CLARITY and Tokenization with Regulatory Parity

June 29, 2026

For most of the period between 2018 and 2025, a recurring argument in token-finance circles held that tokenizing a security would recharacterize it as something other than a security. The argument was never doctrinally serious. Friel v. Dapper Labs, Inc., 657 F. Supp. 3d 422 (S.D.N.Y. 2023), and the SEC’s enforcement actions against Reg D and Reg A token issuances (the Arca and INX matters, the BlockFi Lending consent order, and the various security-token offerings that took the harder route) made clear that the SEC’s view was that wrapping an underlying security in a token did not change its character. But the argument persisted in practitioner discourse, partly because some structural inconsistencies in the pre-CLARITY analysis suggested that distributed-ledger issuance might affect substantive securities-law analysis, and partly because the EU’s Markets in Crypto-Assets (MiCA) regulation and similar foreign regimes took inconsistent positions on the question. The argument also gained traction in policy debates over the pre-emption of state property-transfer law by the Uniform Commercial Code’s 2022 amendments adding Article 12 on controllable electronic records.

§505 of CLARITY would put the wrapper-escape argument to rest. The section provides that tokenization does not change the substantive securities-law character of the underlying asset. Equity tokens remain equity. Debt tokens remain debt. Fund-interest tokens remain fund interests. The Commission may adapt the manner in which regulatory requirements are satisfied to accommodate the technological characteristics of digital assets, but it may not adapt the substantive applicability of the federal securities laws. The §505(b) sense-of-Congress endorses state adoption of UCC Article 12. The §505(h)(1) savings clause is explicit: an asset that is a security under federal law does not cease to be one solely because it is issued, recorded, represented, or transferred using DLT.

The Parity Rule

§505(d) is the operative provision. §505(d)(1) provides that, subject to §505(d)(2), a tokenized security shall be treated, for all regulatory purposes, as the security that the tokenized security represents, except as otherwise provided by §106(a) or by a rule, regulation, or order issued by the Commission. The structural commitment is direct: the tokenization process does not change the substantive securities-law analysis.

§505(d)(2) is the limit on Commission rulemaking authority. A rule, regulation, or order described in §505(d)(1)(B) may only be issued by the Commission to adapt the manner in which the applicable regulatory requirements are satisfied, to the extent necessary or appropriate (A) in light of the unique technological or other characteristics of digital assets or substantially similar technology, or (B) consistent with what is necessary or appropriate in the public interest and protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. The Commission’s adapting authority extends to the manner in which the regulatory requirements are satisfied. It does not extend to the substantive applicability of the requirements themselves.

The distinction matters operationally. A tokenized equity security is subject to §11 disclosure liability, §12(a)(2) prospectus liability, §10(b) and Rule 10b-5 anti-fraud liability, §13 reporting obligations, §16 insider-trading obligations, and §14 proxy obligations, on the same terms as a non-tokenized equity security. The Commission may issue rules adapting how the §13 reports are filed (e.g., permitting on-chain disclosure as an alternative to EDGAR filing for tokenized issuers, or requiring specific reconciliation between on-chain transfer-agent records and traditional transfer-agent records). The Commission may not issue rules exempting tokenized equity securities from §13 reporting altogether. The substantive obligation is fixed by statute; the operational form of compliance is within Commission rulemaking authority.

The §106 cross-reference is to the general exemptive authority CLARITY grants the Commission. §106(a) provides additional exemption authority in specified circumstances. §505(d)(1)(A) preserves Commission ability to apply §106 to tokenized securities, but the operative scope of §106 is established elsewhere in the bill. The bulk of the substantive parity rule operates through §505(d)(2), which constrains the Commission’s adapting authority to operational rather than substantive modifications.

§505(f) Commission Rulemaking Authority

§505(f) authorizes the Commission to issue rules governing tokenized securities consistent with §§ 106 and 107. §505(f)(2) lists the specific topics the rules may address: how requirements applicable to the underlying security apply to custody, books and records, reconciliation with transfer agents or other recordkeepers, auditability, settlement finality, treatment of chain reorganizations, and other operational risks arising from the use of DLT or comparable technology.

The enumerated topics are operational rather than substantive. Custody rules address how a tokenized security is custodied (smart-contract-based custody, custodial intermediary holding the keys, hybrid arrangements). Books-and-records rules address how on-chain records integrate with traditional broker-dealer books-and-records requirements under Rule 17a-3 and 17a-4. Reconciliation rules address how transfer-agent records (typically maintained off-chain) reconcile with on-chain transfer records (which may not match where the on-chain transfer is restricted or the off-chain transfer is unrestricted). Auditability rules address how auditors validate on-chain records. Settlement finality rules address when a transaction is final for purposes of payment-versus-delivery and clearing obligations. Chain-reorganization treatment addresses what happens when an on-chain transfer is reorganized away (a rare but non-trivial issue on some chains).

