The Securities and Exchange Commission (SEC) has introduced a five-year "innovation exemption" that allows tokenized stocks to trade on public blockchains. This new policy grants "Tokenized Securities Venues" operating automated market makers relief from registering as traditional stock exchanges. Liquidity providers contributing proprietary capital will also receive a temporary exemption from broker-dealer registration requirements.
Tokenization, the process of issuing and transferring traditional assets like stocks and bonds on blockchain, aims to attract more investors and enhance trading capabilities beyond regular stock market hours. Major exchanges like the New York Stock Exchange, Nasdaq, and the London Stock Exchange are planning to launch tokenized stocks. Crypto exchanges Coinbase and Kraken are also preparing to offer them to customers.
Supporters argue that blockchain-based equity markets will provide global trading liquidity, round-the-clock access to public stocks, instant settlement, and self-custody options. However, skeptics warn that continuous trading could lead to severe pricing risks and make market oversight more challenging. Early offshore platforms demonstrated how fragmented liquidity can distort asset values, with some stock tokens trading at up to 400% above their real stock price.
The SEC framework restricts eligible assets to listed securities, with strict trading volume caps. Tier 1 stocks are capped at 75 and 0.25% of the prior month’s average daily share volume, while Tier 2 stocks are capped at 250 and 2.5%. For example, Nvidia (NVDA), a Tier 1 stock, could see up to roughly 312,500 tokenized shares traded per day. Venues are also barred from hosting initial public offerings, extending margin leverage, or executing trade lending during the exemption period.