It’s here — SEC releases long-awaited innovation exemption to ‘bring America’s capital markets into the digital age’

On September 17, the U.S. Securities and Exchange Commission introduced a five-year exemption that will permit companies to offer trading in blockchain-based or tokenized stocks and securities, marking a significant step toward integrating digital assets into traditional markets. This exemption, known as the Innovation Exemption, allows platforms facilitating tokenized stock trading to operate with reduced regulatory burdens while maintaining investor protections and market integrity standards, according to SEC Chair Paul Atkins.

Platforms offering tokenized stocks will be required to notify companies before listing the tokenized versions of their stocks and will not be permitted to offer those products if the issuer objects. Liquidity providers in tokenized stocks will also receive a five-year exemption from dealer registration requirements. However, synthetic tokens offering exposure to a stock via derivatives or other products would not be permitted under this exemption.

The crypto industry argues that tokenizing securities could revolutionize markets by enabling 24/7 trading and instant settlements, thereby boosting liquidity and reducing transaction costs. Such tokenized stocks could also facilitate investor self-custody and fractional ownership of shares, as highlighted by the SEC. This exemption is seen as necessary because platforms offering tokenized stocks may find it challenging to comply with federal securities laws without making substantial changes to their business models.

The Innovation Exemption is part of a broader SEC crypto policy shift under President Donald Trump, who had previously advocated for a less restrictive approach to the cryptocurrency industry. Several prominent crypto players, including Coinbase, have expressed plans to launch tokenized stocks in the United States once the rules come into effect. Meanwhile, Robinhood, Kraken, and other crypto exchanges have already been offering tokenized stocks overseas.

While tokenized stock products overseas often resemble traditional stocks, they typically do not offer the same rights, disclosures, and protections as conventional equities. However, under the SEC's exemption, tokenized stocks must provide the same rights and privileges as traditional securities, including the right to receive dividends and exercise voting rights. The SEC emphasizes that these tokenized stocks must comply with federal securities laws, ensuring investor protections and market integrity.