Fidelity Urges SEC to Improve Cryptocurrency Regulation, ATS Tokenization Framework Awaiting Legislation

Fidelity Investments sent a letter to the U.S. Securities and Exchange Commission (SEC) on March 22, urging the agency to continue refining the regulatory framework for broker-dealers that offer, custody, and trade crypto assets on Alternative Trading Systems (ATS). The letter outlines three core demands: establishing comprehensive trading rules for tokenized securities, reforming reporting standards for decentralized finance (DeFi) platforms, and providing guidance on the application of distributed ledger technology.

Key Recommendations from Fidelity to the SEC: Three Core Demands

(Source: Fidelity)

Comprehensive Trading Rules for Tokenized Securities: Fidelity emphasizes the importance of establishing detailed trading regulations for tokenized securities, including those issued by third parties. The letter notes that tokenized tools differ significantly in issuance structure, legal validity, and valuation models—tokenized real-world assets (RWA) include stocks, real estate, bonds, and private credit, which are entirely different asset classes and cannot be regulated under a single set of rules.

Bridging the Regulatory Gap Between Centralized and Decentralized Systems: Fidelity urges the SEC to “consider how intermediary trading venues and non-intermediary trading venues develop and coexist,” and calls for a comprehensive overhaul of existing reporting rules to reflect the reality that DeFi trading platforms lack central authorities and are objectively unable to generate detailed financial reports as required by the SEC, thereby preventing the imposition of “undue burdens” on decentralized systems.

Guidelines for Distributed Ledger Technology (DLT) Applications: Fidelity recommends that the SEC issue clear guidance permitting broker-dealers to utilize DLT for ATS operations and recordkeeping, establishing a compliant pathway for institutional-grade blockchain applications.

Regulatory Challenges of Tokenization Tools: Legal Classification and Stakeholder Rights

Fidelity elaborates on the legal complexities surrounding tokenization tools. The letter distinguishes two main models: one, where crypto assets represent indirect ownership of underlying securities through security interests; and two, where crypto assets constitute securities swaps, which are typically only accessible to qualified contract participants.

This distinction directly impacts investors’ rights, trading feasibility, and regulatory classification. Fidelity points out that tokenization models “differ significantly” in structure and the rights granted to holders. If current regulations cannot effectively differentiate between these models, systemic gaps may arise in compliance obligations, capital requirements, and investor protections.

Current Policy Context: Recent Regulatory Positions

Fidelity’s letter echoes broader recent trends among regulators. SEC Chair Paul Atkins has repeatedly expressed support for 24/7 capital markets, approved several tokenized trading experiments by financial firms, and stated that the SEC’s interpretation of cryptocurrency laws “is just the beginning, not the end.”

Meanwhile, the Federal Reserve, FDIC, and OCC jointly issued a statement in March confirming that tokenized securities and their underlying assets should be subject to the same banking capital requirements, emphasizing that “the technology used for issuing and trading securities generally does not affect their capital treatment.” This statement establishes basic capital regulation standards for tokenized assets, but specific trading rules under the ATS framework remain undefined.

Frequently Asked Questions

Q: What specific actions does Fidelity’s letter call for from the SEC?
Fidelity urges the SEC to take action on three levels: establish comprehensive trading rules for tokenized securities (including RWAs); reform existing reporting requirements to reflect the realities of DeFi platforms; and issue guidance allowing broker-dealers to use DLT for ATS operations and recordkeeping.

Q: What is an Alternative Trading System (ATS), and why does crypto regulation require special rules?
An ATS is a trading venue that matches buyers and sellers but is not registered as a national securities exchange. As crypto assets and tokenized securities begin trading on such platforms, existing regulations are not clearly defined regarding their scope, leading to regulatory gaps in custody requirements, reporting obligations, and capital treatment.

Q: Why are DeFi platforms difficult to comply with SEC reporting requirements?
Traditional SEC reporting presumes a central managing entity. DeFi platforms, with their decentralized architecture, lack a single legal entity responsible for operations, making it objectively impossible to generate detailed financial reports as required by the SEC. Fidelity calls on the SEC to recognize this technological reality and develop differentiated compliance pathways for decentralized systems.