The Securities and Exchange Commission is delaying a plan to provide broad exemptions for U.S. crypto firms to trade tokenized assets linked to stocks, according to people familiar with the matter.
The SEC's staff was preparing to release its so-called innovation exemption for tokenized stocks as soon as this week, according to the people, who asked not to be named while discussing the commission's business. A draft of the plan had been prepared and reviewed by staff.
But the timing has since been pushed back as the SEC weighs input from stock-exchange officials and other market participants who've held discussion with agency staff in the past few days to learn details of the plan. One part that has raised concerns is a move to allow for the trading of so-called third-party tokens, which would be issued without the backing or consent of the public companies involved.
The SEC hasn't made any decisions to change its draft proposal.
Any SEC decision to allow for the trading of the third-party instruments would run counter to the expectations of some crypto-market experts and trading firms.
Under the SEC's proposal, platforms offering tokens would need to guarantee investors receive the same rights as regular shareholders — including dividends and voting rights. But several former regulators said it's unclear how companies would technically fulfill those obligations given that tokens change hands on pseudonymous blockchain networks.
Not all SEC officials would support a decision to allow for the trading of third-party tokens, according to people familiar with the matter.
Commissioner Hester Peirce, a long-time ally of SEC Chairman Paul Atkins, on Thursday posted on X that she expects the innovation exemption to be "limited in scope" and would "facilitate trading only of digital representations of the same underlying equity security that an investor could purchase in the secondary market today."
Former regulators and market experts cited a number of concerns about the SEC's plan.
Several said public companies might face uncertainty about how to go about normal practices such as issuing dividends and counting shareholder votes as tokens with those rights proliferate on the blockchain. Some have already raised that question with stock exchange officials, according to a Wall Street executive.
"If I was a corporate executive, I'd be very concerned about the implications," said Amanda Fischer, policy director at Better Markets and a former senior SEC official during former President Joe Biden's administration.
Another concern is that the tokens could end up in the hands of bad actors overseas using loopholes in blockchain technology to skirt regulatory oversight in the U.S.
Austin Campbell, a crypto expert and former banker who is now a professor at the NYU Stern School of Business, warned that tokenized securities could potentially end up on platforms that don't follow strict know-your-customer policies. That raises the risk that sanctioned entities overseas operating on crypto platforms could own the tokens.
"You can't pay a dividend when you don't know who owns the token, because it might be the North Koreans," he said. "It opens a Pandora's box."
Larry Tabb, director of market structure research at Bloomberg Intelligence, said tokenization of stocks has a number of benefits, including more rapid settlement of trades.
"Speeding settlement allows traders and investors to more effectively control their cash and collateral," he wrote in a report Thursday. "Cash from the execution of one trade can be immediately transitioned to another use."
Joe Saluzzi, a partner at Themis Trading, a Chatham, New Jersey, brokerage firm, said he has asked a number of clients about their interest in trading in the 24/7 markets that tokenized securities can provide. None were.
"Nobody is asking for this," he said.
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