This morning, the SEC revealed its first direct answer to the boom in offshore tokenized crypto stocks: a 5-year exemption which allows allowed Automated market makers (AMMs) trade actual U.S. stocks bearing rights under the federal securities law.
The order, which the SEC calls the Innovation exemptionlanded just two days after Congress’s crypto market structure bill, the Clarity Act, died in the Senate.
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What’s in the order
Above all, the ordinance establishes a standard that describes what constitutes a Place of tokenized securities (TSV)that is, a trading platform built around authorized AMM liquidity pools that are exempt from the legal definition of “exchange”.
Second, the order requires liquidity providers inside these TSV pools must be exempt from the definition of “reseller”. Traditional brokers who show up to trade on a TSV of course still have all their obligations, as this exemption only concerns the platform and its LPs rather than the brokers who route orders there.
These classifications and protections are effective immediately and continuing the SEC’s recent intensified clarification efforts around crypto, just months after the watchdog joined forces with the CFTC to issue landmark guidance in the form of a new token taxonomy framework.
Decoding the SEC’s Bankless Token Taxonomy
The new framework attempts to classify crypto assets and clarify the boundaries of securities law. Let’s see what some of today’s crypto assets belong to.
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However, under this new order, TSVs will only be considered TSVs if they facilitate transactions of genuine 1:1 tokenized versions of National Market System (NMS) stocks, such that the tokens offer the same dividends, voting rights, etc. than real actions. Synthetics or derivatives will be disqualifying.
There are also additional stipulations, such as TSV must execute verifiable smart contracts on chains without permission; they must comply with OFAC rules; they must accept volume and ticker caps; and they must notify issuers and wait for potential vetoes before listing unaffiliated third-party equity tokens.
Go out of bounds in any of these respects and a TSV will lose its exempt status.
Open questions
This new exemption system is naturally not intended for centralized exchanges which Already have the capital and users to register properly, but would prefer to avoid the compliance elevator. It is designed for the decentralized on-chain side, for example Uniswap style pools instead of Coinbase style order books.
It is also narrow, in the sense that this order doesn’t affect offshore synthetic markets and exclude them from existence. They will continue to operate as they already do and in the meantime there is now also a route to commerce. on the ground in a manner that is compliant and respectful of rights.
However, the most difficult challenge in terms of practicality is that this entire model is licensed. Each TSV must have certain gates, its permitted pools, its size inside guardrails, etc. Other projects like Robinhood Stock Tokens, Backed, Dinari and xStocks are not as strict; all you need is a wallet and you can exchange them.
That is, the bet the SEC is making, which remains to be proven, is that a compliant and authorized KYC system can supplant offshore alternatives that are simply easier to use. Consider me skeptical, but then again, maybe things are stratifying. Perhaps offshore continues to be the retail arena, and perhaps TSVs will be dominated and succeed through institutional adoption.
The issuer’s veto, however, constitutes its own wild card. Perhaps offshore synthetics have angered issuers enough that they openly embrace legitimate, rights-bearing tokens. Or maybe everyone wants to have as much control as possible and vetoes of TSV lists are becoming so common that the system becomes untenable.
Whatever happens from here on out, this new order is a big deal, given that it stands in stark contrast to what we saw from the SEC during the agency’s previous Gensler era. It also comes strategically in the days following Clarity’s failure, providing a possible path to more permanent crypto rules in the United States.
It is unclear in the near future whether TSVs can transcend their limits and generate significant volume, as the system will take time to mature, but it is encouraging to say the least that the SEC has proposed them, as it shows that the Commission is directly working to positively clarify crypto’s land frontier. Bullish.