The Securities and Exchange Commission (SEC) is granting temporary exemption for cryptocurrency platforms to trade tokenized stocks.
The trading platforms, or tokenized securities venues (TSV), bring together buyers and sellers of tokenized stock by providing automated market makers and liquidity pools. The exemption for TSVs is from the definition of “exchange” in the Securities Exchange Act, subject to certain conditions, including that:
- Tokenized stocks traded on a TSV are subject to limits on the number of symbols and volume traded;
- A TSV must verify that the tokenized stock made available for trading on the TSV provides holders the same rights and privileges as does traditional stock of an equivalent class;
- Before making available for trading a tokenized stock that is tokenized by an unaffiliated third party, the TSV must provide written notice and an opportunity to object to the issuer of the underlying stock;
- Smart contracts used by a TSV must be auditable, public, and deployed on a public, permissionless distributed ledger;
- A TSV must stop trading in a tokenized stock concurrently with any stoppage of trading in the underlying NMS stock on the primary listing exchange; and
- A TSV must provide public notice about its operations, trading activities, and the trading activities of its affiliates on the TSV.
“Today, 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. “The Innovation Exemption, while temporary, would allow TSVs to trade tokenized NMS stock in a permissioned environment today while the Commission considers the need for additional action to facilitate onchain trading. As we take this important first step, we invite public comment on all aspects of the Innovation Exemption to help inform the Commission as it considers further changes.”
The SEC’s order will temporarily grant a conditional exemption from the definition of “dealer” as to liquidity providers in an AMM Liquidity Pool.
“Today’s approval of exemptive relief for on-chain secondary trading on a TSV – known as the ‘Innovation Exemption’ – marks an important milestone for the Commission’s work to open our capital markets for tokenized securities,” Jamie Selway, director of the SEC Division of Trading and Markets, said. “The division stands ready to work with interested parties seeking to operate a TSV and field questions from investors and market participants.”
The exemptions are set to expire five years after publication. The SEC is seeking public comment about the possible modifications after it is published on SEC.gov and in the Federal Register.
The Securities Industry and Financial Markets Association (SIFMA) expressed concerns about the proposal’s potential impact on investor protection and market integrity. SIFMA CEO Kenneth Bentsen, Jr. said the SEC should avoid unnecessary and potentially costly fragmentation in the listed securities market.
“The exemption could allow multiple tokenized versions of U.S.-listed securities to trade in parallel, lightly regulated markets, in ways that could lead to investor confusion and harm, as well as price and liquidity fragmentation. SIFMA has been clear that any innovation exemption should be narrowly drawn, open to all market participants, technology neutral, and subject to appropriate guardrails, including duration, customer, and transaction limits. While today’s order includes some of these guardrails, it is unclear if they are sufficiently robust to protect investors and market quality,” Bentsen said.
Bensten added that SIFMA looks forward to working with the SEC as this framework develops.
“We appreciate that the SEC is soliciting public comment and note the chairman’s statement that this interim measure must be followed by durable rulemaking,” Bentsen said. “We urge the commission to commence that formal notice and comment process as soon as possible so that this framework can benefit from broad public input and rigorous economic analysis, and so that tokenized securities markets have the certainty they need to develop in a responsible manner.”