SEC Proposes 5-Year 'Innovation Exemption' for On-Chain Tokenized Stock Trading

The U.S. Securities and Exchange Commission (SEC) has implemented a temporary regulatory exemption to support on-chain trading of tokenized stocks, addressing longstanding regulatory uncertainty that has hindered innovation in the U.S. market. SEC Chairman Gary Gensler announced the 'Innovation Exemption' on September 17, stating it would allow certain tokenized National Market System (NMS) stocks to be traded via licensed automated market makers (AMMs) and liquidity pools on designated Tokenized Securities Venues (TSVs).

The exemption excludes qualifying TSVs from the definition of 'exchange' under securities law and removes specific entities providing liquidity for tokenized stocks from the 'dealer' classification. The SEC emphasized that while the move aims to foster new opportunities for investors and markets, it also maintains investor protection and market integrity standards.

The exemption is limited in scope and valid for five years following publication, during which the SEC will monitor actual market operations and trading data to inform future rulemaking. Requirements include TSVs being U.S.-based with compliance with economic and trade sanctions, restricted access for participants, and tokenized securities must mirror rights of underlying stocks including dividends and voting rights.

Chairman Gensler described the measure as a 'bridge' toward long-term regulatory frameworks, noting that the temporary exemption would allow the SEC to observe how on-chain trading functions in practice before developing sustainable rules. He stressed that additional rulemaking would be necessary after this period to ensure investor protection and market stability while allowing digital markets to become a viable path for U.S. capital markets development.