SEC's Exemption Aims to Break Chicken-and-Egg Stalemate in Tokenized Markets

The U.S. Securities and Exchange Commission (SEC) is advancing a conditional exemption for tokenized securities, aiming to facilitate innovation in the cryptocurrency sector by year-end. In a speech on May 8, 2025, SEC Commissioner Hester Peirce outlined a potential regulatory framework that would allow firms to utilize distributed ledger technology (DLT) for issuing, trading, and settling securities. The initiative, under review by the SEC’s Crypto Task Force, seeks to address barriers to market experimentation while ensuring investor protections. The exemption would operate as a “regulatory sandbox,” enabling firms to test DLT-based solutions in a controlled environment.

The proposed exemption is designed to resolve the “chicken-and-egg” problem in tokenized securities markets. Currently, firms seeking to automate market-making systems for tokenized assets face challenges under Regulation National Market System (NMS), which requires intermediaries to register as broker-dealers, exchanges, or clearing agencies. Without sufficient trading venues, companies are hesitant to tokenize securities, while market makers are reluctant to invest in infrastructure for a nascent asset class. By temporarily exempting qualifying entities from certain registration requirements, the SEC aims to create a viable ecosystem for innovation.

Key conditions for the exemption include robust disclosures to users about a platform’s operations, risks, and conflicts of interest, particularly related to smart contracts. Entities would also need to comply with recordkeeping and reporting standards, undergo monitoring by SEC staff, and maintain adequate financial resources. Trading volume and the number of tokenized securities listed or traded may be capped initially, with the SEC retaining the ability to raise these limits for firms demonstrating successful performance.

Commissioner Peirce emphasized that the exemption aligns with the SEC’s mandate to foster competition and investor confidence. “Well-balanced regulation” is essential to ensure markets remain dynamic while protecting participants, she stated. The proposal reflects the SEC’s broader effort to modernize rules for digital assets, building on feedback from a February 2025 request for public comment. The conditional approach draws inspiration from regulatory sandboxes in other jurisdictions, where firms can innovate under controlled conditions.

The exemption’s potential impact extends beyond tokenized securities. By enabling DLT-driven settlement and clearing, the SEC could accelerate the adoption of blockchain technology in traditional markets. For instance, the use of DLT could reduce settlement times, enhance transparency, and lower operational costs. However, the SEC remains cautious about risks, including fraud, market manipulation, and systemic vulnerabilities. The Crypto Task Force will monitor participants closely, ensuring compliance with market integrity standards.

Industry stakeholders have expressed cautious optimism. While the exemption could unlock new capital formation opportunities, participants must navigate complex compliance requirements. For example, platforms would need to implement systems to verify investor accreditation and ensure transparency in tokenized asset offerings. The SEC’s focus on investor education and risk mitigation underscores its commitment to balancing innovation with safeguards.

As the SEC finalizes the exemption, it will likely engage with market participants to refine implementation details. The conditional framework represents a pragmatic step toward integrating emerging technologies into the U.S. capital markets, positioning the country as a global leader in digital asset innovation. With year-end as a target, the initiative could reshape the landscape for tokenized securities, fostering a more resilient and competitive financial ecosystem.

Source: [4] U.S. SEC Considers Conditional Exemption for Tokenized Securities (https://www.mofo.com/resources/insights/250512-us-sec-considers-conditional-exemption-for-tokenized-securities)