A coalition of major exchanges has formally requested the U.S. Securities and Exchange Commission (SEC) to re-evaluate the regulatory exemptions that permit cryptocurrency platforms to offer tokenized stocks. These platforms, according to the coalition, are operating without adhering to the traditional obligations and investor protections typically mandated for securities exchanges.
The World Federation of Exchanges (WFE), an organization representing prominent exchanges including Nasdaq, CME Group, and Cboe, has voiced its concerns in a letter submitted to the SEC. The letter, dated November 21st and publicly released on November 27th, highlights that these exemptions allow crypto firms to rapidly enter functions traditionally reserved for regulated exchanges.
Concerns Over Investor Protection and Market Integrity
The WFE contends that tokenized products replicating U.S. equities are being marketed to the public without the comprehensive disclosure, oversight, and investor protection standards mandated by U.S. securities law. The federation points out that these "stock tokens" can mislead investors into believing they possess the same safeguards as traditional listed shares, when in reality, they operate under significantly more lenient regulatory frameworks. This discrepancy, the WFE argues, jeopardizes the integrity of U.S. markets and increases the risk associated with platforms that offer similar products under less stringent supervision and without equivalent regulatory obligations.
While the WFE acknowledges that regulatory exemptions can serve a valuable purpose in facilitating new market structures, particularly when a product requires specific, temporary flexibility to function, it asserts that such exemptions should only be granted when consistent safeguards are maintained. The federation believes that the current expansive use of exemptions for tokenized stocks exceeds this intended purpose, thereby creating a regulatory imbalance that benefits crypto companies without enforcing exchange-level standards.
SEC Explores Regulatory Sandbox for Digital Assets
In parallel, the SEC is actively considering the establishment of a regulatory sandbox specifically for digital assets. This proposed framework would allow platforms dealing in tokenized stocks to operate under time-limited exemptions while the agency works on developing a more permanent regulatory structure. SEC officials have indicated that they are evaluating "innovation exemptions" for the upcoming year, which could permit supervised pilot programs without necessitating an immediate overhaul of the entire regulatory framework.
Previous attempts to list tokenized equities, including models associated with Robinhood through European partners, have already attracted formal scrutiny from regulators. Industry leaders, such as Kanny Lee, CEO of SecondSwap, emphasize that any future regulatory framework must mandate that crypto platforms adhere to investor protection standards equivalent to those required of traditional exchanges. This, they argue, is crucial to prevent investor confusion and avoid regulatory arbitrage.
Proponents of tokenization acknowledge its potential to broaden access to U.S. equities. However, they caution that the success of this model is contingent upon avoiding a fragmented and inconsistent market structure.