You Cannot Regulate What You Cannot Define – Part 2: Tokenization, DeFi: By Kelvin To, Founder And President Of Data Boiler Technologies

What “tokenization” or “DeFi” is truly about

In a sharing economy, crypto / Digital Ledger Technology (DLT) are like other shared services (e.g. Uber, Air B&B) that unleash tremendous "societal values by promoting access over ownership, which challenges traditional notions of property rights." We think the Bank for International Settlements (BIS) has an overly complicated definition or concept about “tokenization”. Tokenization to some extent may equate to Securitization, when it serves as an alternative or a poor person way for securities issuance and asset gathering processes. Putting it in layman terms, both “tokenization” and “securitization” aim to make assets tradable and liquid.

We have no objection with the IOSCO’s statement, “Tokenization arrangements typically seek to achieve one or more of the following features: Fictionalization, Programmability, Composability, and Atomicity.” A nuance – fractional participation in a tokenized product that is otherwise framed as a risk management or treasury tool with no general solicitation or advertising, no emphasis on profit potential, offered as part of a broader banking relationship and is a direct bank obligation under “incidental banking service”, may be considered as investment activities under the current law.

If the tokenized product meets the criteria of an “investment contract” under the Howey test or falls within the statutory definition of a security under the Securities Act of 1933, then one may use private placement (Reg D) and restrict access only to accredited investors. If it is structured as a commodity option, it may be offered only to Eligible Contract Participants (ECPs) via registered Futures Commission Merchant (FCM) / Retail Foreign Exchange Dealer (RFED). The current narrowly defined banking exemptions that community banks and credit unions are forced to handover business to a third-party or their larger counterparts with a brokerage / securities service arm. Clients suffer from bureaucracy and higher fees.

When formal orders legitimize exploitations, informal sub-orders will emerge as a counter response. If policy-makers want tokenized activities in the above example to go away (without price control to curb the Elites, nor rule-by-enforcement that is a double-edged sword), we recommend granting a “break-bulk exemption” (e.g. shared representation of a claim < 35, aggregate < 110% cost if client was otherwise engaged in individual contract).

We recognize that, for example, credit card reward points, frequent flyer programs and the like, if tokenized to allow easier transfer of these “reward tokens” to freely trade and exchange with other third-parties beyond family members may serve good community values. NOTE: “tokenized reward points” may have unlimited supply and program organizers may have “small-print” discretionary clauses to change or alter reward programs at any time (analogy to “hard fork” – a backward-incompatible upgrade to the blockchain).

There is no single authoritative FASB standard under the US Generally Accepted Accounting Principles for how a recipient of reward points or tokens should be accounted for. Commercial practices vary – some treat them as a “freebie” and not keep any record of it in an accounting book, others consider it as a “rebate / discount” deducting them directly from expenses, also certain firms may consider it materiality and treat them as a “prepayment asset” on their balance sheet.

Firms operating “reward programs” must choose between ASC 450-30 Gain Contingency Model and ASC 606 Vendor Rebate Model to develop a defensible and consistent policy. There are different valuation-of-rewards approaches – (i) direct cash-out value, (ii) estimated redemption value, or (iii) conservative average based on historical redemptions – timing of recognition varies depending on the policy – (a) at redemption, (b) when statement is issued, or (c) when qualify purchases are made. Additional nuances include but are not limited to: no purchase requirement, consolidation of reward programs, tax treatment, interest or yield bearing on these “reward tokens”, etc.

Smart contracts are an oversimplified mechanism for delineating complex real-world rights and obligations. Challenges include: limited access to off-chain data; interoperability issues, where different chains operate in silos; immutability (which provides security but leads to inflexibility or difficulty capturing legal nuances when dealing with evolving circumstances, renegotiations, or unforeseen events). In turn, hybrid solutions are being created, resulting in DeFi convergence to TradFi with no necessary efficiency gain.

Are commercial disputes or consumer protection mechanisms being insufficient that it calls for involvement of securities laws? Are many existing commercial reward programs being unsustainable and they seek tokenization as an exit or chance of revitalization? Would “rewards” be used as alternate means to raise funds cheaper than bank loans, Private Equity or Venture Capital funding? There are more questions than answers. The US Congress should refrain from laying an invisible hand of Government to regulate these private “reward program” activities. Regulatory agencies, the SEC and FINRA in particular, do NOT have the necessary capacity to practically review hundreds of thousands, if not millions, of applications to register these “reward tokens” as “securities”.

Tokenized assets can be uncountable, i.e. unlimited supply. Uncapped supply creates inflationary pressure; hence value of such digital assets cannot be properly determined or quantified by the amount of outstanding inventory. The original Dodd-Frank Volcker rule’s securities Inventory RENTD provision has it merits. Uncountable "Funny money" is more akin to "non-cashable gambling chips". NOTE: there is no formal “certification body” for token classification in the US, but to rely on issuer’s initial representation in simple agreement for future tokens (SAFT) to “self-certified”, p.s. $BTC has no centralized issuer, no initial sale or fund raising.

CFTC is in a better position than the SEC to regulate the trading of Spot Crypto Asset Contracts and Tokens sold via SAFT. CFTC authority under §2(c)(2)(D) of Commodity Exchange Act (CEA) and COMEX Rule 7 help curb and mitigate situations such as the Monex case, retail metal fraud cases, and Silver Thursday event. We recommend the CFTC to require Designated Contract Markets (DCMs) to set aside at least 1 to 2% of gross revenue allocated to risk education program for existing and prospective retail clients, on top of protection against abusive practices, and updating Core Principle 12 outlined in 5(d) of the CEA and Part 38 accordingly. We do NOT want the SEC to cross subsidize the cost to regulate crypto from equity trading.

