SEC's Innovation Exemption Opens Door for Onchain Trading of Tokenized Stocks

Following the stalled progress of the Clarity Act in the Senate, the U.S. Securities and Exchange Commission (SEC) has implemented a five-year exemptive relief that permits trading of stock tokens onchain. These tokens must be fully backed by their underlying assets, offering holders the same voting rights, dividends, and proxies as traditional shares.

The SEC's order allows onchain trading venues, including those using automated market makers and liquidity pools, to trade these tokenized stocks without the burden of registering as exchanges under the Securities Exchange Act of 1934. Liquidity providers on these platforms also won’t need to register as dealers as defined by the Act.

“Today, the SEC is taking a significant step forward in bringing America’s capital markets into the digital age by facilitating onchain trading of certain tokenized stocks through the ‘Innovation Exemption,’” stated SEC Chair Paul Atkins.

Regulations for Tokenized Securities Venues

The Innovation Exemption sets clear guidelines for Tokenized Securities Venues (TSVs): they must be U.S.-based entities, require permission for participant access, and utilize smart contracts on public blockchains. This ruling specifically applies to “tokenized NMS stock,” which includes shares from exchange-listed companies tokenized either by the issuer or by a third party, provided these tokens maintain equivalent rights to their traditional counterparts.

Prior to initiating trading of a tokenized NMS stock, TSVs are obligated to notify the issuer a minimum of 30 days in advance. If the issuer disapproves, the specified stock cannot be traded. However, if the issuer remains silent, their lack of objection is considered tacit approval.

TSVs are required to publicly disclose operational details and trading activity, suspend trading when there’s a halt in the primary market, and adhere to anti-fraud and anti-manipulation regulations. Moreover, liquidity entities on AMMs that utilize proprietary capital to execute trades of tokenized NMS stocks are exempt from dealer registration.

Highlighting the nature of this exemption, an SEC spokesperson revealed that the development has been in the works for 14 months. They mentioned that this could be seen as a transitional phase towards comprehensive rulemaking and possibly future legislation.

Exclusion of Synthetic Tokens

Notably, this exemption does not extend to synthetic stock tokens, which merely provide price exposure without offering the full rights associated with the underlying assets. This exclusion indirectly addresses concerns raised in a previous letter from the Securities Transfer Association, which advocated for issuer authorization to be a prerequisite for any relief related to tokenized securities.

While the SEC has not detailed potential future provisions regarding synthetic tokens, they acknowledged the high demand for compliant securities token trading in the U.S. A spokesperson remarked, “We see very little interest on the derivative side in the U.S.” They also commented on the status of synthetic tokens internationally, noting, “They can remain out in the wilds.”

The absence of explicit future directives concerning synthetic tokens suggests that while the SEC's current ruling aligns with views from the STA, it does not commit to any specific path forward for synthetic stock tokens.

Trends in Stock Token Trading

Interest in stock tokens has surged recently, particularly following the July launch of Robinhood Chain, which includes tokenized debt securities that aren't available to U.S. residents. On Hyperliquid, trading in HIP-3 markets, which feature perpetual futures tied to equities, has expanded significantly—growing from approximately 2% of the platform's perpetual volume at the year's start to around 50% by July, as reported by The Block.

The discourse surrounding stock tokens intensified with a recent public exchange between AMC CEO Adam Aron and Robinhood CEO Vlad Tenev, centered on synthetic AMC stock tokens being offered on the Robinhood Chain in non-U.S. jurisdictions.

This year has also seen wild trading activity linked to these products. For instance, during the weekend of Aug. 30, a memecoin named BONER was paired with Robinhood's tokenized Hims & Hers (HIMS) shares, resulting in the token reaching a temporary value of $132.64, far exceeding the actual stock price of $28.84. By the subsequent Monday, the tokenized HIMS stock had corrected back towards its true market value.

Current estimates indicate that the total market value of all tokenized stocks has skyrocketed from $688 million at the beginning of the year to nearly $3 billion now, the majority of which consists of synthetic tokens.