SEC Draws Hard Line on Tokenized Stocks

The U.S. Securities and Exchange Commission (SEC) has swiftly moved to temper expectations surrounding its highly anticipated regulatory framework for tokenized equities.

This comes after a Reuters report that has detailed the potential rollout of a new "innovation exemption" that could pave the way for blockchain-based stock markets.

Tempering expectations

SEC Commissioner and Crypto Task Force Chief Hester Peirce has called out the "hyperbole" surrounding the SEC's potential exemption for the on-chain trading of tokenized stocks.

Peirce has stressed that the much-hyped regulatory safe harbor will be very limited in its scope.

"Keep in mind: I've always expected that it'd be limited in scope & would facilitate trading only of digital representations of the same underlying equity security that an investor could purchase in the secondary market today, not synthetics," she wrote.

The problem with synthetics

Currently, much of the tokenized stock market is based on the so-called "synthetic" model. A third-party crypto firm uses financial engineering to mint a token that merely mimics or tracks the price movements of a traditional stock (like Apple or Tesla).

The underlying company does not issue these synthetic tokens, so buyers do not receive traditional shareholder rights (voting power, dividend payouts, and so on).

Based on Peirce's comments, it is clear that the SEC will draw a hard regulatory line against synthetic tokens.

The SEC’s innovation exemption will be applied only to genuine "digital representations" of equities. Decentralized trading platforms will be required to facilitate the transfer of the aforementioned benefits.

The framework that has been developed by the SEC is supposed to test whether crypto infrastructure will be able to handle traditional stocks.

The SEC has yet to fully authorize such markets in the U.S. That said, tokenized stock offerings have already been pioneered globally by companies such as Backed Finance, Swarm Markets, and Dinari.