Tokenized trading takes off

Just two days after the Senate failed to advance the Clarity Act, the SEC unveiled its counterplan: the Innovation Exemption, a five-year exception that will let approved platforms trade tokenized versions of US stocks.

“The Innovation Exemption is designed to resolve challenges that have prevented responsible innovation from taking root in the United States while providing investor protections and market integrity standards,” SEC Chair Paul Atkins said in a statement.

WTF is a tokenized stock? It’s a digital token on a blockchain that represents ownership in a real company share. Instead of your Nvidia stock existing only inside the traditional brokerage system, an equivalent token could be bought and sold on blockchain-based platforms—potentially around the clock, and with much faster settlement. In short: crypto-style trading of US stocks.

Token trouble

AMC Entertainment CEO Adam Aron recently went after Robinhood for offering a tokenized version of AMC stock without the company’s involvement, mincing no words as he called the practice “contemptible, outrageous, disgusting, detestable, inexcusable, vile.” Investors buying third-party tokens aren’t getting actual shares or the same voting rights and shareholder protections, and tokenization may also siphon trading activity away from the actual stock—making it harder for companies to raise money from investors.

The SEC’s new framework is meant to address some of those concerns: Approved tokenized stocks must carry the same rights as their traditional counterparts, and companies will have the ability to object to having their shares tokenized in the first place.

Say goodbye to the closing bell

Thanks to its Project Crypto initiative, the SEC has been working toward today’s announcement for more than a year—and its decision to keep moving even after the Clarity Act stalled shows how motivated the agency is to bring traditional financial markets “onchain” (onto blockchain rails).

That’s great news for crypto companies like Robinhood, Coinbase, and Kraken, who could benefit from more trading activity—and the custody and transaction fees that come with it. Traditional Wall Street firms are also moving in, with Nasdaq recently investing in Kraken parent Payward as part of a broader push into tokenized markets.

But before you eager day traders cancel your weekend plans, know that this is still a small experiment: Tokenized stocks remain just a tiny corner of the market.—SY