The CLARITY Act failed to pass votes in the Senate earlier this week, a piece of legislature that would set out guardrails and ground rules for crypto assets in the U.S. With the failure of passage, the Securities and Exchange Commission took matters into its own hands, passing a conditional exemption Thursday for tokenized stocks. This Innovation Exemption allows for a limited type of tokenized securities to trade on specific Tokenized Securities Venues (TSVs), giving them a 5-year runway to prove their trading chops.
Tokenization is one of the latest trends in the investing world, whereby an asset is represented digitally on a blockchain. It's seen as the next frontier in finance, with digital trading opening up greater access both for a broader investor base as well as the potential to trade 24/7, while also offering the potential for increased efficiency. However, some argue that tokenized assets come with added, unique risks and that by moving investments to the blockchain you introduce greater exposure to bad actors in an as-yet unregulated space in the U.S.
The SEC exemption allows for a specific type of tokenized stocks to be traded, specifically ones that retain the investor rights of the stock they are tied to (voting and dividends for example). National Market System (NMS) stocks qualify that trade through U.S. venues who have established standards for who can trade, limit trading volumes to a certain percentage of the stock, and make public their trading activities as well as any affiliates on the TSV. In addition, venues must halt trading when the primary exchange halts, and leverage is not permitted.
Any company that does not want tokenized shares has 30 days to object and prevent their shares from being created. It's important to note that currently there are two main types of tokenized securities, those that are directly linked to the asset they represent digitally and those that provide synthetic exposure. Of the two, only the direct exposure tokenized stocks qualify that meet all of the exemption's restrictions.
"The Commission is not cementing today's technology as the standard for tomorrow. Instead, it is allowing the market to evolve, monitoring its development, and using that insight to inform a nimbler and future-ready regulatory framework," SEC Chair Paul Atkins said in a statement. The move by the SEC propels the U.S. into new but not unchartered territory.
Crypto regulation is a relatively established reality for many countries globally, while the U.S. has trailed behind, much to the current administration's consternation. With many crypto-friendly appointments spearheading key positions in U.S. government now, it's little surprise that the SEC has finally taken matters into its own hands after yet another failed attempt to establish regulation via the CLARITY Act. It is, however, a monumental shift for traditional finance, with the 5-year clock now ticking down for the digital finance ecosystem to prove its capabilities and its legitimacy.
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