Key Takeaways:
- The SEC has introduced a five-year “Innovation Exemption” to permit trading of U.S. stocks by tokenizing them on approved venues.
- With a permissioned AMM liquidity pool, Tokenized Securities Venues (TSVs) can comply with investor protection’s necessary rules.
- With onchain securities trading, the agency is looking to receive public input on considered permanent rules.
The U.S. Securities and Exchange Commission (SEC) has unveiled a new regulatory framework that could accelerate the adoption of tokenized stocks in the United States.
On September 17, the agency announced a temporary “Innovation Exemption” that grants conditional relief to Tokenized Securities Venues (TSVs), allowing them to facilitate trading of tokenized National Market System (NMS) stocks through blockchain-based infrastructure.
SEC Opens Door to Onchain Stock Trading
Property tax exemption is granted for the operation of TSV as a “not a traditional exchange” under the Securities Exchange Act of 1934.
Permissioned automated market makers (AMMs) and liquidity pools can facilitate the assembly of sellers and buyers for tokenized stocks in these venues. The framework is aimed at providing protections for investors and the marketplace, while encouraging innovation,” the SEC said.
SEC Commissioner Paul Atkins called it a vital step forward in modernizing U.S. capital markets and allowing regulated onchain trading for some equity securities. The exemption is temporary and runs for five years from the date of publication, unless the exemptions are to be revoked by further regulation.
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Key Rules for Tokenized Securities Venues
The SEC placed several conditions on the relief. TSVs must ensure that tokenized shares have the same rights and privileges as the underlying shares. Capitals on number of symbols listed, and trading volume, also for platforms.
Compliance Requirements
TVS must meet several critical requirements under the order. To support tokenized stock trading, smart contracts should be open, verifiable and built on a public permissionless chain.
If the underlying stock is suspended from the main exchange, trading of tokenized shares should be suspended. Platforms must also make public information on their trading activities and operations. Further, before an unaffiliated third party tokenizes a company’s shares, the issuer would have to be alerted and provided an opportunity to object.
While the SEC noted that the measures are geared toward safeguarding investors, they also enable experimentation with possible blockchain-based structures of markets.
Liquidity Providers Also Receive Relief
Additionally, the order provides conditional exemption from issuance of “dealer” registration for liquidity providers in TSV-registered liquidity pools.
This applies to the participants who offer liquidity through their own capital and could add to what is described as typical market-making activity. Expect the exemption to have a positive impact on liquidity for token-based stock trading venues during the pilot.
The SEC is seeking public comment on any aspects of the framework, such as proposed amendments and further action.
The announcement is one of an unmistakable move by regulators in the U.S. to expand blockchain-based security markets. The framework is a temporary solution, but it does offer a clear process for trading tokenized securities as traditional financial assets advance onto blockchain networks.
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