SEC's Potential Tokenized Securities Exemptions Draw Caution from SIFMA
In a move that could reshape the financial landscape, the Securities and Exchange Commission (SEC) is contemplating an exemptive order that would enable firms to utilize distributed ledger technology (DLT) for issuing, trading, and settling securities. This decision, if implemented, aims to address the current bottleneck in the tokenized securities market, where firms are hesitant to register as broker-dealers or exchanges due to the limited market size, thereby hindering the development of secondary market infrastructure.
SEC Commissioner Hester Peirce believes this proposed order could pave the way for digital asset platforms to consolidate exchanges, brokers, clearing, and custody functions into one platform, enhancing efficiency. However, this approach has raised concerns, particularly in the wake of incidents like the collapse of FTX, which underscored the dangers of combining trading and custody functions on one platform without sufficient safeguards.
On the other side, the Securities Industry and Financial Markets Association (SIFMA), representing traditional finance firms and securities issuers, strongly opposes immediate no-action or exemptive relief for tokenized equities. SIFMA argues that granting such relief would allow crypto firms to offer securities outside the established federal securities laws framework, potentially undermining investor protections. They urge the SEC to reject requests for immediate relief in favor of a more substantive notice and comment process to thoroughly evaluate critical policy questions.
Key concerns raised by SIFMA include the impact on market transparency, liquidity, application of Regulation National Market System (NMS) rules, and investor access to liquidity pools. Additionally, they are worried about the application of Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements outside traditional regulatory frameworks.
Notable players in the digital asset space, such as Coinbase and Robinhood, are expected to benefit from such a decision, should it be granted. Coinbase, for instance, has submitted digital securities recommendations to the SEC in March, proposing exceptions from NMS rules for digital asset platforms hosting listed stocks. They also argue against the best execution rule, claiming it only considers price and not order size or demand, and aim to operate 24/7 trading without intermediaries.
The current status of the SEC's consideration regarding exemptive orders for digital asset firms to trade tokenized traditional securities on digital asset platforms is marked by significant regulatory caution and industry concern. As the debate continues, the SEC will need to balance the benefits of innovation and efficiency against risks to investor protections and market integrity.
| Stakeholder | Position | Key Points | |------------------------|---------------------------------------------------------------|---------------------------------------------------------------------------------------------------| | **SEC Commissioner Peirce** | Considering exemptive order to facilitate DLT-based trading | Aims to solve market infrastructure bottleneck; consolidate market functions; cautious approach | | **SIFMA** | Opposes immediate exemptive relief; favors full rulemaking | Emphasizes investor protections, regulatory consistency, market transparency, KYC/AML compliance |
- The SEC Commissioner Hester Peirce, with her supportive stance on an exemptive order, aims to facilitate distributed ledger technology (DLT) for securities trading, pointing out the potential for consolidating exchanges, brokers, clearing, and custody functions into one platform.
- Meanwhile, the Securities Industry and Financial Markets Association (SIFMA), representing traditional finance firms and securities issuers, opposes immediate relief for tokenized equities, emphasizing concerns such as investor protections, regulatory consistency, market transparency, and KYC/AML compliance.
- Notable players in the digital asset space such as Coinbase and Robinhood, anticipated to benefit from such a decision, have been actively engaging with the SEC, submitting proposals like exceptions from Regulation National Market System (NMS) rules and arguing against the best execution rule to operate 24/7 trading without intermediaries.
- The SEC's consideration of exemptive orders for digital asset firms to trade tokenized traditional securities on digital asset platforms is characterized by significant regulatory caution, as the commission attempts to balance the benefits of innovation and efficiency against risks to investor protections and market integrity.
