SEC Set to Delay Tokenization ‘Innovation Exemption’ Again Amid Pushback

The SEC had been preparing to release at least part of its proposed “innovation exemption” alongside Friday’s now-canceled meeting on its broader “Reg Crypto” initiative.

The U.S. Securities and Exchange Commission is expected to postpone the tokenization-focused exemption again after concerns from the White House and Wall Street raised questions about its legal basis and possible effects on financial markets, according to three industry sources familiar with the discussions.

The exemption was reportedly close to being unveiled as early as Friday. It would have reduced some regulatory barriers for companies seeking to issue and trade tokenized securities on blockchain networks under existing securities laws.

The SEC had scheduled an open meeting for Friday to discuss its separate “Reg Crypto” rulemaking, which aims to establish a framework for crypto projects seeking to raise capital through token offerings. Officials were also expected to provide information about the innovation exemption during the meeting, although the exemption itself was not expected to immediately enter a formal notice-and-comment process. The agency canceled the meeting late Thursday.

One source familiar with the matter said White House officials were concerned the proposal could “kick a hornet’s nest” while lawmakers continue negotiating the Digital Asset Market Clarity Act. According to the source, the exemption could potentially make efforts to pass broader crypto legislation more difficult.

SEC staff have also reportedly been examining whether the agency has sufficient legal authority to provide such broad regulatory relief. Questions include whether the SEC has conducted adequate economic analysis and followed the necessary procedures to support the exemption. Industry participants have reportedly been told that the initiative could remain on hold until lawmakers resolve the Clarity Act.

Wall Street Raises Market-Structure Concerns

Traditional financial institutions have also pushed back against the SEC’s approach.

The Securities Industry and Financial Markets Association (SIFMA), a major Wall Street trade group representing broker-dealers and investment banks, has reportedly become one of the key groups opposing the initiative, according to an industry source. SIFMA had not immediately responded to requests for comment.

A major concern involves how blockchain-based trading platforms would operate under existing equity-market rules, particularly brokers’ obligations to obtain the best possible execution for customers.

Under the current market structure, Regulation NMS connects pricing across exchanges and generally requires brokers to execute orders at the best available protected quote. Applying those rules becomes more complicated when tokenized securities are traded through decentralized platforms or automated market makers, where prices and transaction costs can differ from those on traditional exchanges.

The SEC proposed eliminating Rule 611 of Regulation NMS, also known as the Order Protection Rule, in June. The move was widely interpreted as an effort to remove a significant regulatory hurdle for tokenized securities.

SIFMA has also argued that major changes to market structure should not be introduced through exemptions or no-action relief, which has been part of the SEC’s proposed approach to tokenization.

In a June 30 letter to the SEC, the organization argued that significant structural changes should instead go through an open process that provides the public and industry participants with opportunities to review and comment on the proposals.

An SEC spokesperson did not immediately comment on the timing of the agency’s latest crypto policy decisions.

Another Delay for the Innovation Exemption

This is not the first time the SEC has postponed the initiative.

The agency appeared ready to unveil the exemption in May after repeatedly extending its own target deadline. At the time, the proposal was thought to potentially allow issuers to create security tokens without necessarily maintaining control over the underlying securities.

That possibility raised concerns among companies that issue traditional securities because of the potential introduction of synthetic versions of those assets.

The SEC ultimately did not release the proposal. SEC Commissioner Hester Peirce later told CoinDesk that she did not expect the exemption to cover synthetic security tokens. She also said the framework was more likely to permit tokens representing digital versions of the same underlying equity securities available to investors through traditional markets.

Why the Delay Matters

The latest postponement comes as tokenization has become one of the fastest-growing areas of the crypto industry, drawing significant attention from Wall Street because of the possibility of placing stocks, bonds and investment funds on blockchain networks.

Major exchanges, including Nasdaq and the New York Stock Exchange, have announced plans to build infrastructure for tokenized securities. The Depository Trust & Clearing Corporation, a key part of the U.S. securities market, also conducted its first live production transactions involving tokenized securities last month as part of a testing program.

The potential market is substantial. Analysts at Citi have estimated that tokenized assets could reach a $5.5 trillion market by 2030.

Under Chairman Paul Atkins, the SEC has increasingly expressed support for tokenization and presented blockchain technology as a potential way to modernize financial markets. At the same time, debate continues over how traditional financial assets should move onto blockchains and how blockchain-based trading systems can operate within existing U.S. securities regulations and market-structure rules.

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