The U.S. Securities and Exchange Commission (SEC) has approved a five-year temporary “Innovation Exemption” that allows tokenized shares of publicly traded companies to be traded on public blockchains.
The exemption remains in effect until September 17, 2031, and may be modified, extended, or terminated early by the Commission.
The new framework introduced by the U.S. regulators will exempt Tokenized Securities Venues (TSVs) from registration as traditional exchanges. These venues are using automated market makers (AMMs) as well as on-chain liquidity pools.
In addition, liquidity providers that supply funds for such pools are temporarily allowed to avoid broker-dealer registration obligations. This relief applies to the secondary market trading of tokenized NMS stocks, i.e., stocks listed on U.S. exchanges and some ETFs.
Tokenization can be defined as a procedure that involves the issuing and transferring of standard assets, stocks and bonds onto the blockchain. Regulators claim that tokenization is a good way of attracting new investors, providing investors with more trading options, and enhancing the efficiency of the settlement process.
Major stock exchanges like the New York Stock Exchange (NYSE) and the London Stock Exchange are planning to launch their tokenized stock offerings. Crypto exchanges, including Coinbase and Kraken, also get ready for documentation of their tokenized stocks. Several exchanges, including Robinhood and Kraken, already provide tokenized stocks for the European market.
Putting stock markets on blockchain technology means trading can be done 24/7. This way both retail and institutional investors will have access to traded shares any time they want, instant settlement of transactions, and the option of self-custody of the assets.
Supporters of the initiative emphasize that tokenized stocks offer greater flexibility: holders can earn interest or take out instant loans secured by their shares at any time of day. Automated smart contracts can pay dividends directly to shareholders, reducing companies’ administrative costs.
However, skeptics warn of serious risks. Continuous trading could increase price volatility. Traditional after-hours periods have served as a “cooling-off period,” preventing panic from selling during sudden crises. In addition, early offshore platforms have already demonstrated how fragmented liquidity can distort asset prices.
Arbitrage opportunities exist poorly when various cryptocurrency exchanges issue tokens that are not standardized when it comes to redemption and have a vague relationship with their respective underlying stocks. Critics assert that disregarding the regular rules imposed by exchanges when it comes to digital markets disrupt regulation, reduce the chance of noticing price manipulation, and give fewer guarantees to customers. Companies labeled “public” will have to change their methods of releasing profits and announcements.
Strict requirements and restrictions
The SEC has established strict conditions for participation in the pilot program. Tokenized stocks must provide holders with the same economic and governance rights as traditional securities, including voting rights, dividend payments, and claims in the event of liquidation.
The regulator has explicitly banned synthetic tokenized derivatives and securities-based swaps. Public companies whose shares are tokenized by third parties will receive 30 calendar days’ notice and have the right to object. If an issuer submits a written objection, trading in those tokens on the specific venue will not be permitted.
Strict trading volume limits apply at the initial stage. Eligible assets are limited to exchange-listed securities. For Tier 1 stocks, securities included in the S&P 500 and Russell 1000 indices, as well as certain highly liquid ETFs, a venue may trade no more than 75 tickers. Trading volume for each security must not exceed 0.25% of its average daily trading volume over the previous month. For Tier 2 stocks, the limit is 250 tickers and 2.5% of average daily trading volume.
Venues are prohibited from issuing IPOs, granting margin loans, or providing trading credit throughout the exemption period. By imposing these prohibitions, regulators may gather data on uninterrupted trading while avoiding any systemic risk to the marketplace.
Analysts expect major digital asset companies, including Coinbase, Robinhood, and Circle, to be the first beneficiaries. They will be able to expand their custody, tokenization, and settlement infrastructure using stablecoins.
