Crypto Firms Face SEC Scrutiny Over Tokenized Stocks

An industry trade group has called on the US securities regulator to reject a series of requests from crypto companies seeking to offer tokenized stocks. The Securities Industry and Financial Markets Association (SIFMA), which represents securities issuers and finance firms, expressed significant concern in a letter sent on Monday regarding reports of crypto firms submitting no-action or exemptive relief requests to allow them to offer tokenized equities or securities.

No-action relief would mean the SEC would not recommend taking enforcement action against a firm over products it launches. Exemptive relief allows the SEC to exclude some products from securities laws to test them. In the letter to the Securities and Exchange Commission’s Crypto Task Force, SIFMA argued that granting such reliefs could allow crypto firms to offer securities to the public outside of the regulatory structure established by federal securities laws, potentially bypassing critical investor protections.

SIFMA urged the SEC to reject such requests, stating that these policy questions are too important to be addressed purely through immediate no-action or exemptive requests. The group emphasized the need for a more substantive notice and comment process. This stance comes after SEC Commissioner and Crypto Task Force leader Hester Peirce indicated in May that the regulator is considering a potential exemptive order for firms using blockchain to issue, trade, and settle securities.

Peirce noted that companies looking to create platforms for tokenized securities may have to register with the SEC, which could be too expensive for many firms. This could limit the number of platforms available for trading tokenized securities. Exemptive relief, according to Peirce, could help resolve this issue by allowing firms to operate without complying with regulations that were developed before the technologies being tested existed.

Alexander Grieve, the vice president of government affairs at venture firm Paradigm, suggested that SIFMA members are motivated by a desire to protect their market position. Tokenized securities could see many more platforms offering trading on what are essentially stocks, potentially disrupting the traditional finance industry. Grieve highlighted that for every regulation topic and technological advancement, there is often opposition from incumbents, such as banks opposing stablecoins and crypto derivatives having traditional finance counterparts.

Bill Hughes, a lawyer and the global regulatory lead at blockchain software firm Consensys, agreed that SIFMA’s primary argument is procedural and reasonable. He emphasized that changing substantive rules on how retail participants can access securities should be done through notice and comment rulemaking, not through particularized exemptive relief or no-action assurances. Hughes also noted the regulatory challenges of having certain assets with one foot in the less intermediated and controlled crypto world and the other in the heavily intermediated and controlled traditional finance capital market.

Crypto exchanges Coinbase and Kraken have shown interest in launching tokenized securities trading in the US with SEC approval. Coinbase’s chief legal officer, Paul Grewal, reportedly stated that the exchange was seeking approval for “tokenized equities,” considering it a “huge priority” for Coinbase. On Monday, Kraken began offering tokenized stock trading on its platform, providing tokens fully backed by shares in major US stocks such as Apple and Microsoft. However, Kraken did not make the service available for users in the US, Canada, the EU, the UK or Australia.