Innovation Exemption: Recent reports indicate that the U.S. Securities and Exchange Commission (SEC) is preparing to introduce a new regulatory framework as early as this week (reported on May 18) that would enable trading of blockchain based tokenized stocks on decentralized finance (DeFi) platforms.
The “innovation exemption” would allow third-party tokens that track the share prices of listed companies without requiring approval from those companies. This move could dramatically expand the market for stock-linked crypto assets.
How the Innovation Exemption works
According to the SEC’s framework, crypto platforms can issue tokens representing the companies Apple, Tesla, Amazon, or NVIDIA, without the participation of the issuer. The tokens will not represent legal ownership of actual shares listed on a blockchain; instead, they will be a digital representation (or mirror) of the price movement, trading most likely on decentralized platforms. The tokens issued under this exemption will not have voting rights or be entitled to receive dividends, unlike other stocks.
This method will be substantially dissimilar from the Nasdaq-approved model for tokenizing securities, which keeps trading tied to existing market infrastructure and Depository Trust Company (DTC) settlement. The SEC proposes that this regulatory innovation exemption would allow trading outside parts of the traditional equity-market structure, potentially creating a parallel market.
Broader context and implications
The SEC has previously described tokenized securities as falling into two categories: issuer-direct models and third-party issuance models. The agency is reportedly leaning toward the latter, despite ongoing internal fine-tuning. An SEC spokesperson said, “The agency is broadly consulting with market participants as it designs rules for new trading structures.”
If implemented, the exemption could become a key regulatory test of whether traditional securities market structures are shifting. The emergence of a parallel market for tokenized stocks could offer 24/7 trading, fractional ownership, and composability with DeFi protocols (benefits that traditional equity markets cannot provide).