SEC Developing Framework to Permit Tokenized Stocks

The Trump administration is reportedly readying a plan for trading digital versions of securities.

That’s according to a report Tuesday (May 18) from Bloomberg News, which characterizes the proposal from the Securities and Exchange Commission (SEC) as one that could reconfigure the U.S. stock market.

Sources told Bloomberg that the SEC could unveil its “innovation exemption” for tokenized stocks as soon as this week, establishing a framework for betting on public companies.

As covered here Wednesday, tokenization creates digital representations of real-world assets, like shares or bonds, on a distributed ledger.

“Regulators view the technology as a primary driver for efficiency, potentially streamlining security issuance and asset management while lowering costs and enhancing market resilience,” PYMNTS wrote in a report on a similar proposal in the U.K.

In what the Bloomberg report calls a surprise move, the commission is leaning toward permitting the trading of tokens that don’t have the consent of the public companies whose shares they track, the sources added.

Bloomberg notes that this move would be among the most significant regulatory tests of whether stock trading can occur within crypto infrastructure without the safeguards found on traditional equity markets.

The report also points out the vulnerabilities at play here. For example, this year has seen several decentralized finance platforms targeted in hacks that siphoned away hundreds of millions in digital assets.

And the Securities Industry and Financial Markets Association (SIFMA) has warned that a lack of standards like market interconnectivity and price transparency for tokenized markets could cause markets to “fragment and become disorderly.”

“If third parties can tokenize Apple or Amazon without the issuer at the table, there’s no theoretical limit on how many wrappers of the same company exist at once,” Brett Redfearn, president of tokenization firm Securitize and former director of the SEC’s trading and markets division, told Bloomberg.

“This could create a whole new level of market fragmentation and could leave investors less certain what their shares are actually worth at any moment.”

The report added that the exemption has been presented as a way to let companies experiment with tokenized securities without violating US securities laws.

However, industry players like Citadel Securities and SIFMA have warned that broad exemptions for tokenized stocks could hamstring investor protections such as know-your-customer (KYC) and anti-money laundering (AML) laws.