SIFMA Urges SEC to Reject Crypto Tokenized Stocks

SIFMA has formally requested the SEC to reject applications from crypto companies seeking to offer tokenized equities through specific exemptive relief. The trade association expressed concerns that such actions could compromise transparency and regulatory safeguards.

Crypto companies have been seeking no-action or exemptive relief from the SEC to offer tokenized stocks. No-action relief would mean that the SEC staff would not recommend punitive action against the companies for selling these products.

In response, SIFMA sent a letter to the SEC’s Crypto Task Force, expressing alarm over these developments. The association emphasized that these policy issues are too significant to be addressed solely through immediate no-action or exemptive requests and urged the SEC to reject such requests.

SIFMA advocated for a more transparent process involving public comment and broader industry engagement, rather than relying on no-action or exemptive relief to launch these products.

This move by SIFMA follows their previous concerns about IEX’s proposal to open a new options trading site. They had asked regulators to thoroughly evaluate whether the plan meets standards for market fairness and transparency.

IEX proposed an options exchange with a 350-microsecond pause on trades, aimed at preventing very fast traders from exploiting small price differences. SIFMA, representing broker-dealers, investment banks, and asset managers, argued that this setup could potentially harm investors.

According to SIFMA, brokers are required to send orders to the exchange displaying the best price. However, under IEX’s plan, these displayed prices might disappear before the trade is executed, potentially leaving customers with less favorable deals.

IEX’s chief market policy officer, John Ramsay, countered that the SEC and Federal Court have established that IEX’s innovations help investors and do not harm them.

SIFMA also raised questions about whether firms need to become members of the Financial Industry Regulatory Authority and how investors would be protected, as well as whether the SEC would be able to oversee unregistered entities.

Several firms and individuals have submitted written input to the SEC’s Crypto Task Force over the past several months. The task force, led by SEC Republican Commissioner Hester Peirce, was established in January.

Some crypto companies, such as Coinbase and Kraken, have already started offering tokenized stocks, allowing investors to trade traditional stocks on the blockchain. This puts them in direct competition with more traditional financial brokerages. Kraken has expressed interest in dealing stocks using tokens in regions such as Europe, Latin America, Africa, and Asia.

The SEC is currently reviewing dozens of proposals for crypto exchange-traded funds, including those tracking SOL, XRP, and DOGE. Reports suggest that the SEC is considering a “generic listing standard” for these ETFs, which could expedite the clearance process by bypassing the usual 19b-4 process led by exchanges.

If the SEC grants permission to crypto companies like Coinbase and Kraken to offer tokenized stocks, it could significantly alter the competitive landscape of the financial industry. This development would enable traditional stocks to be traded on the blockchain, potentially disrupting the market dynamics and challenging established financial brokerages.