The word doing the work here is "exchange." Under the Securities Exchange Act of 1934, a venue that brings buyers and sellers of stock together is an exchange, and being an exchange carries a large body of obligations. On September 17 the SEC said that a particular kind of venue, for five years, is not one.
What was issued
Not a rule. An order: "temporary, conditional exemptive relief to Tokenized Securities Venues each a 'TSV' from the definition of 'exchange' in the Securities Exchange Act of 1934 (Exchange Act) to trade tokenized National Market System (NMS) stock using innovative permissioned automated market makers and liquidity pools (together 'AMM Liquidity Pools')."
What a TSV does, in the Commission's description, is bring buyers and sellers of tokenized NMS stock together "by: (1) providing one or more AMM Liquidity Pool(s) for permissioned participants to interact and agree to terms of a trade and (2) setting standards for persons to access trading on such AMM Liquidity Pool(s)."
Chairman Paul S. Atkins framed it as a first step: "The Innovation Exemption, while temporary, would allow TSVs to trade tokenized NMS stock in a permissioned environment today while the Commission considers the need for additional action to facilitate onchain trading."
The conditions, which are the substance
An exemption is only as meaningful as what it is conditioned on. The SEC lists six, and they are not decorative:
- Size limits. Tokenized NMS stocks on a TSV "are subject to limits on the number of symbols and volume traded".
- The token must be the share. A TSV "must verify that the tokenized NMS stock made available for trading on the TSV provides holders the same rights and privileges as does traditional NMS stock of an equivalent class".
- The issuer gets told, and gets to object. Where a third party did the tokenizing, the TSV "must provide written notice and an opportunity to object to the issuer of the underlying NMS stock".
- The code is public. "Smart contracts used by a TSV must be auditable, public, and deployed on a public, permissionless distributed ledger".
- It stops when the stock stops. A TSV "must stop trading in a tokenized NMS stock concurrently with any stoppage of trading in the underlying NMS stock on the primary listing exchange".
- It says what it is doing. A TSV "must provide public notice about its operations, trading activities, and the trading activities of its affiliates on the TSV."
The fifth condition is the one that will be tested first. A trading halt exists so that everybody stops at once; a venue that kept trading a tokenized share through a halt in the ordinary share would be the exact thing this condition forbids.
A second exemption, for the people supplying the liquidity
The order, the Commission says, "also will temporarily grant a conditional exemption from the definition of 'dealer'" to liquidity providers in a TSV's AMM pool who "supply liquidity in the form of tokenized NMS stock using proprietary capital" — including where they do things that otherwise look like dealing, "such as quoting pricing to customers or entering into agreements to provide committed capital."
Two definitions, then, are switched off in the same order: exchange for the venue, dealer for the people filling it.
Two dates, one of which does not exist yet
"The exemptions are set to expire five years after publication." That is a real clock, and it starts on a publication that has not happened: the order "will be published on SEC.gov and in the Federal Register."
The comment window is the same shape: "The order solicits public comment about possible modifications to the exemptive relief and potential next steps," with no closing date stated in the announcement.
This is the second time in two days that the Commission has attached a public comment period to a date nobody can yet write down — the September 16 proposal to rescind Rule 14a-8 runs 60 days from its own Federal Register publication, which also had not occurred. In both cases the useful action is not to wait for a deadline but to watch for the printing that creates one.
What is actually new here
Tokenized stock has mostly been discussed as a question of whether the law allows it. This order does not answer that. It suspends two definitions for five years, attaches conditions to the suspension, and asks for comment on whether the suspension is the right shape — with the Commission's own Director of Trading and Markets, Jamie Selway, saying "The division stands ready to work with interested parties seeking to operate a TSV and field questions from investors and market participants."
Five years is long enough for a market to form around an exemption. What happens at the end of it is the question the comment file is for.