How Tokenization Could Transform U.S. Financial Markets—If Trump Clears the Path

Tokenization has the potential to revolutionize U.S. financial markets, unlocking efficiencies, transparency, and new investment opportunities. However, current regulatory hurdles continue to hinder its widespread adoption. With crypto-friendly President-elect Donald Trump set to take office, there is a unique opportunity to reshape the regulatory landscape and allow tokenization to flourish.

While ending the U.S. government’s cryptocurrency crackdown is a promising first step, more needs to be done. For tokenization to truly take off, Trump’s administration, including a potential crypto czar and new leadership at the Commodity Futures Trading Commission (CFTC), must reimagine outdated regulations—creating a framework that blends the best features of traditional finance and decentralized finance (DeFi).

The goal is to preserve core investor protections, such as Know Your Customer (KYC) protocols, exchange oversight, and custody rules, while enabling the innovation that tokenization promises. The good news is that these changes don't require new laws, only a fresh approach to regulation.

Tokenization: Unlocking New Possibilities for Financial Markets

Tokenizing real-world assets (RWAs), like stocks, bonds, and mutual funds, can dramatically improve nearly every aspect of the financial system. By using blockchain technology, tokenization brings programmability, transparency, and efficiency to securities markets.

Smart contracts, for example, can enshrine investors' rights into unchangeable code, ensuring transparency and reducing administrative overhead. Public blockchains offer clear, immutable ledgers, enabling more efficient trade settlement and reporting. Moreover, self-custody of assets preserves tokenholders' autonomy, which is a key feature of decentralized systems.

Even the U.S. Treasury Department is recognizing the potential of tokenization. In an October report, the department noted that tokenizing U.S. Treasury bills could unlock "new economic arrangements and enhance efficiencies."

Despite its potential, tokenized assets are still in their infancy. As of November 2023, the total value of security tokens was only around $12 billion—small compared to their $30 trillion addressable market. Tokenized money funds are seeing traction, with BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) managing over $540 million. But the overall market remains underdeveloped, primarily due to regulatory challenges.

Streamlining KYC to Enable Tokenization

One of the biggest hurdles for tokenization is the outdated and fragmented KYC regulations. Traditional financial institutions are required to verify the identity of every user, including details about net worth, trading experience, and more. However, applying these rigid identity requirements to DeFi could be disastrous, stifling the very innovation that tokenization is supposed to enable.

To resolve this, regulators need to rethink KYC processes. Decentralized identity solutions, such as Circle’s Verite, could be key. These protocols allow users to complete one comprehensive KYC check that can then be used across multiple DeFi applications without the need to repeatedly submit personal data. This approach would help protect user privacy while ensuring compliance.

Decentralizing Securities Exchanges for the Future

A major challenge lies in integrating decentralized exchanges (DEXs) with traditional U.S. securities markets. Currently, securities exchanges are heavily regulated, relying on the Depository Trust & Clearing Corporation (DTCC) for trade settlement. To bring security tokens into the fold, the DTCC must embrace blockchain technology.

The DTCC has already begun testing on-chain settlement solutions and piloted a permissioned Avalanche subnet. However, since security tokens mainly reside on permissionless networks like Ethereum, the DTCC must focus on integrating these decentralized systems. One possible first step would be to route security token transactions through private validator sets that adhere to DTCC guidelines. Over time, the DTCC may even outsource trade settlement entirely to decentralized blockchain networks.

Embracing Self-Custody for a More Decentralized Future

Traditional custody rules prioritize funds held in brokerage accounts. But in Web3, self-custody is the norm. About 70% of crypto holders use non-custodial wallets like MetaMask, which give individuals full control over their assets. To accommodate this shift, regulators must adapt their framework to reflect the realities of self-custody.

Self-custody isn’t new—before the advent of digital wallets, investors kept physical stock certificates in safes. The same basic principles can be applied to digital assets. And with the rise of insured third-party custodians, many investors may still prefer professional custody services for their digital assets. Regulators should facilitate this transition by easing onboarding for new users and token types, ensuring that both self-custody and third-party custodians can thrive in a tokenized financial ecosystem.

The Road Ahead: A Strategic Opportunity for Trump’s Administration

While these steps may seem small, they are critical to bringing securities markets onto the blockchain and realizing the full potential of tokenization. With President-elect Trump’s ambition to turn the U.S. into the “world’s crypto capital” and build a strategic Bitcoin reserve, the time to act is now. His presidency offers a historic opportunity to reshape financial regulations and clear the path for tokenization to transform U.S. markets.

By modernizing outdated rules and embracing the best of both traditional and decentralized finance, Trump’s administration can lead the way in creating a more efficient, transparent, and accessible financial system. The clock is ticking, and the world is watching. The question is: will Trump seize this opportunity to turn the U.S. into a leader in the tokenized economy? The future of financial markets depends on it.