Reinforcing Custody, Transfer Agency, Compliance and Accounting in the Tokenization Era

The modernization of financial market infrastructure is no longer theoretical. As tokenization of real-world assets “RWA” accelerates and digital settlement rails mature, the integration of blockchain into traditional financial services is shifting from experimentation to strategic necessity. For custodians, transfer agents, compliance providers and accounting firms, distributed ledger technology (DLT) presents an opportunity to materially enhance transparency, security, auditability, and regulatory alignment.

Recent enforcement actions underscore why modernization is urgent.

When Legacy Systems Fail

In 2024, the U.S. Securities and Exchange Commission (SEC) charged Equiniti Trust Co., formerly known as American Stock Transfer & Trust Company, with failing to protect client funds against cyber intrusions. According to the SEC, deficiencies in safeguarding protocols led to the loss of more than $6.6 million in client funds across two cyber incidents in 2022 and 2023. Although approximately $2.6 million was recovered and clients were fully reimbursed, the firm agreed to pay an $850,000 civil penalty to settle the charges.

Separately, litigation filed in the Southern District of New York placed Transhare Corporation and Ascent Investor Relations LLC at the center of an alleged scheme involving manipulated share counts and concealed issuances. Regulators alleged that approximately 240 million shares were secretly issued, enabling a $300 million pump-and-dump fraud. In parallel, six investors filed a class action lawsuit on January 30 against China Liberal Education Holdings Ltd..

These cases are not merely isolated failures, they highlight structural vulnerabilities in legacy recordkeeping and control frameworks.

Under Section 17A(d) of the Securities Exchange Act of 1934, transfer agents are required to maintain accurate records, safeguard securities and funds, and ensure operational integrity. When systems rely heavily on fragmented databases, manual reconciliation and siloed third-party processes, the risk of manipulation, delayed detection and cyber exploitation increases.

Blockchain as Infrastructure, Not Speculation

Blockchain is often discussed in the context of cryptocurrencies. However, its most consequential impact may lie in institutional market plumbing.

At its core, blockchain provides:

Immutable, time-stamped records

Distributed consensus validation

Programmable logic (smart contracts)

Real-time settlement visibility

Cryptographic security controls

For service providers, this transforms recordkeeping from a periodic reconciliation exercise into a continuously verifiable system of truth. Transfer agents are responsible for maintaining shareholder records, processing issuances and ensuring authorized share counts are accurate. There is no sidestepping this as it is their core fucntion.

In traditional systems:

Share issuances may be recorded internally before external visibility.

Reconciliation between issuer, transfer agent, and broker records can lag.

Audit trails can be altered or obfuscated without robust forensic controls.

On a blockchain-integrated system:

Every issuance is cryptographically recorded.

Total supply is transparent and verifiable in real time.

Smart contracts can enforce authorized share caps automatically.

Any attempt to exceed programmed limits becomes computationally impossible without network consensus.

This eliminates ambiguity in float calculations and materially reduces the ability to conceal unauthorized issuances. It brings in full transparency into this area, it allows custodians to regulate how short players work and what they can work with. It also allows a company with the potential ability to control shorting of their equity, preventing naked shorts and manipulation.

Custody Strengthening Safeguards

Custodians face rising cybersecurity threats, as demonstrated in the Equiniti case. Traditional custodial systems often rely on centralized databases that can be attractive targets for intrusion. It these databases are compromised in any way it will trickle down to a host of future issues. Let use this as an something to think about, if a ship is sailing across the Atlantic ocean and the coordinates are off by a single degree, it could set that ship not only of course but to a different country entirely. That is because it compounds mile on mile, setting the ship way of course.

Same holds true for custodial, one wrong record can become a major issue down the line.

Blockchain-based custody can incorporate:

Multi-signature authorization protocols

Hardware-secured private key management

On-chain proof-of-reserve verification

Immutable transfer histories

Rather than discovering breaches after capital has moved, onchain systems can enable real-time anomaly detection and programmable transaction restrictions. Prevent it before it happens, being proactive as opposed to reactive is key to investor protection.

Compliance and Accounting Going From Reactive to Continuous

Compliance in traditional finance is often retrospective. Reviews, reconciliations and reporting cycles occur after transactions settle. That means a trade can occur, shares transferred and transaction settled before any issues are detected. If fraud is involved then it will involve regulators, authorities and pretty much become a big mess.

This is what Blockchain enables:

Continuous compliance monitoring

Automated regulatory rule enforcement

Transparent audit trails accessible to authorized regulators

Real-time reconciliation between issuer, custodian, and transfer agent

Now for accounting professionals, distributed ledgers provide:

Immutable transaction histories

Reduced need for manual confirmations

Automated financial statement integration

Reduced fraud exposure

This directly supports safeguarding and recordkeeping provisions under Section 17A(d), enhancing regulatory defensibility.

Tokenization and the Convergence of TradFi and DeFi

We have touched on this topic on a number of occasions, and it is only now that major exchanges, including Nasdaq and New York Stock Exchange, are actively exploring tokenization frameworks. As equities, bonds and alternative assets migrate toward tokenized representations, service providers must adapt, they have little choice. It is adapt of get left behind.

Tokenization of real-world assets is not hypothetical, it is a reality. Companies and platforms such as:

Securitize

HootDex

Fiqure

They are all building infrastructure that bridges traditional securities with blockchain-native settlement layers. They are building on traditional rails , enhancing them and bringing them to what will be the future of finance, not replacing but enhancing.

In this hybrid environment:

Transfer agents may become digital asset registrars.

Custodians may manage both tokenized and traditional assets.

Compliance teams may supervise programmable securities.

Accounting firms may audit on-chain financial flows.

Service providers that integrate blockchain early position themselves not only as compliant operators, but as competitive leaders in a converging financial ecosystem.

Demand, Regulation and Competitive Advantage

As regulators increase scrutiny over cybersecurity, transparency and anti-fraud controls, service providers that rely solely on legacy systems may face growing liability exposure. Just as digital entries replaced paper slips for trading, is just as blockchain will be the norm and not the exception. We have seen this building momentum since 2019 and more so since 2022.

Blockchain integration can:

Reduce operational risk

Shorten compliance turnaround times

Increase transparency for regulators

Strengthen client confidence

Provide real-time proof of integrity

In a marketplace where institutional capital demands verifiable controls, blockchain enabled service providers may become more attractive partners. They would be able to provide the most proactive approach, the most transparency in their stewardship and give those companies a more powerful shareholder infrastructure for the future.

The Strategic Imperative

Let’s be very clear, this is not about replacing financial intermediaries. It is about reinforcing them.

Transfer agents, custodians, compliance professionals and accounting firms remain essential pillars of capital markets, that will not change. But what will change with the next generation of financial infrastructure is a blending of centralized oversight with decentralized verification.

The firms that embrace blockchain not as a marketing term but as an operational backbone, those firms will not only be better positioned for growth but be leaders in this convergence.

Some of the ways they will be better positioned include some of the following:

Prevent fraud

Protect client assets

Accelerate regulatory reporting

Bridge traditional and decentralized markets

The evolution is already underway. Tokenization will not eliminate intermediaries—it will elevate the ones capable of adapting. In the coming decade, transparency will not be optional. It will be engineered and blockchain may become the ledger that defines that new standard.