SEC Tokenization ‘Innovation Exemption’ Triggers Debate in US

SEC Introduces ‘Innovation Exemption’ for Tokenized Stock Trading

Debate Grows Over Standard for ‘Public, Permissionless’ Blockchains

Listed Companies Included in Tokenization Plans Push Back

The U.S. Securities and Exchange Commission’s rollout of an “Innovation Exemption” allowing tokenized stock trading is stirring controversy, with blockchain projects arguing that their networks should qualify for the measure.

Crypto in America, a digital-asset news outlet, reported on October 24 that the SEC’s exemption has recently drawn a range of responses from the blockchain industry and Wall Street firms.

The SEC said in September that companies meeting certain requirements could trade tokenized U.S. stocks without registering as traditional securities exchanges. Tokenized stocks are digital tokens on a blockchain that represent the rights attached to conventional shares.

The agency said smart contracts used for tokenized stock trading must be publicly available for outside verification. It also required the activity to run on a public, permissionless blockchain.

The problem is that the SEC has not clearly defined what qualifies as a public, permissionless blockchain. Because blockchain networks use different transaction-validation methods and operating structures, views differ on which networks should be eligible.

Companies preparing to operate tokenized stock trading platforms have already picked different blockchains.

Three companies have filed operating plans with the SEC so far: TSV, OKXICE and Kephas. TSV plans to use Canton Network, an institutional blockchain. OKXICE and Kephas plan to use Ethereum layer-2 networks developed by their respective corporate groups.

Solana Says Standards Should Be Stricter, While Hedera Wants Permissioned Chains Included

Industry participants are taking opposing positions on what standards should apply to blockchain networks eligible for the exemption.

The Solana Policy Institute said in a comment letter submitted to the SEC on October 22 that the definition of a permissionless blockchain should be tightened. Simply allowing anyone to access a blockchain does not make it a permissionless network, it wrote.

It also said a blockchain’s true level of decentralization should be judged by factors such as who has the authority to validate or block transactions and who can change the network’s operating rules.

Hedera, by contrast, has taken the opposite position.

In a comment letter submitted to the SEC on October 9, Hedera said blockchains that limit who can participate in transaction validation should also qualify for the exemption.

Hedera allows open access to the network, but grants transaction-validation authority only to approved participants. The company argues that limits on validator participation alone should not disqualify a network from the exemption.

The SEC, however, has signaled that it will let the market experiment rather than immediately decide whether specific blockchains qualify. An SEC official said the measure is not formal rulemaking and that the market will determine which blockchain models are appropriate.

Companies that meet the exemption’s conditions can begin tokenized stock trading 30 days after filing an operating plan with the SEC, without separate approval. In other words, the SEC does not pre-approve the blockchain chosen by each company.

‘We Don’t Want Tokenization’: Listed Companies Also Push Back

Opposition is also growing among existing listed companies included in tokenization plans.

Of the 62 U.S.-listed companies initially selected by OKXICE for tokenization, 22 have expressed opposition. That amounts to more than one-third of the total.

Reuters reported on October 23 that six additional companies, including Wells Fargo, Arm Holdings and Intuit, had voiced opposition. Combined with the 16 companies that had already objected, the total reached 22.