The US Securities and Exchange Commission (SEC) Crypto Task Force is considering issuing an exemptive order to let companies deploy securities tokenization. SEC commissioner Hester Peirce disclosed this in a speech at the SEC’s 31st International Institute for Securities Market Growth and Development.
According to Peirce, who heads the SEC Crypto Task Force, the potential order could allow firms to use digital ledger technologies (DLT), which also refers to blockchain for issuing, trading, and settling securities without complying with some SEC registration requests. She said:
“The SEC’s Crypto Task Force, informed by a February request for comment, is considering a potential exemptive order that would allow firms to use DLT to issue, trade, and settle securities.”
Peirce noted that any firm that wants to operate an automated market system for tokenizing securities currently has to comply with the SEC Regulation National Market System. This usually entails registering as an exchange, broker-dealer, or clearing agency.
However, she admitted that not every firm may want to commit to the resources required for this registration, especially because there are few tokenized securities. This could also prevent companies from issuing tokenized securities as there are not many venues where they can be traded.
In order to solve this problem, the SEC commissioner believes that an exemptive order could allow companies and financial institutions to try out tokenization while the SEC works on comprehensive rules and modifications to existing regulations to enable tokenization.
The proposed SEC exemption will be conditional
Meanwhile, Pierce explained that the exemption would be conditional with any entities that qualify expected to comply with market integrity rules to prevent manipulation and fraud. Such firms may also be required to provide disclosures to users about their products and risks, including technological risks, while being subject to SEC monitoring.
Interestingly, she hinted that crypto exchanges may be able to participate and qualify for the exemption; However, they would have to include disclosures about their custody arrangements and other risks.
The proposed exemption aligns with Pierce’s previous calls for the US to implement a regulatory sandbox similar to other countries. This will allow companies to test innovative products and services in the financial markets without full compliance, which is an approach focused on balanced regulations. She said:
“Enabling firms to deploy new products and services in a streamlined fashion contributes to balanced regulation.”
While she acknowledged the risks, she noted that there would be some restrictions to mitigate them for investors and the market. Potential limitations include the number and type of tokenized securities or even trading volume.
However, Pierce admitted that the potential exemption is still a work in progress and reflects her views, not necessarily that of the regulator. Thus, she called for feedback from market participants and all stakeholders on the right way to develop commercially feasible solutions that give investors access to emerging technologies for securities trading while still protecting their interests.
She further advocated for cross-border collaboration, noting that regulators globally will benefit from seeing how products and services work in different environments. To achieve this, she wants collaboration to let participants in foreign sandboxes test their products in the US while regulators globally also share information.
Tokenization part of the SEC focus
Meanwhile, Pierce mentioned in her speech that the tokenization of traditional securities is one of the areas that the SEC is looking to better regulate as it changes its approach to the crypto industry.
This represents a welcome development, particularly as many financial institutions have highlighted its potential for the capital markets. So far, tokenization efforts remain in the early stages, with US treasuries being the biggest tokenized asset class.
However, most experts believe the tokenized treasuries are only the start, and the long-term goal is for securities to become tokenized. BlackRock chairman Larry Fink identified tokenization as what will make financial products more accessible for investors.
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