Concerns Over Market Integrity and Investor Protection
The World Federation of Exchanges (WFE), an advocacy group for stock exchanges, has urged the U.S. Securities and Exchange Commission (SEC) not to grant broad regulatory relief to cryptocurrency companies that are launching tokenized stock offerings. The group argues that such relief risks the stability of the market and the protection of investors.
In a letter submitted to the SEC, the WFE expressed alarm over the increasing number of brokers and crypto-trading platforms that are offering or intend to offer products described as "tokenized U.S. stocks." The WFE emphasized that these products are marketed as equivalent to stocks but do not actually represent shares, posing multiple interconnected risks.
Several cryptocurrency exchanges are seeking to provide tokenized stocks in the U.S., which would enable investors to gain exposure to publicly traded companies without directly owning their shares. These offerings are often promoted for their faster settlement times compared to traditional stock exchanges and their availability for trading at any time, outside of regular market hours.
Crypto companies that are not registered as SEC broker-dealers would typically require an exemption from the agency. SEC Chair Paul Atkins has previously indicated a willingness to consider granting such exemptions.
Targeted Exemptive Relief Advocated
The WFE, whose members include prominent exchanges like Cboe and Nasdaq, stated that it supports the SEC's use of exemptive relief. However, the group voiced concerns that a broad application of such relief could jeopardize investors and the integrity of the market.
"We simply believe that this authority is most effective when exercised in a targeted manner and not applied as a means to circumvent or fast-track exemptions to longstanding regulatory requirements," the WFE stated in its letter.
The WFE acknowledged that tokenization is likely an "evolution in capital markets" and that the group is "pro-innovation." However, they stressed that this evolution "must be done in a responsible way that does not put investors or market integrity at risk."
The organization suggested that it would be more beneficial for the SEC to initiate a public rule-making process to solicit feedback on tokenized stocks, rather than attempting to enact significant changes through exemptive relief.
"Alternatively, the Commission could consider the creation of a sandbox regime or other innovation facilitator," the WFE added.
In August, the WFE had previously called for stricter oversight of tokenized stocks from regulatory bodies including the SEC, the European Securities and Markets Authority, and the International Organization of Securities Commissions, citing a lack of investor protections.
SEC's Consideration of Exemptions for Tokenized Stocks
SEC Chair Paul Atkins, who has a background in crypto advocacy, has indicated that he is considering an "innovation exemption." This exemption would aim to relieve crypto firms from certain regulations, thereby accelerating the introduction of crypto and blockchain-based products to the market.
Atkins stated that such an innovation exemption could help realize the vision of making America the global crypto capital. He believes it would encourage developers, entrepreneurs, and other firms willing to adhere to specific conditions to innovate with on-chain technologies within the United States.
U.S. trading platforms have begun preparing to offer tokenized stocks under the current regulatory climate. Robinhood Markets launched offerings of hundreds of tokenized stocks to European investors in June, with plans to extend similar products to the U.S. market, following a similar move by Kraken the previous month.
Coinbase also reportedly sought SEC approval in June to offer tokenized stocks, with its legal chief, Paul Grewal, describing it as a "huge priority" for the cryptocurrency exchange.
Traditional financial companies are also exploring this area. In September, Nasdaq submitted a request to the SEC for a rule change that would permit the exchange to list tokenized stocks.