The U.S. has unlocked trading for tokenized stocks that carry real shareholder rights, including dividends and voting privileges, rather than merely tracking stock prices. This move allows traditional securities to transition to blockchain-based tokens while preserving shareholder rights. Unlike previous stock-tracking tokens in the crypto market, this initiative brings on-chain trading of tokens linked to actual stocks into the regulatory fold, potentially blurring the line between traditional securities and the crypto market.
On Thursday, the U.S. Securities and Exchange Commission (SEC) introduced the Innovation Exemption, granting conditional regulatory relief to tokenized securities trading platforms for the next five years. Tokenized Securities Venues (TSVs) meeting specific criteria can bypass certain registration requirements applicable to conventional exchanges, enabling them to operate on-chain trading services for tokenized U.S. listed stocks.
Stock-Tracking Tokens Excluded… Must Include Dividends and Voting Rights
This move came just two days after the U.S. Senate failed to pass the Clarity Act, aimed at structuring the crypto market. The SEC has taken the initiative to institutionalize the tokenized securities market using its existing legal authority, independent of congressional action.
A crucial aspect of this measure is the SEC’s limitation of regulatory exemptions to tokenized stocks directly linked to actual stock ownership and shareholder rights.
Investors in tokenized stocks must receive not only profits and losses tied to underlying stock price movements but also standard shareholder rights, such as dividends and voting privileges, typically enjoyed by traditional stock investors. For instance, if Apple stocks are tokenized, the corresponding token must be tied to rights in actual Apple shares, not just a separate crypto asset tracking Apple’s stock price.
Conversely, synthetic security tokens designed solely to mirror stock prices are excluded from this regulatory exemption. This aims to disqualify products like securities-based swaps or Wrappers that only replicate profit and loss without conferring actual shareholder rights in the underlying stock.
This approach differs from some products that have emerged in overseas crypto markets under the tokenized stocks label. These products, while trading in sync with specific company stock prices, often didn’t grant investors actual shareholder rights or the ability to exercise dividends and voting rights directly.
By applying regulatory exemptions to tokens linked to genuine shareholder rights, the SEC suggests a potential shift in the tokenized stock market’s focus from mere stock-tracking products to on-chain securities that migrate traditional securities onto the blockchain.
AMM and Liquidity Pools Allowed… 24-Hour Stock Trading’ Draws Closer
Trading methods may also diverge from traditional stock markets. The SEC has paved the way for TSVs meeting certain conditions to use smart contracts, automated market makers (AMMs), and liquidity pools for tokenized securities trading. This allows for algorithmic trading based on investor-supplied liquidity, similar to crypto market practices, alongside traditional order book matching.
This development sparks interest in potentially extended securities trading hours. SEC Chair Paul Atkins noted that U.S. capital markets are moving towards 24-hour trading, with tokenization technology potentially facilitating this shift. The spread of blockchain-based trading and settlement could enable trading unrestricted by traditional exchange hours, faster settlements, and real-time asset management.
Besides issuers directly tokenizing their stocks, third parties can also tokenize existing securities under certain conditions. However, third-party tokenization of a listed company’s stock requires advance notification to the company, with the possibility of transaction restrictions if the company objects within a specified timeframe. This safeguard prevents indiscriminate tokenization of a company’s stock without its consent.
Securitize Stock Surges Amid Industry Optimism, But Market Fragmentation Concerns Linger
This development raises interest in both established securities firms and blockchain/crypto businesses potentially entering the U.S. tokenized stock market. Companies like Robinhood, Coinbase, and Kraken, already active in related fields, may compete in this emerging market.
The market reacted swiftly. Shares of Securitize, a tokenized real-world asset (RWA) platform, jumped over 20% following the SEC’s Innovation Exemption announcement. Securitize, which collaborates directly with listed companies to tokenize their shares, is seen as a potential beneficiary of this regulatory shift.
Robinhood also welcomed the SEC’s move. Johan Kerbrat, head of Robinhood Crypto, stated that smart regulation can accelerate innovation, suggesting this exemption could pave the way for tokenized products to enter the U.S. market in earnest.
However, concerns about potential side effects of an expanded tokenized stock market persist. The dispersion of trading across multiple blockchain-based platforms could fragment market liquidity, potentially increasing price volatility during low-volume periods.
The SEC’s decision to implement this Innovation Exemption as a temporary, five-year measure rather than a permanent regulatory change reflects these risk considerations. They aim to test the potential and risks of the on-chain securities market with limitations on trading volume and security types, using these findings to inform potential long-term regulations.
Chair Atkins stated that by promoting on-chain trading of specific tokenized stocks through the Innovation Exemption, the SEC has made significant strides in guiding U.S. capital markets into the digital age. He emphasized that for the on-chain market to remain a sustainable path in future capital market development, long-term rule-making must follow.
