The U.S. Securities and Exchange Commission (SEC) is paving the way for tokenized stocks to be traded on public blockchains, implementing new regulations that will tightly control trading activity, access, and issuer rights.
The SEC's New Sandbox for Tokenized Securities
In a landmark move, the SEC has introduced the "innovation exemption," which will allow qualified tokenized securities platforms a five-year period to operate markets for real U.S. stocks on public blockchains without needing to register as national securities exchanges.
This change enables companies wishing to create a marketplace for tokenized stocks to do so without the constraints of traditional stock exchange regulations, which have previously hindered blockchain trading.
The SEC is making a clear distinction between tokens representing genuine ownership of a stock and synthetic products that merely track stock prices. Under this new framework, designated platforms, referred to as Tokenized Securities Venues (TSVs), can facilitate trades of eligible tokenized U.S. stocks using smart contracts and liquidity pools.
SEC Chair Paul Atkins (Anna Moneymaker/Getty Images)However, trading volume and listing limits will apply, and access to these trading venues will be restricted. The SEC mandates that all software used in these markets must be public and auditable, while the trading venues themselves will remain permissioned.
Implications for Market Participants
This initiative is not just about converting physical stock certificates into digital tokens; it fundamentally alters where and how stocks can be traded. Traditional exchanges typically match buyers and sellers through order books, which presents a high regulatory barrier for companies exploring blockchain trading.
Now, an eligible venue can enable trading through blockchain-based liquidity pools, allowing for a new market structure that may involve automated trading mechanisms rather than traditional order matching. This could provide banks and brokers with opportunities to experiment with innovative trading practices.
As stated by Jamie Selway, the SEC’s director of trading and markets, the framework is intended to facilitate a modest start to gauge the effects of this new trading model. For example, high-liquidity stocks can have up to 75 tokenized listings, with a trading volume limit of 0.25% of the average daily volume.
Tokenization and Company Involvement
For companies like Apple, this framework allows for their shares to be tokenized by others under specific conditions. If a third party wishes to tokenize Apple shares, they must notify the company 30 days prior, giving Apple the chance to object to the tokenization. This safeguard ensures that companies retain control over how their securities are represented.
Trading Environment and Future Outlook
These tokenized stocks will trade on approved TSVs that operate under the SEC's new exemption. While the underlying blockchain technology can be public, the trading environment will be regulated, with certain liquidity providers exempted from dealer registration requirements to ensure sufficient asset availability.
This new category of trading venues could disrupt traditional exchanges by allowing for innovative trading methods without the need to conform to the existing exchange model. While these platforms borrow technology from decentralized finance (DeFi), they maintain a controlled access model, meaning participants must meet specific criteria to trade.
As investors may benefit from faster settlements and programmable market structures, the SEC insists that tokenized stocks maintain the rights associated with traditional shares, such as voting rights and dividends. This is crucial to ensuring that tokenized stocks do not lose the protections afforded to shareholders.
In summary, the SEC has established a defined regulatory path for the trading of tokenized stocks, marking a significant shift in how blockchain technology can be integrated into the U.S. stock market. Over the next five years, the industry will explore the potential of this model, which could reshape financial trading as we know it.
Read more: SEC opens door to tokenized U.S. stock trading. Here’s who could benefit