SEC approves temporary exemption for trading in tokenised shares

The US securities watchdog SEC has approved a temporary and conditional exemption that permits limited trading in tokenised US listed shares via onchain platforms. The so-called Innovation Exemption applies to special trading platforms, called Tokenized Securities Venues (TSVs), which use automated market makers and liquidity pools. It is a pilot project through which the SEC wants to gain more insight into how these platforms work, with a view to future regulation.

In brief:

• The SEC approves a temporary exemption for limited trading in tokenised NMS stocks via onchain platforms.
• As a result, TSVs are temporarily not regarded as an official exchange under the Securities Exchange Act of 1934.
• The exemption is subject to strict conditions, including transparency requirements and volume limits.

What the exemption exactly entails

TSVs that use the Innovation Exemption temporarily do not have to comply with the requirements that normally apply to recognised exchanges under the Securities Exchange Act of 1934. This is relevant because platforms that offer tokenised shares via automated market makers would otherwise quickly be classified as an official exchange, with all the associated obligations that entails.

To be eligible for the exemption, TSVs must meet a series of conditions. These include public disclosure, transaction transparency, technological safeguards and record-keeping. In addition, there are limits on the number of tradable shares and caps on trading volume, linked to the so-called limit up and limit down levels that also apply on regular exchanges.

Transaction data, including price, size, time and daily volume, are made public on a regular basis. According to the official SEC statement, this is intended to limit information asymmetry and make independent research into this new form of trading possible.

Tokenisation as the next step for capital markets

The SEC explicitly positions the step as part of a broader tradition in which the regulator gives room to financial innovation before final rules are established. Previously, a similar approach led to the rise of money market funds, index funds and ETFs.

According to the regulator, tokenisation of shares can modernise the issuance, transfer, settlement and registration of ownership. Particularly for less liquid assets, this could bring advantages in terms of costs, transparency and market liquidity. However, the SEC wants to regulate in a technology-neutral way and not apply existing legislation to new technologies in a forced manner.

The exemption also contains specific rules for market makers who deploy their own capital to provide liquidity. They gain clarity about their position, provided they meet disclosure and record-keeping obligations. This aligns with the broader growth in trading in tokenised real-world assets that has been visible in the market recently.

The SEC calls on market participants to respond to the specific conditions of the exemption. Detailed, data-based responses, including practical experience and incident analyses, can help shape future regulation.