SEC unveils exemption for tokenized stock trading

The Securities and Exchange Commission (SEC) unveiled its long-awaited “innovation exemption” Thursday, a new order aimed at clearing the way for tokenized stock trading in the U.S.

The order creates a pair of five-year exemptions. The first exempts platforms that host tokenized stock trading from the commission’s definition of an exchange, while the second exempts liquidity providers in the space from its definition of a dealer.

“Over the past several years, advancements in distributed ledger technology have facilitated innovations in trading across non-security crypto assets,” the SEC noted in a fact sheet.

However, it suggested that tokenized stock trading platforms “may face substantial challenges with complying with the Federal securities laws without potentially burdensome changes to its business model.”

Tokenized stocks are digital versions of real-world stocks. They are represented by digital tokens on the blockchain, the technology that forms the foundation of cryptocurrency.

The SEC’s innovation exemption specifically applies to platforms that rely on automated market makers, which are often used by decentralized crypto exchanges.

Traditional market makers are separate financial institutions or individuals that provide liquidity for a market. Automated market makers, by contrast, depend on liquidity pools supplied by users and rely on an algorithm to automatically set prices.

To fall under the SEC’s exemption, these platforms have to be permissioned. Permissioned blockchains require some standards for people to access and trade on them, unlike public blockchains that are open to anyone.

Holders of the tokenized stock must also have the “same rights and privileges” as a traditional stock of an “equivalent class,” the SEC noted.

The new order comes just two days after the Clarity Act came up short in the Senate. The crypto regulation bill failed to secure enough support to clear a procedural hurdle on the Senate floor.

SEC Chair Paul Atkins hinted at the agency’s plans Wednesday.

“I have been unequivocal: with or without legislation, we will act decisively within the SEC’s statutory authority to deliver certainty for American investors and for the entrepreneurs shaping our technological future,” he wrote on the social platform X. “Stay tuned.”