SEC drafts tokenized stocks framework

The U.S. Securities and Exchange Commission is preparing a framework for tokenized stocks, according to a Bloomberg report published on May 18 that cited people familiar with the matter. Bloomberg said the agency could release an “innovation exemption” for tokenized stocks as soon as this week. The report follows several months of SEC statements and advisory discussions that have already laid out how the agency is thinking about tokenized securities. A January 28 staff statement from the SEC’s Division of Corporation Finance, Division of Investment Management and Division of Trading and Markets defined a tokenized security as a security represented by a crypto asset, with ownership records maintained in whole or in part on one or more crypto networks. The staff said the format of issuance does not change the application of federal securities laws. (bloomberg.com) ### What exactly is a tokenized stock under the SEC’s current language? The SEC staff said on January 28 that tokenized securities generally fall into two categories: securities tokenized by or on behalf of the issuer, and securities tokenized by third parties unaffiliated with the issuer. The distinction matters because the rights and risks can differ depending on whether the token is tied directly to the issuer’s own shareholder records or created by an intermediary. (sec.gov) Commissioner Hester Peirce said in a prior SEC statement that “tokenized securities are still securities,” and the January 28 staff guidance made the same point in practical terms by saying onchain formatting does not alter the underlying legal treatment. That means existing securities rules remain the starting point even if trading or recordkeeping moves onto blockchain-based systems. ### What is the SEC reportedly drafting now? (sec.gov) Bloomberg reported on May 18 that the SEC is expected to release a so-called innovation exemption for tokenized stocks. The Block, citing Bloomberg’s reporting and earlier public remarks by SEC officials, said the exemption is being framed as a way to allow limited trading of certain tokenized securities on novel platforms while the agency develops a longer-term framework. (sec.gov) SEC Chair Paul Atkins said at ETHDenver in February, according to The Block, that a tokenization exemption would “facilitate limited trading of certain tokenized securities on novel platforms with an eye toward developing a long-term regulatory framework.” That public description is the clearest available account of what the reported exemption is meant to do. (bloomberg.com) ### Which investor protections has the SEC already put on the record? The SEC’s Investor Advisory Committee met on March 12 to discuss a recommendation on the tokenization of equity securities. A draft recommendation dated February 26 said the SEC should not adopt a “blanket” innovation exemption and instead should pursue only reforms needed to facilitate tokenization without compromising core protections. The advisory recommendation listed three protections that should not be compromised: mandatory disclosures so investors understand their ownership rights, SEC/state/FINRA oversight of intermediaries, and trading rules designed to ensure investors receive the best terms for their orders. (theblock.co) Commissioner Peirce, in March remarks to the committee, said the draft posits that intermediaries should be regulated and that tokenized-equity trading should remain subject to protections seeking best execution. (sec.gov) ### Why are custody and trading venues central to this debate? The January 28 SEC staff statement said some tokenized securities are issued by unaffiliated third parties that hold underlying securities or tokenize investors’ security entitlements against a custodian. Peirce warned in an earlier SEC statement that buyers of those third-party tokens may face unique counterparty risks. The Investor Advisory Committee’s draft recommendation said U.S. stock ownership and trading still run through centralized systems including broker-dealers, the Depository Trust Company and the National Securities Clearing Corporation. (sec.gov) Any move toward tokenized equities therefore raises questions about who holds the underlying shares, who updates ownership records, and where trading occurs. (sec.gov) ### What else was happening around tokenized markets this week? Bloomberg reported on May 19 that Polymarket signed an exclusive partnership with Nasdaq Private Market to provide data for contracts tied to private-company valuations, secondary-market activity and IPO timing. That deal is separate from SEC tokenized-stock policy, but it shows how market operators are building products around blockchain rails and market data at the same time regulators are weighing rules. (sec.gov) The next concrete step is an SEC publication. As of May 20, the agency’s most recent public materials on the subject were the January 28 staff statement, the March 12 Investor Advisory Committee meeting materials and related remarks from commissioners and the chair. (sec.gov) (bloomberg.com)