In a landmark move that significantly advances the implementation of a regulated tokenised securities marketplace in the US, the Securities and Exchange Commission (SEC) has granted a temporary and conditional “exemption” to allow new Tokenised Securities Venues (TSVs) to operate and trade tokenised National Market System (NMS) stocks without registering as a traditional exchange.
The SEC’s move to create temporary regulatory oversight of tokenised securities transactions came just 48 hours after a procedural vote in the US Senate that failed to advance the CLARITY Act, which was designed to create a permanent market structure for digital assets. It now looks unlikely that the proposed CLARITY legislation, which has had a long and troubled path in Congress, will be considered before 2027.The SEC’s new “Innovation Exemption” – which lasts for five years from enactment – allows for TSVs to utilise permissioned automated market makers and liquidity pools to facilitate secondary on-chain trading of tokenised securities. The conditional allowance means that TSVs can bypass the standard definition of an “exchange” under the Securities Exchange Act of 1934. According to the SEC, TSVs serve two primary functions:
- AMM Liquidity Pools:Providing permissioned automated market makers and liquidity pools where authorised participants can interact and agree to trade terms.
- Access Standards:Setting specific requirements and compliance standards for individuals and entities looking to access the trading platform.
The exemption from the definition of “exchange” for TSVs is subject to public interest and investor protection conditions, including:
- Tokenised NMS stocks traded on a TSV are subject to limits on the number of symbols and volume traded;
- A TSV must verify that the tokenised NMS stock made available for trading on the TSV provides holders the same rights and privileges as does traditional NMS stock of an equivalent class;
- Before making available for trading a tokenised NMS stock that is tokenised by an unaffiliated third party, the TSV must provide written notice and an opportunity to object to the issuer of the underlying NMS stock;
- Smart contracts used by a TSV must be auditable, public, and deployed on a public, permissionless distributed ledger;
- A TSV must stop trading in a tokenised NMS stock concurrently with any stoppage of trading in the underlying NMS stock on the primary listing exchange; and
- A TSV must provide public notice about its operations, trading activities, and the trading activities of its affiliates on the TSV.
“[The] approval of exemptive relief for on-chain secondary trading on a TSV – known as the ‘Innovation Exemption’ – marks an important milestone for the Commission’s work to open our capital markets for tokenised securities,” notes Jamie Selway, Director of the SEC Division of Trading and Markets.
The limits that the SEC has set on the number of stocks and trading volume will depend on the Limit Up-Limit Down levels used in the US stock market to curb sharp price movements.
TSVs must regularly publish transaction details in dollar terms, including price, size, and time of the transaction, the pool address, its end-of-day size, and daily trading volume.
Platform operators are also required to disclose information about their trading activity and affiliated transactions. The TSV’s smart contracts must be public, auditable and deployed on a permissionless public blockchain to enhance operational transparency, support market integrity and minimise systemic and operational risks.
While the exception allows tokenised assets to be traded on a regulated entity, it does not support decentralised finance (DeFi) as generally understood because it requires TSVs to implement permissioned transactions only. Such transactions typically support identity mechanisms for counterparties, and the ability to implement compliance rules via smart contracts or other mechanisms that allow only permitted functions to be executed by tokens.
In pushing forward with its exemption order, the SEC under the current administration is sending a clear signal to the financial marketplace that it supports digital assets, DLT and tokenisation and that it will make purposeful steps to ensure that they are permitted, whether or not lawmakers in Congress are on board. It remains to be seen whether a future administration and SEC will be as supportive.
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