Hold on to your fax machines, an earthquake of technologically driven changes is about to hit the muni market and shake up how it operates, bringing both new challenges and opportunities to a place not known for rushing to adopt new ways of doing things.
"We are on the cusp of major changes in how the municipal securities market operates," Dave Sanchez, director of the Securities and Exchange Commission's Office of Municipal Securities, said last week in remarks delivered at a program for municipal advisors and municipal dealers, hosted jointly by the SEC, the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority.
That the muni market is on the brink of such changes was the "one resounding reality" that dominated discussions during the two-day event, Sanchez said. Indeed, topics discussed during the program included blockchain technology and artificial intelligence as well the potential disruption quantum computing could pose to current encryption methods used to protect electronic information.
SEC Commissioner Hester Peirce also spoke during the program, and she didn't mince words in describing how the muni market stacks up against other areas of the financial market when it comes to adopting new technologies and innovations, saying, "we must be honest: The pace of change in the municipal securities industry is slower than in other corners of the capital markets."
Tokenization, which she described as "a potentially transformative innovation," is drawing a lot of interest in other areas of the capital market, "and so it may soon be appearing in your corner of the capital market," said Peirce, who in her remarks referenced a deal done by the city of Quincy, Massachusetts. In
While some of tokenization's potential benefits might not be relevant to municipal securities, others such as the ability to offer smaller minimum purchase amounts or the potential to boost secondary market liquidity may be quite appealing to issuers and investors in the municipal securities industry, she said.
"Wide-scale tokenization of municipal securities is not inevitable," Peirce said, adding that unique features of the muni market – including its "retail nature" and "the sheer number of issuers" – might make tokenization not as beneficial as in other markets.
However, "regulators are not great predictors of – let alone good drivers of – innovation," she said.
"And so I do want to extend an invitation to you," she said. "Please come and speak to us as efforts involving tokenization move forward or as other new technologies develop that you think we need to take into account from the regulatory perspective."
The municipal securities market has long been seen "as the quiet, steady engine of our nation's infrastructure," Sanchez said, adding that it is "a market governed by precedent and built on relationships that often span decades."
Now, however, "we are witnessing a technological revolution that could arguably be viewed as more disruptive than prior shifts towards enhanced disclosure and electronic trading," he said.
"Concepts like tokenization, digital collateral and atomic settlement are no longer just theories," Sanchez said. "In some cases they are operational realities that are re-writing how the municipal securities market could operate."
Still, while technology may change how the muni market does business, "it does not change why we do business or the fundamental regulatory concerns that exist in this market," he said.
The muni market "is defined by stability and, frankly, processes that have remained largely static for over 50 years," he said.
"However, from the first blockchain-based issuance to … legislative exploration of bonds collateralized by digital assets, the architecture of our market, like other markets, is being re-imagined," Sanchez said. "With the integration of artificial intelligence, automated compliance and agentic AI, we have been confronted with promises of unprecedented efficiency."
It's tempting to focus on "flashy headlines" such as the arrival of bitcoin-backed bonds or tokenized debt, however, "if we look closer, the real pressure on our regulatory framework isn't just coming from these new vehicles or types of data, but on how enhanced technology can be used in all facets of our market, including even the seemingly most rote or mundane compliance tasks," Sanchez said.
"Two years ago, the market was marveling at chatbots that could summarize a 200-page indenture," he said. "However, today we're dealing with agentic AI, agents that don't just answer questions but can also execute workflows."
The risk associated with such agents "is not just the tech glitch," Sanchez said. As FINRA noted in its 2026 FINRA Annual Regulatory Oversight Report, "the danger can be viewed as the silent erosion of human oversight," he said.
"The risk isn't merely that the AI makes a mistake," Sanchez said. "The risk is that the supervisors are beginning to lose the human-in-the-loop visibility."
In a situation where an AI agent executes a multi-step workflow "how do you reconstruct why it made the specific choices?," he said.
"These are all regulatory challenges that must be considered by both market participants and regulators," Sanchez said.
Hallucinations, when AI produces inaccurate information that appears plausible on the surface, are another well-known risk that could "overshadow the significant potential and progress of AI," the OMS director said.
"This may be viewed as making a materially false or misleading statement in a disclosure document and could violate the anti-fraud provisions," Sanchez said. "If you're using or plan to use AI in drafting official statements or other investor-facing documents, you should be thinking about what you're doing to ensure that AI-drafted disclosures are accurate."
Another topic discussed during the joint compliance outreach program was quantum computing, a field that, according to information available on the National Institute of Standards and Technology's website, "remains in its infancy."
Still, advanced quantum computers "remain a strong possibility," and would have such a big impact on present-day encryption that the world needs to prepare for them, NIST's website said. To counter the looming threat, new encryption methods called post-quantum encryption algorithms are needed, NIST's website said.
"We're all talking about quantum," Omid Rahmani, an associate director at Fitch Ratings who leads the U.S. public finance cyber risk practice there, said during a technology panel that was part of the compliance outreach program. "It is something that will happen, and it has positive benefits."
For example, quantum computing is expected to revolutionize things like cancer research, Rahmani said.
However, quantum computing "does have a serious implication for security because our entire technology-based security posture as long as we've had cyber security has been based on encryption," he said.
"So once encryption is no longer viable in the traditional sense, [we've] got to figure something else out and we all talked about post-quantum encryption and post-quantum security," Rahmani said.
However, "that's a major challenge," he said.
