The U.S. government under President Donald Trump is planning to allow securities to be traded in digital or tokenized forms, potentially marking a major turning point for the U.S. stock market as this administration continues to push for deregulation in the crypto sector.
The U.S. Securities and Exchange Commission (SEC) plans to announce an Innovation Exemption this week, according to Bloomberg, which would pave the way for trading shares as tokens, known as Tokenized Stocks.
Surprisingly, the SEC appears likely to permit trading of tokens that are not backed or approved by the actual stock-issuing companies. These tokens, called Third-Party Tokens, represent a new financial instrument that speculates on the price direction of the real company's shares.
These tokens can be traded on decentralized crypto platforms, or DeFi, although some tokens may not grant shareholder rights such as voting or dividends. Under the SEC's proposal, platforms unable to provide such rights would be barred from listing these tokens.
This move is one of the most significant regulatory tests to determine whether stock trading can transition into the crypto world without the protections of the traditional capital market system.
Tokenization, the process of converting real-world assets into digital tokens, has become one of the hottest trends in crypto over the past year.
This concept covers digitizing various assets including stocks, bonds, real estate, and private loans. Supporters argue the technology will increase financial market efficiency by enabling near-instant settlement and 24/7 trading availability.
Previously, the SEC categorized tokenized securities into two types:
However, if the SEC allows third parties to create tokens of listed company shares without the company's consent, some see this as a challenge and question whether such a parallel market can operate outside some regulatory frameworks.
Typically, tokens traded on DeFi platforms allow users to buy, borrow, or lend digital assets via automated programs with minimal intermediary involvement. If Third-Party Tokenized Securities referencing listed company shares emerge on DeFi, users would be able to transact these tokens similarly to other crypto tokens.
Last year, several DeFi platforms suffered cyberattacks resulting in losses of hundreds of millions of U.S. dollars, highlighting the vulnerability of this still nascent technology.
Allowing tokenized securities trading on DeFi also raises concerns about further fragmentation of the stock market, as assets referencing the same stock could be traded simultaneously across numerous crypto platforms.
Brett Redfearn, CEO of Securitize and former SEC Director of Trading and Markets, said, "If third parties can create tokens of companies like Apple or Amazon without involving the stock-owning companies, there is almost no limit to how many variations of tokens for the same company’s stock could exist."
Bloomberg also reported that some SEC officials oppose allowing trading of Third-Party Tokenized Securities, proposing that third parties should obtain consent from the stock-owning company before issuing tokens referencing its shares.
Meanwhile, major financial industry players such as Citadel Securities and SIFMA have opposed this deregulation, warning that excessive exemptions for tokenized stocks could weaken key measures like KYC, anti-money laundering (AML), and investor protection systems.
In December, Citadel stated that even with innovation exemptions, basic protections essential to financial market integrity should not be neglected.
Source:Bloomberg
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