Happy Thursday, advisors!

In the “Ask an Expert” section, Diego Grassano explains what an advisor should check before trusting a tokenization platform.

Wish you a pleasant reading.

- Sarah Morton

While Congress is at a standstill, Wall Street is formulating its own crypto regulations.

In the absence of a federal framework, financial institutions are standardizing compliance and infrastructure on their own.

When the Senate failed to advance the CLARITY Act on September 15th, the United States once again found itself without a comprehensive federal framework for digital assets, and regulatory agencies began to fill in some of the gaps. Two days later, the U.S. Securities and Exchange Commission (SEC) issued an "innovation exemption" that allowed certain venues to trade tokenized U.S. listed stocks on blockchain.

However, exemptions are not part of written law; they can be just as easily tightened or revoked as they were granted. This presents a practical problem for financial institutions: what should be built during this waiting period? For advisors, the answer is more important than who wins or loses in Washington.

Last week, at an event organized by Crain in their New York Business, this issue was a constant theme throughout the discussions, whether it was about tokenization, compliance, or cybersecurity. Those who are most closely involved with practical work are not waiting for Congress; they are building systems for the real world.

OKX The Vice President of Legal Affairs, Adam Schumann, explained the legal challenges involved. American companies have to deal with federal regulations, federal agencies, state laws, and state regulatory bodies at the same time, and the pace at which these entities move forward is not consistent. He said, "You hope for overall consistency, but you won't achieve complete uniformity." Companies can only address these issues on a state-by-state, country-by-country basis, while the regulatory bodies fill in the most urgent gaps.

This kind of piecemeal system comes at a cost. Uphold, the Chief Financial Officer, Aravind Raju stated that since the company needs to customize solutions for the requirements of each state, the compliance department has now become one of the largest departments in the company. As the rules become clearer and more consistent, he expects that these resources can be reallocated. For consultants, this means that compliance is the true cost of doing business on these platforms, and those companies that can manage compliance better will have an advantage.

You might think that such repetition would drive the industry towards shared infrastructure. On the contrary, this year many institutions have launched private, closed networks for tokenized assets, stablecoins, and securities ledgers, and these networks are not easily interoperable with each other. Lewis Tuff, the CEO of Twilight which is responsible for clearing and settlement technologies, stated that as a result, each company is repeatedly building the same connections.

Risks, on the other hand, are moving in the opposite direction, towards separation. In the early days, cryptocurrency companies combined trading, custody, and settlement under the same umbrella. Today, traditional custodian institutions hold digital assets, while the venues where transactions are executed are becoming increasingly separate from the institutions that store these assets. This means that no single entity is required to undertake all key functions, nor is there a need for them to become a single point of failure. Compliance and security standards are also evolving, shifting from annual certifications and periodic reviews to continuous checks for each individual transaction.

All of this does not require congressional approval, and that is precisely the point. In the absence of a comprehensive framework, the industry is moving towards practices that will be difficult for future laws to ignore: verified trading counterparts, a clear division of labor between trading and custody, and continuous compliance operations.

Whether these practices will ultimately become a bridge to legislation or a substitute for legislation is still unknown at present, but the direction is clear. Raju has made a prediction. He said that within three years, “as tokenized government bonds and money market funds become commonplace, we will probably stop using the term ‘crypto’.”

If what he says is correct, then the impact of the infrastructure being built without the guidance of written laws will far exceed that of this current cycle.

- Eric Soufer, Tusk Strategies Partners and Heads of Advanced Technology

Ask an Expert

Question: Regulatory VulnerabilitiesWhat is the risk when institutions invest capital in infrastructure that is based on temporary SEC exemptions and state-level workaround measures?

The main risk lies in investing long-term capital in infrastructure that may only obtain temporary operating permits. Exemptions can help institutions get off the ground, but if these permits change or expire, they need to have credible contingency plans. I would hope to see clear ownership, segregated custody, and a tested exit strategy that allows investors to retrieve their assets.

Question: Solving fragmentationHow can institutions connect their isolated private blockchains without compromising security or regulatory isolation?

Institutions need to connect to the network without losing ownership, compliance, or control over privacy. Cross-chain bridges are improving, but they still pose real security and operational risks. With regulatory standards remaining fragmented, I will keep legally recognized ownership records on the original chain and allow secured, redeemable representations to circulate on other chains, while enforcing eligibility and transfer restrictions on both networks.

Q: Key points that consultants can executeWhat standards should financial advisors use to review tokenization platforms when federal investor protection remains unresolved?

I will first ask two questions: What exactly does my client own? How can they get their money back? Then I will check who holds the assets, who independently verifies the data, and what will happen if the platform fails. I will also carefully examine the fees, conflicts of interest, and withdrawal restrictions. If the consultant cannot clearly explain the ownership structure, risks, and recovery process to the client, then the due diligence has not been completed.

- Diego Grassano, Shyft Business Director; Lumia Chief Product Officer

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Beyond risk-free rates: Diversified real-world returns in productive stablecoins

Beyond risk-free rates: Diversified real-world returns in productive stablecoins

As the cost of encrypted financing has been compressed to around 4%, diversified RWA stablecoins can maintain yields of 5% to 7% through real credit. GENIUS pushes these yields off-chain; within three years, TAM is expected to grow to $4 billion.

As the cost of encrypted financing has been compressed to around 4%, diversified RWA stablecoins can maintain yields of 5% to 7% through real credit. GENIUS pushes these yields off-chain; within three years, TAM is expected to grow to $4 billion.

Why it's important:

As the cost of encrypted financing has been compressed to around 4%, diversified RWA stablecoins can maintain yields of 5% to 7% through real credit. GENIUS pushes these yields off-chain; within three years, TAM is expected to grow to $4 billion.

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