SEC advances tokenized stock trading after CLARITY Act setback

The US Securities and Exchange Commission [SEC] has allowed a temporary route for tokenized shares to trade on public blockchains.

The decision comes shortly after the Senate failed to advance the CLARITY Act, allowing the SEC to test one part of Congress’s stalled crypto agenda without waiting for new legislation.

US shares can move onchain—but within limits

Under the SEC’s Innovation Exemption, approved users can trade blockchain versions of shares listed on US exchanges.

They should also hold the same basic rights as conventional shares, that is, voting rights, dividend rights, and a right to the remaining corporate assets upon liquidation.

Trading could still take place outside trading hours at a sped-up settlement rate. Investors could also have the ability to hold such tokens in eligible digital wallets, instead of conventional brokerage investment accounts, and so on.

But this does not mean this is an open DeFi market!

Those that want to participate must obtain approval from operators, as well as adhere to sanctions and rules/regulations. Companies can stop an unrelated third party from tokenizing shares. Trading must cease if stock is halted.

The exemption also prohibits initial share offerings, margin, and other forms of borrowed trading.

Large US stocks are limited to 75 symbols and 0.25% of their previous month’s average daily volume. Less actively traded shares have a 250-symbol limit and a 2.5% volume ceiling.

No venue can begin immediately, and operators must publish detailed information at least 30 days before launching.

SEC delivers a narrow part of CLARITY

The failed CLARITY Act included a section devoted to tokenized securities, which said that placing a share on a blockchain does not stop it from being a security.

It would also have allowed adjustment to the way existing regulations on custody, record keeping, and settlement apply to transactions and systems using blockchain technology.

The new SEC order followed that exact principle. Tokenized shares remained securities, but as for the facilities that traded them, well, they received a temporary respite from registering as conventional exchanges.

The order does not replace the CLARITY. It did not clarify some important issues, like what cryptos fall under the domain of the SEC and CFTC, what rules are set indefinitely for crypto exchanges, or whether the order had an effect on the regulation of DeFi, etc.

It is set to expire on September 17, 2031, unless amended earlier by the SEC.

The order also did not talk about taxes. The Digital Asset Tax Certainty Act could clarify how stablecoins that are used to purchase these shares are treated.

Final Summary

• The SEC has signed off on a five-year experiment to enable permissioned trading of actual tokenized US shares.
• Brings forth one part of the stalled CLARITY agenda while leaving broader regulation/taxation unresolved.