The U.S. Securities and Exchange Commission issued a blanket 5-year exemption for listing and trading tokenized securities without registering as an exchange.
- The SEC announced its "innovation exemption" that would give tokenized securities venues a 5-year permit to operate without having to register as an exchange.
- The innovation exemption has been in the works for more than a year, but was released just days after a crypto market structure legislative effort failed in the U.S. Senate.
- Securities issuers who object to an outside party tokenizing their offerings can block a venue from doing so.
Blockchain-based trading venues that want to list and trade tokenized securities received fresh permission and an explanation of how to do that from the U.S. Securities and Exchange Commission on Thursday.
The SEC unveiled its long-awaited tokenization exemption on Thursday morning, formally granting these so-called "tokenized securities venues" (TSVs) the ability to provide automated market makers and liquidity pools that, in turn, can be used to trade tokenized securities. These companies will have a five-year "conditional exemption" from having to meet the definition of an "exchange" in U.S. securities law, according to the SEC.
Under the SEC's watch, the venues will manage pools of necessary assets and use algorithm-driven automation to manage the activity of buyers and sellers. Thursday's order sets paths for tokenization by either the stock issuer or a third party, under certain conditions.
“The Securities and Exchange Commission is taking a significant step forward, within its statutory authority, to bring America’s capital markets into the digital age by facilitating onchain trading of certain tokenized stocks through the ‘Innovation Exemption,’” SEC Chairman Paul Atkins said in a statement.
The regulator explicitly excluded synthetic security tokens that are derivatives and don't provide ownership of the shares. The SEC only allows tokens that represent real ownership of the underlying stock, which Atkins said “must provide holders with the same rights and privileges as the traditional securities, including rights to receive dividends and exercise voting rights.”
That may exclude derivatives and debt instruments offered in many of the offshore products, such as from Robinhood.
The time-limited innovation exemption doesn't require the SEC to formally designate the venues. Instead, any platform that believes it can meet the SEC's definition and comply with the conditions only needs to provide notice before opening the doors of a tokenization operation, according to the agency.
5 years, to start
Atkins acknowledged the temporary nature of the policy, which he said lets firms operate “in a permissioned environment today while the commission considers the need for additional action to facilitate onchain trading.” He said the measure “must be followed by durable rulemaking to ensure that onchain markets remain a viable pathway as our capital markets continue to evolve.”
Tokenization has become one of Wall Street's biggest blockchain experiments, giving major weight to the SEC's opening move. The basic idea is to take familiar assets such as stocks, bonds or investment funds and represent ownership of them on a blockchain, potentially allowing them to move more easily between investors and financial platforms.
Global asset managers, banks and market infrastructure firms have been pushing deeper into the technology, betting that it could eventually bring faster settlement, around-the-clock markets and lower costs while making securities easier to distribute and use as collateral. It's potentially a huge opportunity for firms: Citi analysts estimated that tokenized assets could grow into a $5.5 trillion market by 2030.
To protect issuers, a TSV needs to provide a 30-day notice before tokenizing another company's securities and give that company the opportunity to object. This could be as simple as the company saying it objects, the official said.
Delivering 'certainty'
Though the SEC had held off on this initiative while the Senate was still working on the legislation that could establish a law to underpin this and other policies, that political constraint has now largely disappeared. The Digital Asset Market Clarity Act stalled Tuesday after the Senate could muster only 49 of the 60 votes it needed to proceed with the sweeping crypto market-structure bill.
After that loss in the Senate, Atkins posted on Wednesday on the social media site X that his agency "will act decisively within the SEC's statutory authority to deliver certainty for American investors and for the entrepreneurs shaping our technological future."
"Stay tuned," he’d said, before following up a day later with the long-awaited exemption.
The SEC already issued the first major proposal for a new crypto rule last month in a regulation meant to clear a path for crypto offerings without triggering certain oversight demands as securities.
Then, the agency on Sep. 1 proposed the first major overhaul of transfer-agent rules in four decades, explicitly accommodating blockchain-based recordkeeping of securities ownership.
On Thursday, Atkins' agency is also set to host a roundtable on around-the-clock trading — a concept native to the crypto industry but a potential revolution for traditional firms.
It's not yet clear whether the regulator will one day have a U.S. crypto law that backs up its tokenization approach, which currently relies on the SEC's power to exempt narrowly defined businesses from the full force of its regulations.
For now, Atkins and his two fellow Republican commissioners are tapping the extent of the agency's authorities, though any policies set up that way could one day be reversed in much the same way.
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