SEC Evaluates Crypto Exemption to Simplify Trading of Tokenized Securities

The US Securities and Exchange Commission (SEC) is currently assessing a prospective exemption order that would enable companies to issue and trade securities using distributed ledger technology (DLT).

Commissioner Hester Peirce disclosed this initiative during a speech on May 8 at the SEC’s International Institute for Securities Market Growth and Development.

SEC’s proposed crypto framework

According to Peirce, the SEC’s Crypto Task Force is investigating a conditional order aimed at reducing regulatory hurdles for platforms that specialize in tokenized securities.

This proposal would permit eligible firms to utilize DLT for trading, clearing, and settlement of securities without the need to register under the typical SEC regulations.

Peirce mentioned that the existing regulations, like those stipulated in the Regulation National Market System, pose challenges for companies seeking to implement automated market-making strategies. Many of these companies might have to register as broker-dealers, clearing agencies, or exchanges, which can involve time-consuming and expensive compliance requirements.

The existing challenges, along with the scarcity of tokenized securities and trading platforms, have deterred many businesses from entering this sector.

Peirce argues that a specific exemption could help ease these challenges and give the SEC the flexibility to create updated regulations that correspond with blockchain technology.

She remarked:

“Exemptive relief could assist in overcoming this chicken-and-egg dilemma. It would also provide the SEC the necessary time to formulate and implement sustainable adjustments to its existing rules to accommodate DLT.”

However, the proposed exemption would include certain protective measures. Peirce emphasized that any firm that receives this relief must adhere to strict standards to guarantee transparency, financial integrity, and protection for investors.

Moreover, the firms would be required to disclose operational details of their platforms, outline wallet and custody practices, and highlight any risks associated with blockchain technology. These organizations would also remain under SEC oversight and would need to maintain sufficient capital to support their operations.

Peirce noted that the agency is contemplating regulations to mitigate fraud and market manipulation, including mandatory disclosures for customers and comprehensive monitoring systems.

She concluded:

“This outline of a potential exemption is still developing. The aim is to devise a commercially viable strategy that safeguards investors, ensuring they benefit from advanced technologies for trading, clearing, and settling securities. I invite input from market participants and other stakeholders.”