The U.S. Securities and Exchange Commission (SEC) has introduced a five-year “Innovation Exemption” that permits U.S. stocks to be traded in tokenized form on approved venues. The temporary framework is designed to allow Tokenized Securities Venues (TSVs) to meet investor protection requirements while using permissioned automated market maker (AMM) liquidity pools, and the agency is seeking public input as it considers permanent rules for onchain securities trading.

On September 17, the agency announced the temporary “Innovation Exemption,” granting conditional relief to TSVs and allowing them to facilitate trading of tokenized National Market System (NMS) stocks through blockchain-based infrastructure. The move was detailed in an official press release issued by the regulator.

Under the exemption, a TSV is permitted to operate as a venue that is “not a traditional exchange” under the Securities Exchange Act of 1934. Permissioned automated market makers (AMMs) and liquidity pools can be used to bring together buyers and sellers of tokenized stocks on these venues.

“The framework is aimed at providing protections for investors and the marketplace, while encouraging innovation,” the SEC said.

SEC Commissioner Paul Atkins described the action as a vital step forward in modernizing U.S. capital markets and in allowing regulated onchain trading for certain equity securities.

The relief is temporary. It runs for five years from the date of publication, unless the exemptions are revoked through further regulation. That five-year term gives venues, liquidity providers, and issuers a defined operating window during which the agency can observe how tokenized equity trading functions in practice — consistent with its stated aim of enabling experimentation with blockchain-based market structures — before any move toward permanent rules.

Key Rules for Tokenized Securities Venues

The SEC placed several conditions on the relief. TSVs must ensure that tokenized shares carry the same rights and privileges as the underlying shares. Caps on the number of listed symbols and on trading volumes also apply to the platforms.

Compliance Requirements

TSVs must meet several critical requirements under the order. Smart contracts used to support tokenized stock trading must be open and verifiable, and they must be built on a public, permissionless blockchain. combination places the smart-contract layer on open infrastructure that can be publicly verified, while confining the matching of buyers and sellers to permissioned AMM participants.

If trading in the underlying stock is suspended on its main exchange, trading of the corresponding tokenized shares must be suspended as well. Platforms must also make public information on their trading activities and operations.

In addition, before an unaffiliated third party tokenizes a company’s shares, the issuer must be alerted and given an opportunity to object.

The SEC noted that the measures are geared toward safeguarding investors, while also enabling experimentation with possible blockchain-based structures for markets.

Liquidity Providers Also Receive Relief

The order additionally provides a conditional exemption from “dealer” registration for liquidity providers in TSV-registered liquidity pools. This applies to participants who offer liquidity through their own capital, an activity that could extend beyond what is described as typical market-making.

The exemption covers liquidity provision on token-based stock trading venues for the duration of the pilot period.

The SEC is seeking public comment on all aspects of the framework, including proposed amendments and possible further action.

The announcement represents a further step by U.S. regulators to expand blockchain-based securities markets. Although the framework is a temporary solution, it offers a clear process for trading tokenized securities as traditional financial assets advance onto blockchain networks. Over the pilot period, the points to watch include how the caps on listed symbols and trading volumes shape participation, the outcome of the public comment process, and the possibility, flagged in the order itself, that the exemptions could be revoked through further regulation.

Source: Crypto Ninjas