The U.S. Securities and Exchange Commission on Sept. 17 released an "innovation exemption" rule, opening a formal path for tokenized stock trading under a trial framework.
Under the rule, platforms or exchanges that rely on blockchain technology and automated market maker, or AMM, mechanisms to trade tokenized stocks would temporarily not be treated as SEC-regulated exchanges. Liquidity providers, or LPs, that supply liquidity to those venues also would not be treated as market makers if they meet certain conditions.
Core conditions for trading stock tokens
The rule lays out a detailed set of requirements for tokenized stock trading.
- Tokenized stocks must trade in permissioned AMM liquidity pools.
- The tokens must carry the same rights as actual shares, including voting rights and dividend rights. They cannot be synthetic tokens created through derivatives or other assets that merely track a stock price.
- There are limits on the categories of tokenized stocks and on trading volume.
- Before issuance, there is a 30-day window during which the stock issuer can object. If the issuer objects within that period, the token issuance becomes invalid or the token cannot be listed for trading. If there is no response, the token can be issued and traded after 30 days.
- Smart contracts for tokenized stocks must be public, auditable, and deployed on a public, permissionless ledger, meaning a blockchain.
- If the underlying stock is halted on an exchange, trading in the corresponding token must stop at the same time.
The framework will remain in effect for five years before being reviewed again.
Rule structure balances legacy market interests and crypto design
According to the source article, the rule appears designed to preserve room for the crypto ecosystem while also taking account of the interests of traditional brokerages. In that reading, the issuer veto mechanism and the requirement to align token trading hours with the status of the underlying stock are clear protections for incumbent market participants.
Beyond those restrictions, the article said most of the conditions sought by crypto participants are addressed, especially the requirement that tokenized stocks be implemented on public, permissionless blockchains.
The source article also highlighted the provision requiring tokenized stocks to include full shareholder rights. It said many products currently described as stock tokens do not provide complete equity rights, creating risks for investors. In that view, the new rule closes a gap that could otherwise become a larger problem later.
Source article points to Uniswap V4 and future indicators
The article said that, based on the rule’s current design, Uniswap V4 is the decentralized exchange mechanism that fits the requirements for trading tokenized stocks. It added that UNI moved higher after the rule was announced.
On what comes next, the source article said traditional institutions are unlikely to stay on the sidelines and may enter the sector to test the market over time. It also said that, despite the five-year trial period, two metrics will be worth watching closely across platforms: trading volume in tokenized stocks and the amount of capital flowing into the segment.
