As expected, the Securities and Exchange Commission (SEC) has published its “Innovation Exemption” for tokenized or digital securities. The new rules will allow tokenized securities to trade on marketplaces or Tokenized Securities Venues (TSVs), each of which is a “TSV” under the definition of “exchange” in the Securities Exchange Act of 1934. The SEC is providing conditional exemptive relief for markets trading tokenized securities. The exemption is live today.
The five-year, temporary order will also provide a conditional exemption from the definition of “dealer” as defined by the Exchange Act.
The exemption will give the SEC a way to monitor and review how tokenized securities are traded.
The exemption is not for DeFi.
SEC Chairman Paul Atkins said the Commission is taking an important step forward to bring capital markets into the digital age by enabling onchain trading of stocks.
“The Innovation Exemption, while temporary, would allow TSVs to trade tokenized NMS stock in a permissioned environment today while the Commission considers the need for additional action to facilitate onchain trading. As we take this important first step, we invite public comment on all aspects of the Innovation Exemption to help inform the Commission as it considers further changes.”
Atkins has strongly supported beneficial innovation that improves ecosystems for both investors and issuers.
Jamie Selway, Director of the SEC Division of Trading and Markets, said that exemptive relief for on-chain secondary trading is an important milestone.
“The division stands ready to work with interested parties seeking to operate a TSV and field questions from investors and market participants,” said Selway.
Conditions of the Innovation Exemption include:
- Real ownership only. Tokens must confer the same rights as the underlying NMS stock (dividends, voting, etc.). Synthetics and derivatives are out.
- Issuer veto. If a third party tokenizes a stock, the TSV must give the issuer written notice and 30 days to object. An objection bars that token from the venue. Issuers can opt out.
- Limits. Symbol counts and volume caps, calibrated to limit-up/limit-down tiers.
- Tech and market integrity. Smart contracts must be public, auditable, and deployed on a public permissionless ledger. Trading in a tokenized stock must halt when the underlying stock is halted on its primary listing exchange.
- Access and sanctions. TSVs must be U.S. persons, comply with OFAC sanctions, and restrict who can trade.
- Transparency. Public notice of operations; regular publication of USD-denominated trade data (price, size, time, pool address, end-of-day pool size, daily volume); books and records; technology safeguards.
Commissioner Hester Peirce explained, “Temporary, limited exemptions like this one are intended to provide the Commission and market participants with an opportunity to observe how tokenized NMS stocks are used and traded in different onchain contexts and how onchain and traditional markets interact with one another.” She added:
“Making practical, careful, and sensible adjustments to the existing framework allows us to accommodate innovation without undermining our regulatory objectives of protecting investors and market integrity.”
Commissioner Mark Uyeda said the exemption offers a path to data-driven rulemaking while embracing public feedback.
Digital securities or tokenized shares are widely expected to replace their more analog brethren over time. By leveraging technology, tokenized shares can benefit from streamlined settlement and transfers, improved security, and automated services.
While the previous administration did what it could to inhibit beneficial innovation, the Commission under Chairman Atkins has supported change and innovation, which clearly improves capital markets.
Commissioner Uyeda said the “Innovation Exemption is the latest instance of the Commission using scoped relief to experiment responsibly, learn, and translate old protections to new contexts.”
The Innovation Exemption arrives just as Congress failed to pass updated laws to support the digital asset ecosystem. The CLARITY Act, which was voted down this week, would have provided regulatory clarity, investor protections, along with rules that would support innovation in the digital asset industry.