The Missing Piece for Tokenized Securities

For years, the tokenization industry argued that the rules had to change before tokenization could work. The SEC has since proposed a new transfer agent rule and issued the Innovation Exemption, but most firms still do not know how to use them. Most tokenized products in the news are tokenized brokerage accounts, which are the old market structure with a wallet address, so they will not deliver the benefits the industry promised issuers and investors. That leaves two possibilities: 1) composability, where securities move between wallets, venues and chains the way stablecoins do, requires major legislation, or 2) a fix that seems implausible at first: Portable and reusable identity.

1. Tokenized securities need identity verification that many firms can rely on

Tokenization should give financial institutions distribution to investors they can't reach today, rails that settle trades and enforce transfer rules automatically, and verifiable transactions that comply with US regulation. On a public ledger, an investor with a self-custody wallet can buy and sell tokenized securities via participating venues. So every regulated firm that deals with the wallet must verify who the investor is and that she controls the wallet, which is hard when the firm's only contact with her is a transaction on the public ledger. Nobody opened an account, but the firm still has to identify the holder, screen her, and keep records as if someone had.

The fix is an identity verification that more than one firm can rely on. An experienced compliance officer will ask three questions:

1. Is this verification weaker than if we just did it ourselves?

2. How do I rely on a verification I didn't do?

3. Am I taking on another firm's judgment as my own operational risk?

Opacity upgrades investor verification, so the answer to the first question is no. Firms will rely on another firm's verification only if it is stronger than their own. Today a firm receives a passport photo and a bank statement PDF from the same person the documents describe. Anyone can forge both for the price of a software subscription. A clerk's review of those documents leaves no record that another firm can test. No one can later check whether the clerk caught the discrepancy on the third page or clicked past it on a slow afternoon, and even a perfect review leaves nothing the next firm can verify.

Opacity instead builds the verification from accounts the investor already has, such as a bank, a brokerage, a payroll provider and a government registry. The technology is zkTLS. She logs in to each account, and Opacity uses multi-party computation (MPC) and zero-knowledge proofs (ZK) to generate a cryptographic proof of what the site showed her, tied to the site's domain (for example, api.irs.gov). The account provider does not sign a data-sharing agreement, and the investor only needs to log in from an ordinary browser. She repeats this for several independent accounts, and Opacity checks that the records agree: the registry confirms her name and date of birth, and the payroll and bank records show wages paid and received in that name.

Regulated firms keep the same requirements. Opacity changes the evidence that firms check against those requirements. Today a firm that relies on another firm's verification relies on that firm's judgment, so it pays to supervise that judgment for as long as the account is open. With Opacity, any firm can verify or reverify the evidence against its own requirements. Each firm makes its own decision, and the firms share only the evidence.

2. The Verified Data Network checks credentials at every transfer

Opacity's Verified Data Network (VDN) lets many firms rely on the same verification.

The VDN has two parts: onchain registries of credential flags, and an offchain network of node operators that verify the evidence, store it and keep the registries current. When a token smart contract transfers a security, it needs an approval at the moment of the transaction, with no personal data or judgment attached. The registries hold credential flags for each wallet, such as identity verified, sanctions cleared, accredited, US person, and any other flag a firm requires. A firm's smart contracts read those registries and can rely on each flag, because the VDN node operators store the encrypted source records behind every flag. FinCEN and the federal banking regulators confirmed in September 2026 FAQs that electronic credentials, including verifiable digital credentials, can serve as one method of verifying a customer's identity.

Before a share moves on a public blockchain, the token's smart contract reads the registry for the receiving wallet and completes the transfer only if every required flag is present. At onboarding, the Opacity app screens the investor against OFAC's SDN list and the other restricted-party lists, and checks that the investor's source records agree. The app flags a name or date of birth that differs between accounts, and it rejects an account with almost no history.

The investor receives a credential only after she passes screening. After that, the network checks her against the sanctions lists continuously. If her name appears on a list, the network removes her sanctions flag, so the next transfer into or out of her wallet fails and every firm that reads the registry blocks her transfers automatically. Each firm then adds the requirements of its own compliance program to this sanctions check. A firm's risk model might flag her because she subscribed for a large amount from an unfamiliar jurisdiction or because her wallet history shows risky activity. The firm then decides what enhanced due diligence it requires, and the Opacity app asks her for it. She might have to prove she still controls her accounts, connect another account for more information, or prove her source of funds. She can reverify at low cost by logging in again. An attacker holding her real logins would have to keep control of several accounts at once, with histories that agree, for as long as the credential is in use.

Investor source records contain the sensitive personal data, so Opacity designs the VDN so that no single party holds them. Each node operator on the VDN keeps an encrypted share of the records, and the operators can reassemble the records only by acting together on a grant the investor has signed. A firm's token smart contract reads the registry flag to confirm that the investor passed screening. The firm must still store the records under its own obligations. So the firm's token contract adds one condition before it moves a share into her wallet: her wallet must sign a grant that gives the firm access to the records its program lists, such as identity, source of funds and residency. The node operators check that her wallet signed the grant and that the firm requests only what the grant allows. The operators then reassemble those records from their encrypted shares and deliver them to the firm. The firm keeps the records in its own customer file. The public ledger records ownership, so the share settles when the blockchain confirms the transfer, and the record delivery happens offchain without delaying settlement.

When examiners or law enforcement ask for the investor's file, the firm produces it from its own records, including the evidence, the provenance of each source and the credential checks it ran. The firm's obligation stays the same, but the firm meets it with better evidence, and the next firm the investor deals with can request the same evidence instead of verifying her from scratch.

3. Tokenized securities venues can onboard investors in emerging markets

The SEC's Innovation Exemption lets a tokenized securities venue (TSV) trade tokenized stock on a public ledger without registering as an exchange, provided the TSV keeps meeting its sanctions and AML obligations and admits only identified, eligible participants. The SEC's separate guidance on covered user interfaces (CUIs) applies to the wallets and apps that investors trade through. Under these two SEC actions, a qualified investor in an emerging market can reach American capital markets from a wallet she already uses, on a venue anyone can connect to. Opacity's VDN connects those wallets to those venues, because every venue can read the same credential.

Before Malcom McLean introduced the standard shipping container in 1956, port workers unpacked and repacked cargo by hand at every transfer. McLean standardized the outside of the box, so cranes, trucks and ships could handle any shipment without opening it. Loading costs fell from $5.83 a ton for conventional cargo to about $0.16 a ton on McLean's first container ship. An Opacity credential gives US capital markets the same kind of standard, because every wallet and venue can check one credential.

The same standard lowers the investment minimum for investors in emerging markets. US banks have dropped whole categories of foreign customers because supervising those accounts over their lifetime cost more than the accounts earned. When a firm can recheck the evidence at the source, it can run that supervision as a standard automated check. How Tokenization Finally Reaches Emerging Markets explains the mechanics.

By Hersh Patel
Co-founder and CEO
Opacity Labs