Tokenization of Bonds

Federal Securities Lawyers Experienced in Tokenization of Bonds and Other RWA

Tokenization of real-world assets (RWA), including traditional bonds, presents unprecedented opportunities for issuers, investors, brokers, and other interested parties in financial markets. But with these new opportunities also come new risks. At Oberheiden P.C., our lawyers are leading the way in the tokenization of bonds, digital assets, and other RWA, working with issuers and other clients to blend the worlds of traditional investing and blockchain technology.

Understanding the Challenges of Establishing and Managing Compliance for the Tokenization of Bonds

How tokenized bonds blends two very different worlds. This is true not only from a technological perspective but also from a legal perspective. The laws and regulations governing the financial institutions and traditional bond markets in the United States are well-established—and they have been for a long time. In contrast, the legal regime and smart contracts governing blockchain-based investments and tokenization are still very much in the early stages of development, and many key questions currently do not have clear answers.

Yet, the tokenization of bonds is happening, and the U.S. Securities and Exchange Commission (SEC) is not trying to stop it. Rather, the SEC is focusing on applying existing law to blockchain-based investing while also working to develop a new regulatory regime for the new world. There are benefits of tokenized bonds and negatives. On the one hand, moving forward with a cautious and compliance-first approach is possible. On the other hand, significant changes can happen rapidly, so it is critical to monitor for new developments and be prepared to change course if necessary.

Regulation of the Bond Market in the United States

Corporate bonds are a very traditional type of investment, and U.S. corporate bonds make up “the largest securities market in the world” according to the SEC. While individual companies’ bond ratings vary, corporate bonds are generally considered relatively safe investments, as they can offer a predetermined rate of return and do not present the same risks as equity investing.

Another feature that adds to the relative safety of corporate bond investing is the SEC’s oversight of the U.S. corporate bond market. Corporate bonds are heavily regulated, and before issuing bonds to retail investors, companies must either register with the SEC or take the steps necessary to qualify for a registration exemption.

Thus, federal bond compliance is the first step when it comes to the tokenization of bonds. If a company’s bond issuance is non-compliant in any respect, this will render the entire tokenized investment structure violative of federal law. Not only can this trigger enforcement action from the SEC (which is prioritizing blockchain-related oversight and enforcement), but it can also trigger a wave of lawsuits from aggrieved investors.

Regulation of Blockchain-Based Investments in the United States

The SEC broadly classified blockchain-based investments as crypto assets. Over the past several years, it has initiated dozens of enforcement actions targeting companies involved in issuing, promoting, and brokerage these novel investment products. This includes targeting companies with tokenized bonds and other “crypto asset lending products.”

In 2024, the SEC’s Director of Enforcement, Gerbir S. Grewal, gave a speech titled, What’s Past is Prologue: Enforcing the Federal Securities Laws in the Age of Crypto. In his speech, Grewal discussed the SEC’s strategy for overseeing the blockchain-based investment market, including tokenized RWA. In particular, while he acknowledges that new regulations have been slow to keep up with technological development, he also argues that the breadth of the existing federal securities laws and regulations allows for oversight and enforcement—and recent enforcement actions have borne this out. He also emphasizes the SEC’s focus on protecting investors without stifling innovation (stating, “innovation and compliance with the securities laws are not mutually exclusive”). However, he closes by stating that preserving public trust in the U.S. securities markets is the SEC’s ultimate goal.

So, what does all of this mean for bond tokenizers?

While federal compliance presents many challenges, given the unique and complex nature of bond tokenization and smart contract, these challenges are not an excuse for non-compliance. Tokenizing bonds involves using the available information to take an informed approach to federal securities law regulatory compliance. This is true for both registered and unregistered offerings, and it is true for offerings targeting both accredited and non-accredited investors.

Even within the blockchain sphere, bond tokenization is relatively new. With this in mind, issuers can draw insights from the SEC’s compliance guidance and enforcement efforts focused on other blockchain-based offerings—including cryptocurrencies, initial coin offerings (ICOs), and non-fungible tokens (NFTs). At Oberheiden P.C., our lawyers have extensive experience in this space, and we can use the insights gained from our experience to guide you forward.

Put our highly experienced team on your side

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

Managing State and Federal Compliance with Bond Tokenization

We take a comprehensive, forward-thinking, and custom-tailored approach to assisting our clients with managing compliance related to bond tokenization at the state and federal levels. We help our clients launch their tokenized offerings and maintain compliance on an ongoing basis. We also assist with SEC inquiries and enforcement matters, and several of our lawyers have extensive experience working with the SEC (and state securities regulators) on behalf of our clients.

Our services for managing state and federal compliance with bond tokenization include:

• Compliance for Issuers – We guide issuers step-by-step through the tokenization process. This includes assessing options for registration and registration exemptions, drafting the necessary filings, and offering documents. Since we are actively involved in this space, we also advise our clients regarding potential legal and regulatory changes as they arise so that our clients can plan accordingly.
• Compliance for Brokers – We advise brokers selling tokenized bonds and other RWA. Given the SEC’s focus on these tokenized assets, a comprehensive and well-documented approach to compliance is critical. We ensure our brokerage clients have the protocols, systems, and documentation to confidently manage compliance.
• Compliance for Promoters and Influencers – Our lawyers also represent promoters and influencers in marketing tokenized bond offerings on social media and other online platforms. Along with the SEC, the Federal Trade Commission (FTC) and other agencies have oversight (and pay close attention to) these promotional activities. Our lawyers can explain everything you need to know so you don’t get into trouble with the federal government.

From SEC compliance and enforcement to civil litigation involving allegations of investor fraud, bond tokenization is rife with legal challenges and risks. At Oberheiden P.C., we rely on our financial industry experience to help our clients overcome these challenges and manage these risks effectively, and we are also available to defend individuals and organizations against fraud and other allegations when necessary.

FAQs: Tokenization of Bonds

Speak with a Senior Federal Securities Lawyer at Oberheiden P.C.

If you have questions about the legal and regulatory issues involved in tokenizing bonds and fractional ownership in the United States, we invite you to contact us. To confidently speak with a senior federal securities lawyer at Oberheiden P.C., please call 888-680-1745 or request a consultation online today.