If the bill is enacted, the Commission’s rulemaking under §505(f) is going to be substantial. The structural choice is to permit operational flexibility within the existing substantive framework. The BlackRock USD Institutional Digital Liquidity Fund (BUIDL), the Franklin Templeton OnChain U.S. Government Money Fund (BENJI), and the various JPMorgan Onyx/Kinexys tokenization platforms are all operating under pre-CLARITY interpretive postures that the §505(f) rulemaking will codify. The rulemaking will have to take up the operational rough edges that have emerged in practice: chain-reorganization handling, transfer-agent reconciliation, custody arrangements for institutional investors, and integration with traditional clearing-and-settlement infrastructure.

§505(b) and UCC Article 12

§505(b) is a sense-of-Congress endorsing state adoption of UCC frameworks providing clear and uniform rules for the ownership, control, and enforceability of rights relating to digital assets. The reference is implicit but unmistakable: UCC Article 12 on Controllable Electronic Records.

UCC Article 12 was adopted in final form by the Uniform Law Commission and the American Law Institute in 2022. The article defines “controllable electronic record” as a record stored in an electronic medium that can be subjected to control, and provides take-free rules, attachment and perfection rules, and priority rules for security interests in CERs. As of mid-2026, more than thirty states had adopted Article 12 or were considering adoption.

The §505(b) sense-of-Congress is not preemptive. State law continues to govern the property-law side of tokenized securities transactions. But the federal-policy signal is supportive of UCC Article 12 adoption, and the §505(h)(2) savings clause preserves state property-transfer rules from §505 preemption. The structural choice is to leave the property-law framework to state law (consistent with the post-Erie architecture of commercial law in the United States) while federalizing the securities-law treatment.

A tokenized security issued in a state that has adopted UCC Article 12 sits in a clearer property-law framework than one issued in a non-Article-12 state. Holders of tokenized securities can rely on Article 12’s take-free rules for good-faith purchase, the attachment-and-perfection rules for security interests in CERs, and the priority rules for competing claims. The §505 federal-securities-law parity rules layer on top of the Article 12 framework. The state-law venue and its Article 12 adoption status belong on the structuring checklist.

The Savings Clauses

§505(h) provides four savings clauses. §505(h)(1) is the principal one: any asset that is a security under the federal securities laws does not cease to be a security solely because the asset is issued, recorded, represented, or transferred using DLT or comparable technology. This is the structural commitment to substance-over-form analysis. The wrapper-escape argument would be foreclosed by statute.

§505(h)(2) preserves state property-transfer rules. The §505 federal-law parity framework does not preempt, supersede, invalidate, or otherwise affect state property-transfer rules, laws, regulations, or common-law principles relating to the transfer or recording of real, tangible, or intangible assets or interests in them. The structural choice is consistent with the §505(b) endorsement of state-law UCC Article 12 adoption: federal securities-law treatment is harmonized, but state property-law treatment remains state law.

§505(h)(3) preserves §106 rulemaking authority. The Commission’s exemptive authority under §106 applies to any rulemaking, order, or other action under §505. The §106 exemptive authority operates as a general flexibility tool that can address tokenization-specific issues that arise outside the §505(f) operational rulemaking framework.

§505(h)(4) preserves the ability of persons to offer or sell tokenized securities consistent with the federal securities laws. The §505 framework is not a registration regime or a permissioning regime. It is a clarification that tokenized securities operate under existing federal securities law with operational adaptations. Persons can offer and sell tokenized securities under §3, §4(a)(2), §4(a)(6), Reg D, Reg A, Reg CF, or under registered offerings on the same terms as non-tokenized securities, subject to the §505(f) operational rules.

§505(e) and §505(g) Anti-Fraud Preservation

§505(e) prohibits misrepresentation. Any statement or omission with respect to any material fact made by a person in connection with the offer, sale, or other representation regarding a tokenized security is subject to the federal securities laws, including the applicable anti-fraud and anti-manipulation provisions. The structural choice is to preserve anti-fraud authority as fully applicable to tokenized securities transactions.

§505(g) is the parallel rule of construction. Nothing in §505 prevents the Commission from enforcing the anti-fraud and anti-manipulation provisions of the federal securities laws, and the rules issued under them, with respect to tokenized securities, provided that the elements of those provisions are satisfied. The §10(b) and Rule 10b-5 framework, the §17(a) framework, and the §13(b)(5) books-and-records anti-fraud framework all apply to tokenized securities on the same terms as non-tokenized securities.

