Tokenization is coming to America, said Robinhood CEO Vlad Tenev after the SEC announced its innovation exemption last week, and it seems that the markets have viewed this development favorably.
Bitcoin and Ethereum have risen by more than 10 percent, and Uniswap’s UNI token, a protocol that appears poised to become a major venue for trading tokenized stocks, surged by over 30 percent in the days that followed.
Although the Securities and Exchange Commission (SEC) has indeed approved the tokenization of stocks in America, most existing stock tokens do not fall under the new rules.
The new five-year innovation exemption issued by the commission creates a pathway for certain venues to trade tokenized stocks on the blockchain without registering as a securities exchange, and for third parties to tokenize stocks, but only under specific conditions.
Tokens must provide owners with the same rights and privileges as the underlying stocks and trading venues that are necessary for users and groups of licenses.
Not all tokenized stocks are created equal. A token may look like a stock and track the stock’s price without providing shareholder rights to the stock. Under the new rules, this is classified as a synthetic stock and is not compliant.
This means that some of the largest players in the industry may already have a head start, while others will have to catch up.
SEC’s understanding of tokenization is narrow
The SEC order from September 17 grants certain platforms a temporary exemption from the registration requirement as an exchange when trading tokenized stocks through permitted liquidity funds.
In other words, the agency has opened a trading lane for stocks on the blockchain, but it is quite specific, and the token itself becomes as important as the trading venue.
To qualify, a tokenized stock must have the same dividends and voting rights as the underlying security. Although a third party can tokenize a stock without being connected to the issuer, the issuer has the opportunity to revoke the token before it can be traded.
This excludes synthetic exposure, which is bad news for Robinhood’s stock tokens and Kraken’s xStocks in their current forms.
SEC Commissioner Hester Peirce emphasized that the exemption covers one specific model, not every possible way of trading tokenized securities, although she stated that the SEC is open to other models beyond the current structure.
Products Closest to SEC’s Model
Coinbase’s stock tokens are on the horizon. On September 14, CEO Brian Armstrong stated that the company has set a standard with its tokenized stocks, as they are not synthetic or debt instruments, but rather real securities with full backing, which can be redeemed for underlying stocks, with integrated dividends and ‘soon’ voting rights.
However, Coinbase’s current offering of tokenized stocks is aimed at customers outside the U.S., and its exchange infrastructure is built around a centralized order book. The SEC exemption is built around platforms that provide permitted AMM (automated market maker) liquidity funds. Coinbase operates the base blockchain, so it has options in that regard.
Ondo launched tokenized U.S. securities in June, with underlying stocks held in traditional custody, and the token represents the investor’s rights on the blockchain.
It also acquired Oasis Pro, which includes a broker-dealer firm registered with the SEC, ATS, and a transfer agent, with infrastructure on both the traditional and blockchain sides of the market.
Peter Curley, head of legal affairs at Ondo, says that the SEC exemption favors exactly the model they have already proven: custody, rights-based, with real shareholder rights and corporate actions that transfer to the holder.
Both Coinbase and Ondo have parts of the infrastructure that the SEC seems to want. Neither can assume that their existing structure meets the requirements without some tweaking.
Uniswap’s Permitted Pools Could Open Doors
The SEC exemption is specifically designed around permitted AMM liquidity funds, which seems like good news for Uniswap.
The protocol introduced Permissioned Pools for the v4 version of the platform in July, allowing trading of regulated assets through AMMs with compliance enforced directly on the blockchain.
Although this does not make Uniswap a licensed platform under the SEC, its v4 infrastructure could be utilized by operators building it, as Permissioned Pools allow issuers to control who can trade or provide liquidity, which aligns with SEC requirements.
Permitted access requires Know Your Customer (KYC) verification, record-keeping, public notices, and transaction transparency.
If this infrastructure can be linked to shareholder rights and the regulatory infrastructure needed to trade U.S. securities, Uniswap potentially has a framework that could be adapted to the SEC model.
Robinhood Has Users, But Not a Real Product
Robinhood already has around 200 stock tokens traded on the Robinhood Chain, which Tenev described as one-to-one backed and fully DeFi compatible.
However, the head of research at Four Pillars, Jaewon Kim, pointed out that the SEC’s order excludes synthetic exposure, which excludes products like Stock Tokens and Kraken’s xStocks.
Robinhood’s stock tokens are tokenized debt securities issued by Robinhood Assets (Jersey) Limited. This means they provide economic exposure to the underlying stocks but do not grant holders legal or beneficial rights. They are also not registered under U.S. securities laws and are not available to U.S. citizens.
Yet, while Robinhood’s existing product does not comply with SEC rules, its distribution and blockchain infrastructure could give it a significant advantage if it manages to adapt its model to the new requirements.
Kraken’s xStocks are fully backed by underlying stocks but also do not provide holders with the same rights as conventional stocks. Being backed by stocks is not enough to qualify for this exemption.
Bryan Choe, head of research and operations at RWA.xyz, a market intelligence platform for tokenized real-world assets (RWA), says that most existing tokenized stock products are currently sponsored by third parties, but he expects this to change in the next 12 months.
– We expect that most products will transition to issuer-sponsored models – adds Choe, stating that the exemption ‘aligns token issuers with stock issuers’ and could bring greater balance between different issuance models.
Five Years to Prove Tokenized Stocks Are Actually Better
The SEC describes the exemption as temporary, and Chairman Paul Atkins says that the five-year period will allow the market to ‘develop’ while the commission ‘assesses future rulemaking.’
Beyond which company will secure the first qualifying spot, the real test is whether tokenized stocks will even take off.
As Curley states, investors ultimately need to get something ‘faster, cheaper, or more useful than a conventional brokerage position.’ Questions have already been raised about whether the fragmented liquidity of stock tokens will provide good prices or a decent user experience.
The exemption could enable 24/7 trading, fractional ownership, faster settlement, chain compatibility, and shareholder rights. But at the end of the day, these advantages matter only if investors truly care.
