SEC Launches Tokenized Stock Trading Initiative, Benefiting Key Players

The U.S. Securities and Exchange Commission (SEC) has initiated a five-year exemption aimed at facilitating the trading of tokenized stocks that maintain full shareholder rights, potentially benefiting firms like Securitize, Bullish, and Superstate, as well as custodians like Dinari.

This initiative opens new avenues for DeFi trading platforms while excluding synthetic stock tokens.

By Krisztian Sandor| Edited by Aoyon Ashraf 22 min ago 5 min read

The SEC's recent experiment with tokenized stocks is expected to significantly benefit sectors within crypto that focus on integrating real securities onto blockchains and providing regulated trading platforms.

This new framework is designed to support tokens that accurately represent U.S. shares and offer the same rights as conventional stocks, including voting rights and dividends. Carlos Domingo, CEO of Securitize, expressed optimism about the initiative, stating, “This is extremely positive because it gives a way to trade real tokenized stocks.”

The SEC’s plan accommodates various tokenization methods, from issuer-led initiatives to custodial arrangements, but deliberately excludes synthetic products that only offer price exposure. This means the initiative favors companies directly collaborating with issuers and custodial models over those that merely create stock-linked offerings.

Additionally, the SEC's framework allows for tokenized stocks to be traded through automated market makers (AMMs) on public blockchains, potentially integrating decentralized finance (DeFi) protocols into U.S. securities markets. However, platforms must adhere to regulations involving Know Your Customer (KYC) protocols and trading limits.

Tokenized Shares Entering the Blockchain Space

Domingo noted that the SEC’s regulation is a robust endorsement of tokenized shares that reflect the actual securities underlying them. He believes the framework will enhance the acceptance of issuer-sponsored tokenization, thus accelerating the adoption of native tokenized securities.

Bullish, the parent company of CoinDesk, is also expanding its tokenization operations by acquiring the transfer agent Equiniti, with Thomas Cowan, its global head of tokenization, calling this development “a step in the right direction.”

Cowan added, “It’s showing that regulators are thinking about how to enable AMMs and new market structure.” However, he also advised that this exemption should be seen as a controlled initial step rather than an immediate full-scale launch of an on-chain stock market.

On Thursday, Securitize's stock rose by 14%, while Bullish's shares increased by 10%.

Public Companies Retain Control

The SEC has also introduced a provision that allows public companies to have a say when third parties tokenize their shares. Trading venues must inform the issuer before any tokenized stock can be traded and wait for 30 days. If the issuer raises objections, the token cannot be traded under this exemption.

“The issuer veto is the key safeguard,” stated Joris Delanoue, CEO of Fairmint, a regulated on-chain transfer agent. This rule follows a recent controversy involving AMC Entertainment and Robinhood, where AMC's CEO criticized Robinhood for offering AMC-linked stock tokens without the company's consent.

Exclusion of Synthetic Tokens

Synthetic products that do not confer the same rights as traditional stocks are not eligible for the SEC's exemption. Gabo Otte, CEO of Dinari, emphasized that the SEC is establishing a crucial distinction regarding what tokenized equities should represent, stating, “Putting stocks on-chain shouldn’t mean stripping away the rights that make them stocks in the first place.”

This exclusion may pressure offshore stock-token offerings, like Robinhood’s Stock Tokens, Kraken’s xStocks, and Ondo Finance’s products, which only provide price exposure without granting shareholder rights. These companies will need to adapt their offerings to comply with the SEC’s new framework if they wish to enter the U.S. market.

Robinhood's crypto head, Johann Kerbrat, welcomed the SEC's initiative, calling it a significant step for tokenization in the U.S. and stating, “This is a major step by the agency and will allow liquid tokenized securities markets to develop onshore.” Robinhood's shares saw a 2.8% increase on Thursday.

Opening Doors for Regulated DeFi

This exemption also presents opportunities for regulated DeFi trading platforms. Tokenized securities venues can utilize AMMs to trade tokenized U.S. stocks without needing to register as traditional securities exchanges. In contrast, centralized exchanges like Coinbase and Kraken may find themselves outside of the SEC's framework. Coinbase's shares climbed by about 5% on Thursday.

Zach Pandl, head of research at Grayscale, mentioned that this move could stimulate more activity on blockchains and decentralized trading applications associated with these markets. He said, “The innovation exemption will bring more utility to tokenized assets, benefiting users, leading public blockchains, including Ethereum, Solana, and BNB Chain.”

While the technology can operate on public, permissionless blockchains, market access will need to be controlled. This might pave the way for a regulated version of DeFi for U.S. securities, incorporating existing crypto trading technology alongside KYC and other regulatory measures.

Domingo expressed optimism, stating, “I expect that all the DeFi AMMs will launch something,” predicting the emergence of various liquidity venues for these tokenized stocks.

However, the practical ability for existing DeFi platforms to leverage this exemption remains uncertain. Jim Petrila, chief legal officer of Dromos Labs, noted, “The SEC’s innovation exemption is a meaningful, directionally bullish signal for DeFi, indicating that the agency is dedicated to determining how tokenization fits into American markets.”

Nevertheless, he cautioned that decentralized or permissionless exchanges may struggle to utilize the exemption due to the necessary compliance requirements, which could slow down adoption and limit the initial scope, even among centralized platforms.

Currently, the SEC is intentionally keeping the scope of this experiment narrow. Trading venues will face restrictions on the number of stocks they can handle and their overall trading volume, with all participants requiring permissioned access.

This framework provides firms with a previously unavailable defined path for trading genuine tokenized stocks on public blockchains, potentially leading to a variety of new product types that align with the new regulations. Robert Leshner, CEO of Superstate, anticipates that issuers will reassess their products to meet these requirements, stating, “I expect over the coming weeks, months we'll see issuers rethink products to conform with these rules. New products will be designed and launched.”

CoinDesk is hosting its annual Policy and Regulation summit on September 22 in Washington, D.C., featuring SEC Crypto Task Force Chief Counsel Taylor Lindman. Register here.