Author: William Peaster

Translation: Deep Tide TechFlow

Deep Tide Guide: The SEC has issued the first legal pass for on-chain AMMs to trade real US stocks with a five-year exemption. The point worth noting is not how relaxed the exemption itself is (it is, in fact, heavily constrained) but that US regulation has finally shifted from "calling for a crackdown" to "drawing a compliant runway," which is a signal worth studying carefully for practitioners and investors.

This morning, the SEC responded for the first time to the crypto industry’s surge in tokenized stocks in offshore markets: a five-year exemption allowing licensed automated market makers (AMMs) to trade real, rights-attached US stocks under federal securities laws.

This order, termed "innovative exemption" by the SEC, comes at a crucial time, just two days after Congress's own crypto market structure bill, the Clarity Act, was defeated in the Senate.

What’s in the Order

First, this order establishes a standard that clarifies what constitutes a "Tokenized Securities Trading Venue" (TSV), specifically a trading venue built around licensed AMM liquidity pools, which may be exempt from the legal definition of "exchange."

Secondly, the order exempts liquidity providers within TSV pools from the definition of "dealer." Of course, traditional brokerage firms entering TSV trades must still fulfill all obligations, as this exemption only pertains to trading venues and their liquidity providers, not to brokers routing orders to those venues.

These classifications and protections take effect immediately, continuing the SEC's recent trend of increasing clarity around the crypto space. Just a few months ago, the agency collaborated with the CFTC to release milestone guidance in the form of a token classification framework.

It is noteworthy that under this new order, a TSV is only eligible to be considered a TSV when facilitating the trading of true 1:1 tokenized US stocks (National Market System, NMS stocks), and these tokens must provide the same rights as real stocks, such as dividends and voting rights. Synthetic assets or derivatives will not qualify.

There are also additional conditions: TSVs must operate on permissionless public chains with auditable smart contracts; they must comply with OFAC regulations; there must be limits on trading volume and code quantity; before listing tokens of unrelated third-party stocks, issuers must be notified and await potential vetoes.

Exceeding any of these aspects will result in the TSV losing its exemption status.

Unresolved Issues

This new exemption system is naturally not intended for centralized exchanges that have capital and users and could register normally but wish to avoid compliance hassles. It is designed for decentralized, on-chain platforms, such as Uniswap-style liquidity pools, rather than Coinbase-style order books.

Its scope is also narrow: this order does not affect offshore synthetic asset markets and will not push them out of the market. They will continue to operate as usual, and in the meantime, there is now an additional onshore pathway for compliant, rights-attached trading.

However, the biggest challenge this model faces at the operational level is that the entire system is based on licensing. Each TSV must set thresholds, liquidity pools must be whitelisted, and scales must remain within parameters, among other requirements. In contrast, projects like Robinhood's Stock Tokens, Backed, Dinari, and xStocks do not have such strict measures; you only need a wallet to trade.

In other words, the SEC is betting on an unproven proposition: a compliant, licensed, KYC-required system can outperform much simpler offshore alternatives in competition. I am personally skeptical, but perhaps things will develop in layers. Perhaps the offshore market will continue to serve as the main battleground for retail investors, while TSVs may dominate and succeed through institutional adoption.

However, the issuers' veto power itself is also a variable. Perhaps the offshore synthetic assets have already frustrated issuers enough that they will openly embrace legitimate, rights-attached real tokens. Or perhaps everyone wants as much control as possible, leading to frequent vetoes on TSV listings, making the entire system difficult to sustain.

But whatever happens next, this new order itself is significant, especially when contrasting it with the SEC's performance during the previous Gensler era. Its timing is also critical: just days after the failure of the Clarity Act, it provides a potential pathway for the United States toward more enduring crypto regulations.

Whether TSVs can overcome their limitations and capture significant trading volume will not have answers in the foreseeable future, as this system needs time to mature. But at the very least, the SEC proposing this solution is encouraging, indicating that the commission is directly working to positively clarify the rule boundaries for the onshore front of the crypto industry. Bullish.