as it evaluates the potential risks and benefits of tokenization. The estimated $68 trillion potential for tokenized markets highlights the scale of the opportunity, but also the need for careful regulation.
The rollout, expected in the second half of 2026, will be closely watched by industry participants and regulators alike. This pilot program could pave the way for a more efficient, transparent, and accessible financial system, but its success will depend on careful implementation and ongoing collaboration between the traditional finance world and the burgeoning blockchain ecosystem. The move also comes at a time when the industry is adapting to the T+1 settlement rule, making the potential efficiencies of tokenization even more attractive.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Investing in cryptocurrencies and digital assets carries significant risk. Always conduct thorough research before making any investment decisions.