The Securities and Exchange Commission is expected to soon provide details on the pending “Innovation Exemption”. The concept has been pitched by the Chairman of the Commission, Paul Atkins.
As previously reported, Atkins, a supporter of digital assets and beneficial innovation, aims to introduce a limited exemption for the trading of tokenized securities. While details are evolving, last month, Atkins promoted the idea for the new exemption during a blockchain event at Vanderbilt University.
While securities laws will remain consistent, tokenization can bring additional benefits to markets and for issuers, including the removal of intrinsic friction in the current issuance, trading, and management ecosystem.
Brian Vieten, a Senior Research Analyst at Siebert Financial, says that tokenized stocks are positive for the aggregate US equity market and outlines three reasons why. Vieten says that tokenized securities will expand global access for non-US investors as compliance can be baked into the digital asset.
As well, instant trading and settlement at near-zero cost will improve capital efficiency and make US financial products more competitive.
“We believe this will accelerate the transition of the US financial system (which makes up >50% of global finance) from legacy rails to onchain blockchain-based rails. We expect a portion of this flow to eventually flow to high-quality blockchain networks like Bitcoin and Hyperliqui,” predicts Vieten.
Maja Vujinovic, CEO of Digital Assets at FG Nexus, notes that, instead of assets being locked in traditional bank-ledger ownership, they will be programmed directly onchain. An innovation exemption could also allow tokenized securities to trade on DeFi platforms under a less onerous regulatory burden.
“Traditional US equity markets face a structural need for continuous, global buying liquidity, which legacy 9-to-5 market hours heavily restrict. Tokenization fixes this by plugging U.S. equities into a hyper-liquid, 24/7 global crypto ecosystem.”
He believes that the US is on the verge of a structural shift where retail investors anywhere can purchase fractional shares of a public firm. The caveat is that “liquidity fragmentation” could emerge.
“If a stock trades on the NYSE, a bank chain, and a decentralized exchange simultaneously, it splits the market into disconnected pools. This can create dangerous price tracking errors and shadow-shorting vulnerabilities where there aren’t enough localized buyers to stabilize a specific token’s price, ultimately muddying traditional shareholder protections,” states Vujinovic.
The SEC may release proposed rules as soon as this week.