SEC Implements 'Innovation Exemption' for On-Chain Trading of Listed Stocks, Valid for Up to 5 Years

[Mexico City = Shim Young-jae, Correspondent] The U.S. Securities and Exchange Commission (SEC) will implement an "Innovation Exemption" that allows tokenized U.S. listed stocks to be traded on public blockchains. Platforms that meet certain requirements can provide tokenized stock trading using automated market makers (AMM) and liquidity pools without registering as national securities exchanges.

This move comes shortly after the U.S. Senate failed to advance the CLARITY Act. The SEC plans to first establish a temporary regulatory framework that allows limited on-chain trading of tokenized stocks, which will then be connected to formal regulations and congressional legislation in the future.

According to Crypto in America and Wu Blockchain, the SEC announced on the 17th (local time) the "Innovation Exemption" that permits on-chain trading of tokenized U.S. stocks. The exemption takes effect immediately and is applicable for up to five years.

SEC Commissioner Paul Atkins stated in a press release, "Despite the relentless efforts of many earlier this week, Congress failed to advance the CLARITY Act."

He added, "The SEC is taking significant steps to transition the U.S. capital markets into the digital age within the authority granted by law," and "will promote on-chain trading of certain tokenized stocks through the Innovation Exemption."

The core of the new system is the Tokenized Securities Venue (TSV). TSVs that meet the requirements can provide tokenized stock trading without registering as national securities exchanges under U.S. securities law.

Trading can utilize public and permissionless blockchains. Transactions through automated market makers and liquidity pools are also permitted.

According to Wu Blockchain, this system is a pilot framework that tokenizes stocks included in the U.S. National Market System (NMS) for limited trading on designated tokenized securities exchanges. Separate regulatory guidelines and exemption systems will apply to some operators that provide liquidity to the market by investing their own capital.

Crypto in America reports that liquidity providers meeting certain requirements may also receive separate exemptions from dealer registration obligations.

The SEC does not approve individual tokenized securities exchanges one by one. If a business meets the necessary requirements and notifies the SEC, it can utilize the Innovation Exemption under specified conditions.

Only Tokens with Actual Shareholder Rights Allowed...Synthetic Stocks Excluded

The SEC has not allowed all forms of tokenized stocks.

The Innovation Exemption is limited to actual tokenized stocks that have the same rights as existing stocks. Token holders must have rights such as dividends and voting rights, just like existing shareholders.

In contrast, synthetic products that only track the price of specific stocks without rights to actual shares are excluded from the exemption.

According to Crypto in America, such synthetic stock products have expanded their market on digital asset (virtual asset) trading platforms outside the U.S. Traditional Wall Street financial firms have expressed significant opposition to this.

There are also differences in the approach to the blockchain itself and trading platforms. Tokenized securities exchanges can use public and permissionless blockchains, but access to actual trading platforms operates on a permissioned basis. Consequently, users and liquidity providers must meet the qualification requirements set by the tokenized securities exchanges to participate in trading.

Initially, the trading volume will also be limited. The SEC will impose a cap on the number of stocks that a single tokenized securities exchange can offer. There will also be limits on the volume of stocks that can be traded on the tokenized securities exchange from the total daily trading volume of individual stocks.

The specific number of stocks and trading volume limits are not provided in the original text.

Third Parties Can Tokenize Stocks...Trading Not Allowed if Issuer Refuses

This exemption allows third parties unrelated to the listed company to tokenize stocks. However, the final decision on whether to trade remains with the issuing company.

According to Crypto in America, tokenized securities exchanges must notify the listed company before trading stocks tokenized by third parties. The issuing company can raise objections within 30 days after receiving the notification.

If the listed company opposes, the tokenized stocks of that company cannot be traded on the tokenized securities exchange.

Chris Hayes, Executive Director of the Coalition for Tokenized Markets and Partner at Thorn Run Partners, positively evaluated this protective measure for issuers.

Hayes stated that the requirement allowing listed companies to reject unauthorized third-party tokenizations and grant investors the same rights as existing shareholders "will help curb synthetic tokenization and provide clearer understanding for investors about what they are purchasing."

Crypto in America notes that while the current market size for tokenized stocks is relatively small, this system could impact the competitive landscape between the existing securities market and the on-chain market.

Hayes further stated, "With the Innovation Exemption, decentralized finance (DeFi) trading platforms and liquidity pools can compete much more directly with existing exchanges and alternative trading systems," adding that "they can also operate under a more flexible regulatory framework."

He continued, "This could encourage more traditional financial market participants to shift their activities to the tokenized market and accelerate adoption."

SEC officials described this Innovation Exemption as a temporary bridge to a permanent regulatory framework. They have left open the possibility of developing the system through formal regulations and related congressional legislation in the future.

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