The Securities and Exchange Commission (SEC) is working on a limited exemption for the trading of tokenized securities.
Tokenized securities, or digital securities, have been in the mix for years now mostly in private markets. By leveraging blockchain technology, activities and actions can be automated and executed efficiently. Over time, as usage matures, issuers, and investors can both benefit from lower cost and improved security. Tokenization may also lead to a new world of novel assets becoming accessible or simply viable.
Yesterday, the SEC Investor Advisory Committee (IAC) reviewed a draft on the tokenization of equities
SEC Commissioner Hester Peirce, who leads the Crypto Tax Force at the SEC, discussed the topic of tokenized securities in a statement delivered in advance of the IAC meeting. She shared that the goal for the exemption is to both protect investors while enabling firms to innovate with blockchain tech. Obviously, tokenization is the future.
The IAC document is available here.
The Commissioner outlined several questions for the IAC on tokenization, shared below:
- The draft suggests that mandatory disclosures should seek to provide investors in tokenized securities with a clear understanding of their ownership rights. How are the SEC’s existing issuer disclosure requirements insufficient in this regard?
- Does the Committee believe that broker-dealers and clearing agencies that tokenize security entitlements should be subject to new disclosure requirements relating to such security entitlements? If so, why should tokenized security entitlements be treated differently than security entitlements that are not tokenized?
- The draft states that allowing for the atomic settlement of tokenized equity securities requires exemptive relief or reforms to the SEC’s existing T+1 settlement rules. Can you clarify why you believe relief or reforms would be necessary for transactions that settle faster than T+1? Would atomic settlement face friction under other existing SEC rules?
- The draft posits that intermediaries for tokenized securities should be regulated and that the trading of tokenized equity securities should be subject to protections that seek to ensure that all investors receive the best terms for their orders. What if there are no intermediaries to regulate? One of the beauties of this technology is the ability to transact without intermediaries. Or, if there are intermediaries, what if they do not clearly fit within the existing intermediary definitions in the Exchange Act (e.g., broker, dealer, exchange, clearing agency)? Does the SEC have statutory authority to impose the requirements that the draft recommends in such cases?
- Should the Commission consider allowing different tokenization models in an innovation exemption to help inform their risks, benefits, and regulatory treatment? Should an innovation exemption require a third party to obtain issuer consent to issue tokenized versions of existing equity securities of that issuer?
- What conditions should apply in an innovation exemption to preserve the fundamental investor protections listed in the recommendation and to minimize regulatory arbitrage?
Tokenization has the potential to streamline both private and public markets. Coinbase believes exempt securities offerings will benefit from the technology. Clearly, they are considering primary and secondary offerings of tokenized securities as part of their everything platform.
While the details may take some time, the good news is there is finally an innovation friendly Commission that aims to adapt and change to help capital formation and improve investor access. This stands in contras to the prior administration which was clearly anti-innovation in a way that undermined US markets and detrimental to US interests.