The SEC has approved limited trading of tokenized stocks on select platforms for five years, allowing innovative trading mechanisms while ensuring regulatory compliance.
The U.S. Securities and Exchange Commission (SEC) has authorized a five-year trial period for limited trading of tokenized stocks on designated on-chain platforms. This initiative, known as the Innovation Exemption, was announced on September 17.
Under this exemption, Tokenized Securities Venues (TSV) can facilitate trading of tokenized National Market System (NMS) stocks using automated market makers (AMM) and controlled liquidity pools.
This temporary exemption allows these platforms to operate without being classified as an "exchange" under the Securities Exchange Act of 1934. Additionally, certain liquidity providers using their own funds may also be exempt from dealer classification if they meet specific conditions.
Tokens may be issued by the stock issuer, an agent acting on their behalf, or an independent third party. Importantly, token holders must retain the same rights as traditional shareholders, including rights to dividends and voting. However, synthetic instruments that only track stock value without conferring ownership rights are not included.
If a third party issues the token, the TSV must inform the underlying stock issuer in writing beforehand, allowing the issuer to object to the trading of its asset on the TSV.
Regulatory Conditions
The SEC has established limits on the number of instruments and trading volumes, aligning them with the Limit Up-Limit Down mechanism used in the U.S. stock market to prevent extreme price fluctuations.
Platforms are mandated to regularly disclose transaction details, including price, size, and timestamps, as well as daily trading volume and pool address details. SEC Commissioner Mark Uyeda emphasized the importance of these disclosures for transparency.
Moreover, TSVs are required to provide operational and trading activity information, including transactions involving affiliated parties. The smart contracts must be publicly accessible for auditing on a permissionless public blockchain.
In case of a trading halt for a regular stock on the primary exchange, TSVs must also suspend trading of its tokenized counterpart.
SEC Chairman Paul Atkins stressed that federal securities laws concerning anti-fraud and anti-manipulation will remain fully applicable under this new framework. Commissioner Uyeda characterized the Innovation Exemption as a regulated approach, enabling the SEC to monitor new platforms and gather data for future regulatory development.
This exemption does not change the classification of tokenized stocks as securities. In a previous clarification, the SEC stated that the format of the asset and methods of accounting for ownership rights do not affect the applicability of federal laws.
By providing this temporary relief to certain trading venues and liquidity providers, the SEC has invited public comments on potential adjustments and further regulatory measures for on-chain trading. Notably, in March, the SEC permitted Nasdaq to begin trading tokenized stocks, and the New York Stock Exchange later announced a collaboration with the RWA platform Securitize.
