U.S. lawmakers and financial industry leaders sparred Wednesday over how to regulate the fast-emerging practice of tokenizing financial assets, revealing sharp divisions about whether the technology represents a natural evolution of capital markets or a potential threat to investor protections.
At a hearing of the House Committee on Financial Services, executives from various financial firms urged Congress to provide clearer rules for tokenized securities—digital representations of stocks, bonds and other assets recorded on blockchain networks.
The March 25 hearing came as the Clarity Act—a bill that would establish a cryptocurrency regulatory framework by splitting oversight between the Securities and Exchange Commission and the Commodity Futures Trading Commission—has hit a snag in the Senate Committee on Banking, which has oversight of the SEC portion of the bill.
Published reports indicate the latest draft of the Clarity Act is also causing delays because it includes a ban on yield payments to investors holding stablecoins. The provision sent stocks of Coinbase; its partner Circle, a stablecoin issuer; and other digital currency exchanges tumbling. Circle stock dropped 20% on Tuesday but recovered about 7% on Wednesday. Coinbase stock faces market volatility related to the proposed bill, and its shares have dropped about 10.5% this year as investors react to the regulatory uncertainties.
The House of Representatives has cleared the Clarity Act, and the Senate Committee on Agriculture cleared the CFTC portion of the bill.
Regulators would like to pass the bill before November’s midterm elections, which could shift control of at least one house of Congress to Democrats.
Hearing Frames Tokenization
At the hearing, committee leaders framed tokenization as both an opportunity for and a test of U.S. financial leadership.
Representative Ann Wagner, R-Missouri, said the technology could “streamline capital formation and modernize our markets” but warned that regulatory uncertainty risks pushing innovation overseas.
Industry witnesses echoed that concern. Kenneth Bentsen, CEO of the Securities Industry and Financial Markets Association, said tokenization could improve efficiency and access but stressed that “the strength of U.S. markets depends on preserving investor protection and market integrity.”
“The goal of policymakers should be to modernize markets in a way that builds on these strengths rather than bypassing them,” Bentsen added.
Similarly, John Zecca, chief legal officer at Nasdaq, said tokenization should be seen as an infrastructure upgrade, not a reinvention of securities laws and regulatory standards.
“A tokenized share is still a share,” Zecca said. “Merely changing the technology used to represent a security should not alter its legal status.”
Benefits, Risks
Tokenization supporters highlighted tangible benefits of moving securities onto a blockchain: near-instant settlement, lower transaction costs and broader access to markets.
Summer Mersinger, CEO of the Blockchain Association, argued that blockchain-based systems could reduce reliance on intermediaries and enable 24/7 trading, while improving transparency through immutable records.
Other witnesses pointed to global competition. Salman Banaei, general counsel for the Plume Network, said most tokenization activity is already happening outside the U.S., warning that jurisdictions like Singapore and Hong Kong are moving aggressively to attract markets for the technology.
“The demand is global, and the benefits are local,” Banaei said, describing how tokenization could allow small investors to fund infrastructure projects or access U.S. markets from abroad.
Skepticism, Regulatory Gaps
But lawmakers also raised significant concerns—particularly about fraud, market fragmentation and regulatory loopholes.
Representative Brad Sherman, D-California, delivered one of the sharpest critiques, warning that some proposals resemble attempts to build financial markets without basic safeguards.
“They’re trying to create a stock exchange without know-your-customer rules, without anti-money laundering, without regulation,” Sherman said. “This is such a bad idea.”
Others questioned how tokenized markets would maintain core features of today’s financial system, including price transparency and best-execution rules for trades under the SEC’s Regulation NMS.
Lawmakers also warned that parallel trading of the same asset—in both traditional and tokenized forms—could fragment liquidity and lead to inconsistent pricing.
Exemptions vs. Rulemaking
A central tension in the hearing was whether regulators should grant temporary “innovation exemptions” to allow experimentation with tokenization or instead pursue full rulemaking before allowing tokenized markets to scale.
Industry groups urged a cautious, iterative approach. Bentsen said any exemptions should be “narrow, time-limited and transparent,” rather than a substitute for formal regulation.
But critics argued that broad exemptions could undermine decades of investor protections and create a two-tiered system.
Still, the need to create a regulatory framework continued to come up during the hearing, with several mentions of the Clarity Act.
“We must provide legal clarity to foster innovation without compromising investor protection,” Wagner said.
The House Committee on Financial Services will host a separate hearing on how regulators can keep pace with technology on March 26.
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Tags: Congress, Digital Assets