SEC Holds Innovation Exemption for Work on Tokenized Securities as IAC Discusses Draft Approach

Securities and Exchange Commission (SEC) is working on a limited exemption for trading in tokenized securities.

Tokenized securities, or digital securities, have been around mostly in private markets for years. By utilizing blockchain technology, activities and actions can be automated and carried out efficiently. Over time, as usage matures, issuers and investors can benefit from both lower costs and improved security. Tokenization can also lead to a new world where new assets become accessible or simply enforceable.

Yesterday, the SEC Investor Advisory Committee (IAC) reviewed a draft regarding the tokenization of stocks

SEC Commissioner Hester Peircewho is leading Crypto Tax Power At the SEC, the issue of tokenized securities was discussed in a statement ahead of the IAC meeting. He shared that the purpose of the exemption is to both protect investors and allow companies to innovate with blockchain technology. Clearly, tokenization is the future.

IAC certificate available here.

The commissioner outlined several questions to the IAC regarding tokenization, which are shared below:

• The draft suggests that mandatory disclosures should seek to provide investors in tokenized securities with a clear understanding of their ownership rights. How are the SEC’s current issuer disclosure requirements inadequate in this context?
• Does the Committee believe that broker-dealers and clearing houses that tokenize securities mandates should be subject to new disclosure requirements regarding such securities mandates? If so, why should tokenized security authorizations be treated differently than non-tokenized security authorizations?
• The bill states that allowing atomic swaps of tokenized equity securities would require exemption or reform of the SEC’s existing T+1 swap rules. Can you explain why you believe relief or reforms are needed for transactions that settle faster than T+1? Would atomic settlement face friction under other existing SEC rules?
• The draft suggests that intermediaries for tokenized securities should be regulated and trading in tokenized equity securities should be subject to protection aimed at ensuring that all investors receive the best conditions for their orders. But what if there are no middlemen to regulate? One of the beauties of this technology is the ability to make transactions without intermediaries. Or if there are intermediaries, what if they do not clearly meet the existing definitions of intermediary in the Exchange Act (e.g., broker, dealer, exchange, clearing house)? Does the SEC have the authority to enforce the draft’s proposed requirements in such cases?
• Should the Commission consider allowing different tokenization models in the innovation exemption to help inform its risks, benefits and regulatory action? Should an innovation exemption require a third party to obtain an issuer’s approval to issue tokenized versions of that issuer’s existing equity securities?
• What conditions should apply to the innovation exemption to preserve the essential investor protections listed in the recommendation and minimize regulatory arbitrage?

Tokenization has the potential to facilitate both private and public markets. coinbase believes exempt securities offerings will benefit from technology. They are clearly considering primary and secondary offerings of tokenized securities as part of their everything platform.

While the details may take some time, the good news is that there is finally an innovation-friendly Commission that aims to adapt and change to help capital formation and improve investor access. This contrasts with the previous administration, which was openly opposed to innovation that would undermine U.S. markets and harm U.S. interests.