The structural commitment to anti-fraud preservation is consistent with the broader CLARITY architecture. Throughout the bill, the registration-and-disclosure framework is being modified to accommodate digital-asset characteristics, but the anti-fraud overlay is preserved. The §505(e) and §505(g) provisions extend this commitment to tokenized securities.

§506 Post-Quantum Ccryptography

§506 is a sense-of-Congress and technical-assistance provision on post-quantum cryptography. It directs the Under Secretary of Commerce for Standards and Technology to promote voluntary adoption of NIST post-quantum cryptography standards, through dissemination of guidance, technical assistance to high-risk entities, and other activities. The provision is structurally separate from §505 but operationally important: tokenized-securities infrastructure relies on cryptographic primitives that are vulnerable to quantum-computing attacks, and the long-term security of tokenized financial markets depends on cryptographic upgrades.

The §506 framework is voluntary rather than mandatory. The Director’s role is to promote, not to require, post-quantum cryptography adoption. The structural choice reflects both the immaturity of post-quantum cryptography standards (as of 2026, the NIST standards are recent and operational deployment is in early stages) and the cost-and-complexity considerations of migration. For long-duration tokenized-securities transactions, the §506 framework is a leading indicator of future infrastructure requirements.

Comparing to MiCA

The EU’s Markets in Crypto-Assets Regulation provides a useful comparison. MiCA takes a similar substance-over-form posture: financial instruments wrapped in token form remain financial instruments under the EU’s existing financial-instruments framework (MiFID II), and the crypto-asset categories in MiCA (asset-referenced tokens, e-money tokens, other crypto-assets) cover non-security tokens. The MiCA framework, like CLARITY, separates the securities/financial-instruments treatment from the crypto-asset treatment, with the substantive analysis running on the underlying economic character of the instrument.

The principal differences are operational rather than substantive. MiCA includes detailed disclosure-and-conduct rules for crypto-asset service providers (CASPs) that are not directly paralleled in CLARITY’s framework. CLARITY’s §505 framework is narrower in scope: it addresses tokenized securities specifically, with the §4B, §301, and §401 frameworks addressing the non-security side. The U.S. framework is generally more permissive than MiCA on the non-security side (CLARITY’s network-token framework is broader than MiCA’s “other crypto-assets” category) and approximately parallel on the security side (both regimes preserve substantive securities/financial-instruments law).

The cross-border implications matter for transactions that touch both regimes. A tokenized equity security issued under §505 in the United States and offered to EU investors will be subject to MiFID II in the EU and to the federal securities laws in the United States, with the §505 framework providing parity-of-substantive-treatment in the United States and MiFID II providing parity in the EU. The operational integration of the two frameworks is where the work sits.

Building on the Parity Rule

Four consequences follow for deal design.

• First, the wrapper-escape argument is doctrinally dead today and statutorily dead the day CLARITY is signed. Tokenization does not change the substantive securities-law analysis. Equity remains equity, debt remains debt, fund interests remain fund interests. Issuance structures and offering documents should be designed on the assumption that the underlying-security analysis controls.
• Second, the operational rulemaking under §505(f) will determine the practical scope of tokenization. Custody, books-and-records, reconciliation, auditability, settlement finality, and chain-reorganization treatment are the operational dimensions on which the Commission will draw lines. The comment-letter process is the chance to shape those lines, and it will reward early, use-case-specific engagement.
• Third, state-law adoption of UCC Article 12 is the property-law foundation. The federal §505 framework operates against state-law property rules, and the state-law framework is most coherent where Article 12 has been adopted. Venue selection should track Article 12 adoption.
• Fourth, anti-fraud preservation is full and substantive. The §505 framework does not reduce anti-fraud exposure for tokenized-security issuers, intermediaries, or representatives. Disclosure quality, accuracy of representations, and absence of material omissions are as important under §505 as they are for traditional securities. The tokenization wrapper does not provide a shield against §10(b), Rule 10b-5, §17(a), or §13(b)(5) liability.

The §505 framework, in the aggregate, would accomplish a clean codification of what most practitioners already believed but could not point to a statute for: tokenization is a technical-form decision, not a substantive-treatment decision. The federal securities laws apply to tokenized securities on the same terms as non-tokenized securities, with operational adaptations to accommodate distributed-ledger characteristics. The remaining work is at the operational level, where the §505(f) rulemaking, state-law UCC Article 12 adoption, and integration with the broader CLARITY framework will play out over the next several years.

Written by David Lopez Kurtz