What will the five-year exemption change from exchanges to liquidity pools?

Written by: ChandlerZ, Foresight News

On September 17, the U.S. Securities and Exchange Commission released a statement on innovation exemptions, approving a temporary conditional exemption ("innovation exemption") that allows limited trading of tokenized NMS stocks on specific chain trading venues (tokenized securities trading venues, referred to as "TSV").

NMS stocks primarily cover listed stocks included in the U.S. national market trading reporting system and certain exchange-traded products. This arrangement allows eligible securities to enter on-chain funding pools, and the platform must set trading access requirements, limit the number and size of tradable securities, and accept ongoing information disclosure requirements.

The official statement indicated that these exemption measures will expire five years after publication. The order seeks public opinion to determine whether to modify the exemption measures and potential subsequent actions.

U.S. SEC Chairman Paul S. Atkins stated regarding this exemption regulation, "We are taking an important step to facilitate on-chain trading of certain tokenized stocks within legal authority through the 'innovation exemption,' thereby advancing U.S. capital markets into the digital age." At the same time, he emphasized that this exemption is a transitional measure, and long-term rulemaking must follow to provide a continuous and effective regulatory framework for the on-chain market.

Stocks entering the funding pool, who has received the exemption?

According to the announcement, two types of exemptions have been clarified.

The first type applies to tokenized securities trading venues (TSVs). The U.S. SEC provides an applicable path for TSVs under the general exemption authority of Section 36 of the Securities Exchange Act of 1934. This type of venue is responsible for providing one or more automated market-making funding pools and determining the access criteria for participants; upon meeting the criteria, they can obtain a temporary exemption under the law's definition of "exchange."

The second type applies to specific liquidity providers, who use their own funds to provide liquidity for tokenized stocks and may quote or commit to invest capital for clients. They can obtain an exemption under the definition of "dealer" when meeting the criteria.

Automated market makers provide trading conditions through programs, and investors transact with assets pre-deposited in the funding pool. U.S. SEC Commissioner Hester Peirce added in a statement that the acceptable pricing methods include external price sources and market data, and the platform does not need to uniformly use the common constant product formula of the crypto market.

This has specific differences from the previously approved Nasdaq plan. On March 18, the U.S. SEC approved amendments to Nasdaq's relevant rules, allowing qualified tokenized securities to use the same security identification code and trading code as traditional securities, trade within the same order book at the same priority level, and settle tokenized forms through the Depository Trust Company (DTC). This exemption further accommodates on-chain funding pool trading, and platforms can design business around the automated market-making mechanism.

Tokenized stock innovation exemption does not cover synthetic products; must ensure dividends and voting rights

Paul Atkins clearly stated that venues applicable for the exemption must belong to U.S. entities, comply with sanctions imposed by the U.S. Department of the Treasury's Office of Foreign Assets Control, and set trading access standards. Smart contracts must be public, auditable, and deployed on a public, permissionless distributed ledger.

Public blockchains allow external viewing of contracts and transaction records, and the venue is still responsible for screening participants who can enter the funding pool; wallets that do not have access cannot obtain trading qualifications merely by connecting to the public chain.

For listed assets, the platform must verify that token holders enjoy the same rights as traditional stocks of the same kind, including dividends and voting rights. Synthetic products tracking stock prices through derivatives and other structures are not included in this arrangement. According to these conditions, merely having price indexing or underlying stock reserves is not sufficient to prove a product meets exemption requirements.

Third parties may still participate in stock tokenization, but the original stock issuers have the right to object. For tokens created by unrelated third parties, the venue must notify the listed company in writing in advance, giving them the opportunity to object. If the listed company raises an objection, its securities cannot be traded on that venue.

The U.S. SEC's staff statement in January this year already distinguished between issuer-led and third-party-led securities tokenization and reminded that third-party arrangements may introduce additional rights structures and counterparty risks. The requirements for shareholder rights and issuer objection rights will directly affect which stocks the platform can introduce and whether existing token products can continue to enter the U.S. market under the original legal structure.

On-chain trading must also respond to trading halts in traditional markets; when the underlying stock is halted on major exchanges, the relevant tokenized stocks must also stop trading. Atkins emphasized that the anti-fraud and anti-manipulation provisions of federal securities law fully apply to securities activities in these markets.

What will the five-year exemption change?

Allowing stocks to transact in the funding pool means the same securities may appear simultaneously on traditional order books and different on-chain pools, giving investors more trading access while needing to face various quotations, depth, and execution conditions differing across locations.

The Securities Industry and Financial Markets Association (SIFMA) had previously expressed concerns about this. In testimony before Congress on March 25 of this year, SIFMA's Chairman and CEO Kenneth Bentsen stated that carefully designed exemptions could help regulators observe new businesses, but if obligations typically borne by traditional intermediaries are waived solely because of the use of distributed ledgers, it may lead to regulatory arbitrage, dispersing liquidity to mutually isolated funding pools, harming price discovery and best execution.

Regarding around-the-clock trading and instant settlement, Reid Noch, Vice President of Electronic Trading at TD Securities, noted during an analysis of the NYSE tokenization platform plan in February that institutional buy-side interest in instant settlement is limited by pre-funding requirements, and they may not be eager to participate in weekend trading. He anticipated that early activity would likely come more from retail investors, while institutions may require brokers to provide short-term financing.

The U.S. SEC requires that observable data be retained. According to Commissioner Mark Uyeda, the number of securities and transaction volume are capped and calibrated according to the tiered mechanism governing price fluctuations of U.S. individual stocks. The platform must also regularly disclose transaction prices, quantities, times, funding pool addresses, end-of-day pool sizes, and daily transaction volumes in U.S. dollars, while fulfilling record-keeping and technical security requirements.

This data can be used to compare on-chain transactions with price deviations in traditional markets, funding pool depth, and trading performance during market volatility. Platforms must also disclose their own operational and related party transaction activities, facilitating external identification of conflicts of interest.

Peirce stated in the same-day announcement that the exemption covers a specific on-chain trading model, and the U.S. SEC is still willing to discuss other models. It will not preemptively determine that participants using the exemption necessarily belong to an exchange or broker-dealer. For platform builders, the five-year period provides a window for conducting business and submitting operational data; a permanent regime still requires subsequent rulemaking. The U.S. SEC has solicited public opinion, and Uyeda specifically invited market participants to submit operational metrics, case studies, and failure analyses as a basis for adjusting exemptions and formulating long-term rules.