SEC Unveils 'Innovation Exemption' for Tokenized Securities, Allows Limited Trading

The US Securities and Exchange Commission has unveiled an "Innovation Exemption" that grants tokenized securities trading platforms conditional regulatory relief for five years. Platforms that meet the requirements will be able to operate tokenized stock trading services without separate designation as exchanges.

CoinDesk reported on September 17 that the SEC's exemption will allow Tokenized Securities Venues, or TSVs, to trade tokenized securities using automated market makers, or AMMs, and liquidity pools.

Under SEC oversight, TSVs will be able to place underlying assets such as stocks into liquidity pools and use algorithms to automatically process trades between buyers and sellers. The SEC also said it would permit not only direct tokenization by securities issuers, but also third-party tokenization of existing securities under certain conditions.

Platforms using the exemption will be exempt for the next five years from the definition of "exchange" under US securities law, along with some related registration requirements. Instead of requiring the SEC to designate each platform in advance, operators that determine they meet the exemption conditions can notify the agency before starting operations.

The measure applies only to tokens that confer actual ownership of shares. Tokenized stocks covered by the exemption must give investors the same shareholder rights as conventional shares, including dividend and voting rights.

Synthetic security tokens structured as derivatives that track stock prices without conferring actual ownership are excluded from the exemption. That means some tokenized stock products offered by certain platforms may not qualify.

SEC Chair Paul Atkins called the exemption an important step toward promoting on-chain trading of tokenized stocks and moving US capital markets into the digital era. He added that the measure is temporary and designed to allow companies to begin operating immediately in an authorized environment.

Atkins said longer-term rulemaking would need to follow if on-chain markets are to remain a sustainable path for capital markets.