The U.S. Securities and Exchange Commission is preparing to delay its proposed “innovation exemption” for tokenized securities again, with concerns from the White House and Wall Street reportedly complicating the initiative.
Three industry sources familiar with the matter said the SEC had been considering releasing at least part of the exemption alongside a Friday meeting on its separate “Reg Crypto” proposal. That meeting was canceled late Thursday.
The exemption was reportedly close to being announced and could have reduced regulatory obstacles for companies looking to issue and trade tokenized securities on blockchain networks under existing securities rules.
The SEC had scheduled Friday’s meeting to discuss “Reg Crypto,” a separate initiative focused on creating a regulatory framework for crypto projects that raise capital through token offerings. Officials were also expected to outline the innovation exemption, although it was not expected to immediately enter the formal notice-and-comment process.
According to one source, White House officials feared the proposal could “kick a hornet’s nest” while Congress continues to negotiate the Digital Asset Market Clarity Act. Moving forward with the exemption could potentially make efforts to reach agreement on wider crypto legislation more difficult.
SEC staff have also reportedly raised questions about the agency’s authority to provide such broad relief. Officials are examining whether the SEC has completed adequate economic analysis and satisfied the procedural requirements needed to support the exemption. Industry participants have reportedly been told the initiative could be delayed until lawmakers make progress on the Clarity Act.
Wall Street Questions the Market Structure
Resistance has also emerged from traditional financial institutions.
SIFMA, the Wall Street trade association representing major broker-dealers and investment banks, has reportedly become a prominent critic of the SEC’s tokenization approach.
The group is particularly concerned about how blockchain-based trading platforms would operate under existing equity-market regulations. One key issue involves brokers’ obligations to secure the best execution available for customers.
Regulation NMS currently connects pricing across traditional exchanges and generally requires brokers to execute orders at the best protected quotation. Those requirements become more difficult to apply when tokenized securities trade through decentralized exchanges or automated market makers, where prices and transaction costs may differ from conventional venues.
The SEC proposed removing Rule 611 of Regulation NMS, also known as the Order Protection Rule, in June. The proposal was widely seen as an attempt to eliminate a major regulatory obstacle to tokenized securities trading.
SIFMA has argued that major market-structure changes should be introduced through formal rulemaking rather than exemptions or no-action letters.
In a June 30 letter, the organization urged the SEC to use a transparent process that allows market participants and the public to provide feedback on significant structural changes.
The SEC did not immediately comment on questions surrounding the timing of the innovation exemption.
Another Setback for the SEC Plan
The latest delay follows an earlier attempt to release the exemption in May, after the SEC had already pushed back its original deadline several times.
At the time, the proposal was believed to potentially allow issuers to create security tokens without controlling the underlying securities. That possibility raised concerns among traditional securities issuers about the emergence of synthetic versions of existing assets.
The SEC ultimately held back the proposal. Commissioner Hester Peirce later said she did not expect the exemption to cover synthetic securities. Instead, she indicated that the framework was more likely to support tokens representing digital versions of the same underlying equities already available to investors.
Tokenization Becomes a Bigger Market
The SEC’s delay comes as tokenization is attracting increasing attention from the financial industry. Wall Street firms are exploring blockchain-based systems for issuing and trading stocks, bonds and investment funds.
Nasdaq and the New York Stock Exchange have announced plans to develop tokenized securities infrastructure. The Depository Trust & Clearing Corporation, a major part of the U.S. securities market, also conducted its first live production transactions involving tokenized securities last month during a testing program.
The opportunity could be substantial. Citi analysts estimate that tokenized assets could become a $5.5 trillion market by 2030.
Under Chairman Paul Atkins, the SEC has increasingly presented tokenization as a potential way to modernize financial markets. The regulator and financial industry, however, continue to debate how traditional assets should be brought onto blockchain networks and how tokenized markets can operate within existing securities and market-structure regulations.
