A committee that advises the U.S. Securities and Exchange Commission has recommended that the agency move forward with a token securities policy that would allow traders to eliminate the type of intermediate settlement that Wall Street investment firms have relied on for decades.
The SEC’s Investor Advisory Committee on Thursday voted to recommend narrow exemptions for blockchain-based innovation for stock trading, provided that the activity is accompanied by mandatory disclosures, routine external oversight and “the requirement that trading in tokenized equity securities seeks to ensure that all investors receive the best terms for their orders.”
These crypto assets still meet the definition of securities under the law, as SEC Chairman Paul Atkins has regularly argued, meaning the activity requires safeguards parallel to those in the traditional system. Atkins said his agency is working on developing formal regulations on tokenization. This work now has the support of a formal recommendation from the committee, whose members include veterans of large trading companies, institutional investors and academics.
The traditional approach to stock trading uses brokers, transfer agents, and centralized settlement databases and can take a day or more to execute, but by placing that same security on-chain, “delivery of the tokenized security and payment can occur as a single transaction, with ownership records directly integrated into a single blockchain.”
The group told the commission that this new approach is not without risks:
“The most significant risk associated with tokenizing equity securities is that these reforms or granting exemptions could introduce new risks that investors do not understand and impose higher costs that outweigh the benefits of tokenization,” according to the recommendation document approved by the committee.
In his remarks Thursday, Atkins praised the committee for its “recognition that tokenization can improve settlement efficiency, reduce settlement risk, and eliminate unnecessary intermediaries.”
“I expect the Commission will soon consider an innovation exemption to facilitate limited trading of certain tokenized securities with a view to developing a long-term regulatory framework,” he said.
