The US Securities and Exchange Commission (SEC) is tightening its rules for tokenized securities. There should be an innovation exception. However, this is stricter than expected.
• SEC panel proposes strict exemptions for tokenized securities
• The advantages of tokenized securities should be accompanied by investor protection
• Targeted reform approach recommended
The US Securities and Exchange Commission (SEC) is working on its regulations for trading in tokenized securities and wants to create a “narrow” exemption for innovations. This is intended to facilitate limited trading in certain tokenized securities while maintaining investor protection. SEC Commissioner Hester Peirce recently stated this at a meeting of the US SEC Investor Advisory Committee (IAC).
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“The Commission staff is currently working on an innovation exemption to facilitate trading in certain tokenized securities on a limited basis – this provision is much narrower than the ‘blanket’ exemption mentioned in the draft recommendation,” Peirce said at the meeting.
A broad exemption such as that applicable to “normal” securities would weaken investor protections, such as clear disclosure of ownership rights, supervision of intermediaries and protection of orders.
Targeted reform approach recommended
Instead, the IAC proposes a targeted reform approach in which each regulation is examined individually, also because the tokenization of securities is still a relatively recent invention.
“We further note that our recommendation focuses on overarching questions and principles, as the tokenization of equity assets is still at a very early stage and involves complex technological developments,” the IAC said, according to The Block. “We believe a principles-based recommendation is most practical and sensible at this stage.”
Various advantages of tokenized securities
In principle, the committee sees advantages in the tokenization of securities, as delays and risks caused by intermediaries in the settlement process are reduced and information gaps between companies and shareholders would be closed through direct information in real time.
Industry representatives also argue that tokenized assets could improve market infrastructure through faster settlement, fewer intermediaries, and real-time ownership tracking.
Tokenized securities are still fully subject to the U.S. securities laws and must comply with applicable registration, disclosure, supervision and settlement requirements.
In traditional stock trading, this includes brokers, transfer agents and centralized settlement databases. For this reason, execution can sometimes take a day or longer. If the stock is placed on a blockchain, “the delivery of the tokenized security and payment can occur in a single transaction, with ownership data embedded directly into a single blockchain,” says CoinDesk SEC Chairman Paul Atkins.
The recommended innovation exemption could enable controlled trials of more advanced or decentralized trading models without compromising investor protection.
However, the IAC also cautions that the greatest risk associated with the tokenization of equity securities is “that these reforms or granting of exemptions could introduce new risks that investors do not understand and could result in increased costs that outweigh the benefits of tokenization,” according to the advisory document approved by the committee and obtained by CoinDesk.
Exception shortly before the exam?
Atkins expressed optimism during the IAC’s recent meeting that “the Commission will soon consider an innovation exemption to facilitate limited trading in certain tokenized securities, with the aim of developing a long-term regulatory framework.”
Incidentally, Hester Peirce reiterated the SEC’s openness to the possibilities of tokenization in a recent interview with CNBC’s “The Exchange.” She called on companies interested in tokenizing financial products to talk to the US Securities and Exchange Commission: “It’s really about you just coming along and talking to us about what you’re planning to do. We want to work with you so you can see if the market is interested in your products.”
Peirce said the SEC expects legal, operational and technical questions to arise as companies test these models. The stock exchange supervisory authority wants to work closely with the industry to clarify these questions.
Martina Köhler, editorial team at finanzen.net
