SEC clears path for tokenized stock trading

• Key takeaway: The Securities and Exchange Commission's temporary "innovation exemption" allows tokenized securities venues, or TSVs, to facilitate secondary trading of tokenized stocks using blockchain-based systems. 
• Expert quote: "This exemption is a principled, structured grant of relief designed to resolve genuine legal uncertainty that has driven innovation away from the United States." —Securities and Exchange Commission Chair Paul Atkins
• What's at stake: Industry insiders say SEC and CFTC rules may not have the same permanence as legislation passed by Congress and could be more easily changed by future administrations.

WASHINGTON — The Securities and Exchange Commission on Thursday issued an order allowing some tokenized U.S. stocks to be traded on blockchain-based platforms under a temporary, limited regulatory framework.

The agency's "innovation exemption" allows secondary trading of tokenized stocks on tokenized securities venues, or TSVs, using blockchain-based systems. The order expires in five years and includes several restrictions.

SEC Chair Paul Atkins said in a recorded video address that the exemption is intentionally limited in scope, giving the market a defined window to operate while the agency evaluates potential future rulemaking.

"We are not cementing today's technology as the standard for tomorrow," Atkins said. "This exemption is a principled, structured grant of relief designed to resolve genuine legal uncertainty that has driven innovation away from the United States." The SEC's order comes two days after the CLARITY Act failed to advance in the Senate. A procedural vote on the cryptocurrency market structure bill Tuesday fell short 49-50. Atkins said the agency's order Thursday was partly a response to the bill's stalled progress 

"Today we are taking a significant step, using the SEC's statutory authority, to ensure that progress continues and that America's capital markets advance into the digital age through what we call the innovation exemption, a mechanism to facilitate on-chain trading of certain tokenized stocks," he said.

Atkins said on-chain trading of tokenized securities could provide "vast benefits" to investors and markets, but that the current regulatory framework can create uncertainty for venues seeking to use the technology.

The order includes several key restrictions. TSVs must be U.S. persons, synthetic versions of stocks are prohibited, and issuers of the underlying stocks must be notified and given an opportunity to opt out. Tokenized stocks also must provide holders with the same rights and privileges as investors who purchase the underlying shares through a brokerage account.

Atkins called the order an "interim measure" that "must be followed by durable rulemaking to ensure that investors are protected and on-chain markets remain a viable pathway as our capital markets continue to evolve."

With the crypto market structure bill stalled indefinitely, the SEC and Commodity Futures Trading Commission have said they will pursue their own rules to clarify their respective responsibilities and create clearer registration pathways for exchanges and custodians. 

Alongside the "innovation exemption," the SEC proposed rulemaking in August that would streamline how crypto companies raise money. The proposed rules, dubbed "Regulation Crypto Assets," include two exemptions that would allow certain crypto companies to raise capital without going through the traditional securities registration process.

Meanwhile, the CFTC is exploring potential rulemaking that would create a framework for crypto exchanges to offer leveraged or margin-based trading and establish a legal path for developers to offer decentralized finance protocols in the U.S.

CFTC Chair Michael Selig said Aug. 20 that the agency will give "CLARITY its breathing room for a vote," but warned that if a bipartisan product is not reached and passed, he will "direct CFTC staff to move swiftly to propose these rules for the industry."

Industry insiders say any SEC and CFTC rules may not have the same permanence as legislation passed by Congress and could be more easily changed by future administrations.