SEC Approves Tokenised Trading in the US Under 5-Year Exemption

Two days after the Clarity Act fell 11 votes short of the 60 it needed to advance in the Senate, the SEC moved on its own authority, opening the door for capital to move on-chain under clear rules.

On 17 September the Commission issued a five-year conditional exemption, branded the “Innovation Exemption”, permitting a new class of operator — the Tokenized Securities Venue, or TSV — to list and trade tokenised versions of US-listed equities without registering as an exchange.

The order also exempts liquidity providers who supply capital to a TSV’s pools from the Exchange Act’s definition of a dealer. Both exemptions expire five years after publication and are paired with a request for public comment on whether the relief should be made permanent, broadened or revised.

Chairman Paul Atkins framed the move as a bridge, not a destination. The exemption “must be followed by durable rulemaking to ensure that onchain markets remain a viable pathway as our capital markets continue to evolve”, he said.

From DEX to TSV 

A TSV is a regulated entity that can run permissioned automated market maker (AMM) liquidity pools, the mechanism behind protocols such as Uniswap (UNI) and Curve (CRV), on a public, permissionless blockchain.

Participants trade against these pools rather than through a central order book. The venue sets access standards and the pools sit on infrastructure anyone can inspect. Only tokenised National Market System (NMS) stock can be traded on AMMs for now. 

Under the new rules, each token must carry the same dividend, voting and liquidation rights as the underlying share. Synthetic instruments that track a stock’s price without representing ownership are excluded, as are derivatives. 

The order divides eligible stocks into two tiers. Tier 1 covers S&P 500 and Russell 1000 constituents and eligible exchange-traded products, capped at 75 symbols. The TSV’s volume in each of these tokens is capped at 0.25 percent of the underlying stock’s average daily volume (ADV) in the prior month.

Tier 2 covers the remaining NMS stocks, is capped at 250 symbols and comes with a volume cap of 2.5 percent of ADV. Volume is aggregated across affiliated TSVs. A first breach carries no penalty; any later breach triggers a mandatory three-month trading pause in the offending symbol.

Issuers Get A Veto

The order draws a sharp line between issuer-led and third-party tokenisation. That bears on a public spat in early September, in which AMC CEO Adam Aron objected to Robinhood offering a tokenised version of AMC stock without the company’s involvement. 

In response, Robinhood CEO Vlad Tenev argued that listed companies do not control third-party products referencing their shares. The Innovation Exemption may side with Aron, at least for US venues.

Before making a third-party token available, a TSV must send the issuer written notice and wait 30 calendar days. If the issuer objects in writing within that window, the token cannot trade on that venue. Silence amounts to consent.

That veto gives listed companies a tool to prevent their equity from being wrapped without their consent. Robinhood, for its part, appears to be moving ahead. Tenev said on 14 September that in-kind redemption and voting rights are coming to its Stock Tokens, which already pass dividends through to holders.

The door is open to new experiments in on-chain dividends that accrue on the ex-dividend date, as opposed to waiting for settlement. It could also extend to exercising voting rights via the same on-chain governance pioneered by decentralised autonomous organisation (DAO) structures.

The SEC is soliciting comments on whether additional conditions are needed. Questions are open on whether the relief should extend beyond NMS stocks, whether the tier thresholds are calibrated correctly and whether broker-dealers that trade on a TSV should receive separate Regulation NMS relief.

Allowing Greater Innovation

The Innovation Exemption is one of three SEC actions in the past month aimed at tokenised securities. In August, the agency proposed a new rule that would let crypto offerings go ahead without triggering certain registration requirements. On 1 September, it proposed the first major overhaul of transfer-agent rules in four decades, explicitly accommodating blockchain-based recordkeeping of securities ownership.

On the same day as the Innovation Exemption order, the Commission hosted a roundtable on 24-hour trading, at which Commissioner Hester Peirce set out how much progress had been made. She noted concerns about thinner overnight order books, wider spreads and compressed back-office processing, while arguing that US equities can learn from markets that already trade around the clock, crypto among them.

The SEC is now using its authority to build a framework for tokenised equities in the absence of legislation. Atkins and his two fellow Republican commissioners can set this up unilaterally, but anything established by exemptive order can be reversed the same way.

For crypto companies operating in the US, the rules bring much-needed clarity. Even in a scenario where a new government turns hostile and tries to reverse the exemption, regulators will be hard-pressed to bring retroactive legal action against companies that operated in good faith under rules that were in force at the time.

Crypto exchanges, Bitfinex Securities among them, have already launched tokenised equity in non-US jurisdictions. These new rules give a possible route into the US, bringing the future of capital markets to the world’s biggest market.