A committee advising the US Securities and Exchange Commission recommended the agency move forward with a tokenized securities policy that would allow traders to eliminate the kind of middlemen that Wall Street investment firms have relied on for decades.
The SEC’s Investor Advisory Committee voted Thursday to recommend narrow exemptions for the blockchain-based innovation for trading stocks, as long as the activity comes with mandatory disclosures, routine external oversight and “a requirement that trading tokenized equity securities seek to ensure that all investors receive the best terms for their orders.”
These cryptoassets still meet the definition of securities under the law, as SEC Chairman Paul Atkins has regularly argued, meaning the activity needs parallel safeguards to the traditional system. Atkins said his agency is working toward formal regulations on tokenization. Now this work is supported by an official recommendation from the committee, whose members include veterans of major trading companies, institutional investors and academics.
The traditional approach to stock trading involves brokers, transfer agents and centralized settlement databases and can take a day or more to execute, but by placing the same stock on the chain, “the delivery of the tokenized security and the payment can be made as a single transaction, with ownership records embedded directly in a single blockchain.”
The group told the commission that the newer approach does not come without risks:
“The most significant risk associated with the tokenization of equity securities is that these reforms or provision of exemptions may 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 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 in certain tokenized securities with a view to developing a long-term regulatory framework,” he said.
