The Securities and Exchange Commission introduced a five-year Innovation Exemption on Sept. 17 establishing a framework for trading tokenized National Market System (NMS) stocks on-chain. Venues operating through permissioned Automated Market Maker liquidity pools can trade without registering as securities exchanges.
Tokenized stocks must convey the same rights as underlying shares, including dividends and voting rights. Synthetic stock tokens that merely track price without shareholder entitlements are explicitly non-compliant. Robinhood's "Stock Tokens" and Kraken's "xStocks" do not meet the standard in their current form due to their synthetic nature.
Coinbase appears well-positioned. On Sept. 14, chief executive Brian Armstrong said the company had "set the standard" with fully-backed, redeemable tokenized stocks that include dividends and voting rights. The company's offerings fit within the SEC's compliance parameters.
Third parties can tokenize stocks independently, but the issuer retains veto rights before the token can trade on-chain. This gives traditional equity issuers control over their tokenized representations.
Commissioner Hester Peirce said the exemption targets a specific tokenized securities model. The SEC remains open to considering alternative structures beyond the established framework.
Peter Curley, head of global regulatory affairs at Ondo Finance, said the conditions mean many existing tokenized stock products fall outside the rules, requiring protocols previously offering synthetic exposure or lacking permissioned trading to adapt.
The exemption creates a defined lane for on-chain stock trading, with both token structure and venue mechanics determining compliance. The five-year window allows protocols to build compliant infrastructure and traditional finance to engage decentralized markets under clearer rules.
