SEC Grants Innovation Exemption for Trading Stock Tokens Onchain, but Not Synthetics

Two days after the Senate failed to move forward the Clarity Act, the U.S. Securities and Exchange Commission granted five-year exemptive relief for the onchain trading of stock tokens that are 1:1 backed by the underlying with full voting rights, dividends, proxies, etc.

According to the order, onchain trading venues built on automated market makers and liquidity pools can trade tokenized stocks without registering as exchanges as would be required by the Securities Exchange Act of 1934. Additionally, certain liquidity providers on those venues need not register as dealers as defined by the Exchange Act.

“Today, the Securities and Exchange Commission is taking a significant step forward, within its statutory authority, to bring America’s capital markets into the digital age by facilitating onchain trading of certain tokenized stocks through the ‘Innovation Exemption,’” said SEC Chair Paul Atkins in a statement. 

According to the Innovation Exemption, a Tokenized Securities Venue (TSV), must be a U.S.entity, permission every participant, and use smart contracts on public, permissionless blockchains. 

The relief applies only to “tokenized NMS stock,” meaning shares of exchange-listed companies tokenized either by the issuer or by an unaffiliated third party, as long as the token carries the same rights as a traditional share. 

In order to commence trading of a tokenized NMS stock, it must notify the issuer at least 30 days beforehand. If the issuer objects,  it cannot trade that stock, but even silence is treated as tacit permission.

TSVs must publicly disclose information about its operations and trading activities, halt trading when the primary market has halted a stock, and are prohibited from offering financing. They must also follow anti-fraud and anti-manipulation rules. 

Entities providing liquidity on such an AMM in the form of tokenized NMS stock using proprietary capital are exempt from registering as dealers. 

An SEC spokesperson, noting that this has been 14 months in the making and referencing the failed attempt to pass Clarity, called the rule “a way station to final rulemaking for us. Potentially, it’s a way station to legislation for Congress.”

The relief does not apply to synthetic stock tokens that give price exposure but not the full suite of rights as the underlying. 

But the rule, particularly the issuer veto stipulation, partly answers a letter sent earlier by Wall Street’s record keepers. In July, the Securities Transfer Association urged the SEC to make issuer authorization a threshold condition for any tokenized-securities relief. 

An SEC spokesperson declined to say whether the commission would make any future statement on whether synthetic stock tokens would be allowed in the U.S. in the future: “ This [exemptive relief] is a statement in response to tremendous demand for doing securities tokens in a compliant fashion in the US. We see very little interest on the derivative side in the US.” 

Describing the activity of the synthetics abroad, he said, “ They can remain out in the wilds.”

While the exemption is a hint that the SEC is aligned with the STA on its request, the order does not appear to be an official response to the letter or a signal of the agency’s future intentions.

Stock tokens have garnered a lot of buzz, partly due to the launch of Robinhood Chain in July, which features tokenized debt securities barred to U.S. persons. On Hyperliquid, HIP-3 markets led by Trade.xyz’s equity perpetual futures, including its Nasdaq-100 tracker XYZ100, grew from roughly 2% of the exchange’s perp volume at the start of the year to about 50% by July, according to The Block.

The conversation about them reached a heightened pitch two weeks ago when AMC CEO Adam Aron and Robinhood CEO Vlad Tenev had a public spat on X over the launch of synthetic AMC stock tokens on Robinhood Chain to other non-U.S. jurisdictions. 

Those products have also produced some of the year’s most absurd trading. Over the weekend of Aug. 30, a memecoin called BONER, whose liquidity pool was paired with Robinhood’s tokenized Hims & Hers (HIMS), ended up holding more than half the token’s supply. With the stock market closed, tokenized HIMS hit $132.64, while the actual stock sat at its Friday close of $28.84. By Monday afternoon, tokenized HIMS was back near $29 to $30, and BONER was up more than 1,000% in 24 hours at a market cap of about $41.3 million, The Defiant reported. 

The total value of all tokenized stocks began the year at $688 million and is now just shy of $3 billion, according to RWA.xyz, with most of those consisting of synthetics.

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