The DTC Tokenization Pilot and the Transition to On-Chain Infrastructure for Capital Markets

By Vanessa Savino, EVP, Chief Legal Officer, tZERO Group, Inc.

The SEC’s recent no-action letter enabling the Depository Trust Company (DTC) to pilot the tokenization of securities entitlements is a pivotal moment for U.S. capital markets. It reflects a growing regulatory comfort with distributed ledger technology (DLT) and a formal recognition that DLT will be the foundational infrastructure of future capital markets. tZERO has been a regulated leader in the tokenized securities market for years, pioneering the infrastructure necessary to achieve the core promise of tokenization: multi-asset interoperability, cross-border convergence, efficiency, and enhanced utility. We welcome this incremental step on the journey to full tokenization rails for capital markets and will continue to pave the path forward.

Tokenization Has Moved Beyond Proof of Concept

For much of the past decade, tokenization was treated as an emerging technology – something to study, test, and cautiously pilot – but more of a novelty rather than a base case. That framing no longer reflects reality. The global financial industry has reached a consensus: we are entering the next phase of capital markets, where the migration of all securities to blockchain infrastructure is inevitable.

The DTC pilot underscores this shift. It introduces DLT to the conventional national market system, permitting large institutional market participants to integrate DLT into their clearing operations at DTC. However, retrofitting legacy systems for conventional securities should be understood for what it is: a transitional strategy.

Retrofitting is a Good Step – But it’s Not the End State

Tokenizing securities entitlements to conventional securities within the existing centralized clearing and settlement framework does offer immediate benefits: it advances the institutional normalization of blockchain-based records and enables 24/7 liquidity and programmability within DTC’s clearing infrastructure.

The pilot also maintains legacy layers of intermediation and uses off-chain records as its source of truth for security entitlement balances.While participants can tokenize their securities on deposit at DTC, effect transfers in those holdings within the DTC ecosystem and make this information available on-chain, DTC is the gatekeeper of all wallets and keys used in this pilot and not interoperable with other clearing ecosystems and markets. Additionally, an off-chain DTC software system scans blockchain transfers to update a participant's balance on a separate, off-chain ledger. The off-chain record is DTC’s official record of the participant’s holdings. When a blockchain layer is merely "paired" with a legacy central database, the purported benefits of DLT are undercut by redundant recordkeeping, reconciliation and unnecessary layers of intermediation. The deepest efficiencies emerge only when securities are digitally native. By collapsing issuance, trading, custody, and settlement into a single, shared ledger in an open source format, we achieve a fundamental structural leap to achieve the core promise of tokenization.

On-Chain Infrastructure is Available Today

At tZERO, we have been working to advance the adoption of fully tokenized securities for years. Following the approval of our special purpose broker-dealer (SPBD) at the end of 2024, we fully tokenized our preferred shares (TZROP) in early 2025 and, since then, have demonstrated how digitally native securities can trade in a regulated environment, with direct on-chain custody by a broker-dealer. There is one source of truth for the digital asset securities on deposit with tZERO’s SPBD – the blockchain. Our experience shows that infrastructure for native digital securities can be adopted today in a responsible manner.

The Transition is Already Underway

The DTC pilot is evidence that the transition to on-chain markets is in motion, but transition to blockchain-based infrastructure continues. SEC Commissioner Hester Peirce’s statement accompanying the no-action letter correctly encouraged continued experimentation and alternative models for the adoption of tokenized securities. We stand ready to collaborate with the DTC, other market participants, and regulators as we all continue to “innovate and experiment” to build the future of finance.