SEC Issues Innovation Exemption Granting Temporary Relief for Onchain Trading of Tokenized Stocks

Key Takeaways

• The SEC has issued a temporary, conditional exemptive order under Exchange Act Section 36(a)(1).
• It exempts Tokenized Securities Venues (TSVs) from the "exchange" definition and Covered Firms from the "dealer" definition, enabling onchain trading of certain tokenized NMS stocks.
• Compliance teams at broker-dealers, trading venues, and liquidity providers should assess eligibility and conditions now, because the relief is interim and the SEC has signaled that durable rulemaking will follow.

Deep Dive

The SEC has issued a temporary, conditional exemptive order under Exchange Act Section 36(a)(1). It exempts Tokenized Securities Venues (TSVs) from the "exchange" definition and Covered Firms from the "dealer" definition, enabling onchain trading of certain tokenized NMS stocks. Compliance teams at broker-dealers, trading venues, and liquidity providers should assess eligibility and conditions now, because the relief is interim and the SEC has signaled that durable rulemaking will follow.

The order provides two forms of relief. TSVs are exempted from the definition of "exchange" under Section 3(a)(1), and liquidity providers designated as "Covered Firms" are exempted from the definition of "dealer" under Section 3(a)(5). The relief is temporary and conditional, and it was issued within the SEC's existing statutory authority after Congress did not advance the CLARITY Act earlier this week. Because it is an exemption rather than a rule, firms must meet the conditions to rely on it. Anti-fraud and anti-manipulation provisions of the federal securities laws apply in full, without exception.

The statement identifies four key conditions. First, a TSV must be a U.S. person and comply with OFAC-administered economic and trade sanctions programs. Second, access is permissioned: a TSV must set access standards allowing only certain participants to trade tokenized NMS stock. Third, there are no synthetics. Tokenized NMS stock must be tokenized by or on behalf of the issuer, or by an unaffiliated third party, and must give holders the same rights and privileges as the traditional security, including dividends and voting rights. Fourth, issuers must have the opportunity to object and prevent their security from trading on a TSV. The statement does not detail the full order text, so firms should review the order itself for additional conditions, definitions, reporting obligations, and the exemption's duration. No effective dates or expiration are specified in the statement.

The SEC is inviting public comment on all aspects of the exemption and says it is monitoring market development. It also states that this interim measure must be followed by durable rulemaking. Compliance teams should expect the conditions to change and should avoid building controls that cannot adapt. Comment periods are an opportunity to shape the final framework, particularly on access standards, issuer objection mechanics, and treatment of third-party tokenization.

Recommended actions:
- Determine whether the organization intends to operate a TSV or act as a Covered Firm, and map the order's conditions to current operations.
- Update sanctions screening and OFAC controls for onchain participants and wallets.
- Establish participant access standards and onboarding due diligence.
- Build issuer-objection monitoring and token-to-underlying rights reconciliation, covering dividends and voting.
- Reinforce surveillance for fraud and manipulation on onchain venues.
- Coordinate legal, technology, and regulatory affairs on a possible comment letter.

Risk implications: Regulatory risk is elevated because the relief is temporary and may be modified or ended, and because reliance on an exemption leaves little room for non-compliance with conditions. Operational and technology risk arises from distributed ledger settlement, custody, and wallet controls. Sanctions exposure is heightened by pseudonymous onchain activity. Reputational and conduct risk may arise if token holders do not receive equivalent rights to the underlying securities. Firms outside the exemption's scope remain subject to full exchange and dealer registration requirements.

Source: Securities and Exchange Commission