The Securities and Exchange Commission has opened a five-year Innovation Exemption path for tokenized National Market System stocks. The Sept. 17 order provides temporary relief for certain venues to trade these assets on-chain without registering as a securities exchange.
The exemption permits third parties to tokenize stocks under specific conditions. Tokens must grant holders the same rights as underlying shares, including dividends and voting rights. Trading venues must permission users and liquidity pools to qualify.
The framework targets tokenized NMS stocks traded through permissioned AMM liquidity pools. Not all existing tokenized stock models fit these rules. The commission explicitly classifies tokens that track a share's price without providing shareholder rights as synthetic stocks, making them non-compliant.
Robinhood's Stock Tokens, in their current form, are ruled out due to their synthetic structure. Kraken's xStocks similarly do not qualify under the new framework. Both platforms will need to adapt their offerings to align with SEC requirements for direct shareholder parity.
Coinbase's stock tokens are positioned favorably. Chief executive Brian Armstrong said the company had "set the standard" with its tokenized stocks, describing them as "real fully-backed securities, redeemable for the underlying shares, with dividends integrated, and possessing voting rights." Coinbase's model is "in the ballpark" of compliance, giving the exchange a head start in the regulated on-chain stock trading landscape.
The token's structure, not just the trading venue, becomes critical for regulatory adherence. The issuer of the underlying security retains the right to block a tokenized stock before it trades, even if a third party created the token. This mechanism ensures issuer consent in the tokenization process.
SEC Commissioner Hester Peirce emphasized that the exemption targets one particular model for tokenized securities, often referred to as a Tokenized Security Venue structure. However, Peirce stated that the SEC remains open to considering other models outside this framework in the future.