The SEC Chair suggested “digital commodities,” “network tokens,” “digital collectibles,” and “digital tools” are NOT securities. We agree with and support the SEC oversight on “Governance token with rights” and “Covered Liquidity Staking Receipt Tokens” and that fits squarely with the definition of “securities” as well as those involves “bundled services” that resemble an investment contract. We have no objection to the SEC establishing a safe harbor for certain airdrops from characterization as “sales” under Section 2(a)(3) of the Securities Act or an exemption from the corresponding registration requirements under Section 5 of the Securities Act. The SEC should also consider an exemption for distributions of digital assets by decentralized physical infrastructure (DePIN) providers in securities transactions for purposes of rewarding participation in DePIN networks, and distributions of certain NFT offerings. We are open minded about DePIN transformation to serve the US in the long-term. 

We do appreciate the duo oversight setup under the “Responsible Financial Innovation Act proposal” (RFIA) regarding “Ancillary Assets,” – the SEC gatekeeping the primary sales and the CFTC be the secondary trading regulator. The Public Company Accounting Oversight Board, oversighted by the SEC, should determine the proper ways in measuring, recording, and disclosing of “Ancillary Assets”. We look forward to the RFIA final bill formally introduced in the Senate that will address the asset classification protocols issue prompted by the CFTC v. Archegos Capital Management LP case.

Meanwhile, the Senate Agriculture Committee released a bipartisan November 2025 draft. It aims to merge with the earlier RFIA draft that expands the CFTC’s authority over the spot market for digital commodities (e.g. requires digital commodity exchanges, brokers, and dealers to register with the CFTC), and overlines mechanisms (joint advisory committee, joint rulemaking, and innovation sandbox) for better coordination of the SEC and CFTC’s roles.

The SEC should refrain from regulating any “uncountable” digital asset that is more akin to “non-cashable gambling chips.” It should not be subjected to investor protection over securities trading activities. Wrapping money-market fund protections around this “funny money” does NOT make it any safer (lipstick on a pig is still a pig). The SEC does NOT need to reconsider its withdrawn Safeguarding rule proposal, which – if revived and modified to accommodate digital asset nuances—could be a detriment to the time-tested Exchange Act framework.

A caveat – crypto Exchange Traded Products (ETPs), the underlying assets do NOT necessarily have to be “securities”. The SEC’s recent approved $DOJE is a crypto Exchange Traded Fund with underlying “assets” being MEME Coin. Recalling a statement by the SEC Division of Corporate Finance on Feb 27, 2025, it stated that “MEME Coins for entertainment and social cultural purposes are NOT securities.” Any “Digital Collectables” that do not involve CEA regulated commodity options, futures, or leveraged OTC transactions, it would be outside scope of CFTC’s oversight. Reliance on the regulated structure of the product and the transparent disclosures for the valuations and the regulatory controls may be an insurmountable reality. That guardrail may ONLY shuffle fraud and manipulation risk out the door of SEC regulated markets, but NOT stopping the risk spreading elsewhere. Bad actors / foreign adversaries play across markets and payment systems simultaneously.

We have reservations with the SEC newly approved generic listing standards. Its first criteria – “The asset is listed on a market that is a member of the Intermarket Surveillance Group” (ISG), reminded me of AIG – notorious for engaging in credit enhancement and securitization that led to their financial distress during the 2008 financial crisis. Most members of ISG are stock exchanges. An ISG can be bought and sold easily (Kraken acquired Small Exchange). KalshiEX is facing regulatory scrutiny and litigation. Some ISG members domicile outside of the US may have close ties with their respective governments (HKEX’s subsidiary LME involved in a notorious futures contracts cancellation case). We certainly welcome our friendly foreign regulators (CIRO and ASIC) as members of the ISG. UK Prime Minister Winston Churchill once said “We have no lasting friends, no lasting enemies, only lasting interests.” Can the US rely on foreign organizations to act in America’s best interest without being taken for granted? Would the US retreat from global governance be exploited by other powers? 

The US cannot call for an outright ban of crypto like China. Foreign nations promoting their own Central Bank Digital Currency (CBDC) while pushing other digital assets out their doors or allegedly “exporting” DeFi to the US is a de-dollarization attempt. Among the $4 trillion aggregated market capitalization of all cryptocurrencies, stablecoins are about 7.5% (~ $300 billion). NOTE:  the 1:1 reserve requirement under the GENIUS Act is NOT a daily mark-to-market, but rather requires permitted issuers to provide monthly public reporting on their reserve assets.

The dilemma is – the more we add new compliance requirements, the more accumulated bureaucracy in dragging the US productivity. Foreign adversaries want the Western civilizations to fall in their trap. The approach to “suck” new money from Digital Asset activities may be unconventional (like Mafia making other gangs abide by their rules), but becoming the biggest force behind DeFi is better. We recommend:

The ideal way to weed out Illicit activity involving Digital Assets is by reducing bureaucracy and removing barriers that widened the gap between the “haves” and “have nots.” When the World prospers more under the US leadership, there will be less bad actors and adversaries.

Revisit Part 1: Definition of Artificial Intelligence

By Kelvin To, Founder and President of Data Boiler Technologies Data Boiler is a Type C organization member of the European Commission’s Data Expert Group. Between my patented inventions in signal processing, analytics, machine learning, etc. and the wealth of experience of my partner, Peter Martyn, we are about Market Reform, Governance, Risk, Compliance, and FinTech Innovations to create viable paths toward sustainable economic growth.