WFE Warns SEC Against Broad Tokenized Stock Relief

WFE Raises Concerns Over SEC's Potential Tokenized Stock Exemptions

The World Federation of Exchanges (WFE) has expressed concerns regarding the U.S. Securities and Exchange Commission's (SEC) consideration of granting broad regulatory exemptions to cryptocurrency companies launching tokenized stock offerings. In a letter addressed to the SEC, the WFE stated its alarm over the increasing prevalence of brokers and crypto-trading platforms offering what are marketed as “tokenized US stocks.”

The WFE emphasizes that these products, often presented as stock tokens or equivalents, do not actually represent ownership of underlying shares. This, the organization argues, introduces a complex web of interconnected risks.

Several crypto exchanges are exploring the possibility of offering tokenized stocks within the US, aiming to provide investors with exposure to publicly traded companies without requiring them to directly own shares. These offerings are often promoted for their faster settlement times and the ability to trade outside of traditional market hours.

However, crypto companies that are not registered with the SEC as broker-dealers would need to obtain an exemption from the agency to offer these products. SEC Chair Paul Atkins has suggested he is open to granting such exemptions.

WFE Advocates for Targeted Exemptive Relief

While the WFE, which includes major exchanges like Cboe and Nasdaq among its members, supports the SEC’s use of exemptive relief in principle, it cautions against its broad application. The organization believes that such sweeping exemptions could pose significant risks to both investors and the overall integrity of the market.

“We simply believe that this authority is most effective when exercised in a targeted manner and not applied as a means to circumvent or fast-track exemptions to longstanding regulatory requirements,” the WFE stated.

The WFE acknowledges that tokenization likely represents a natural evolution in capital markets and affirms its support for innovation. However, the organization stresses that this evolution “must be done in a responsible way that does not put investors or market integrity at risk.”

The WFE suggests that the SEC should consider initiating a public rule filing to solicit feedback from stakeholders rather than pursuing large-scale changes through exemptive relief. As an alternative, the Commission could explore the creation of a regulatory sandbox or other innovation facilitator.

Previously, the WFE has urged the SEC, the European Securities and Markets Authority (ESMA), and the International Organization of Securities Commissions (IOSCO) to implement stricter oversight of tokenized stocks, arguing that they currently lack adequate investor protections. The SEC is currently weighing the possibility of granting exemptions for tokenized stocks.

Atkins, a former crypto lobbyist, has indicated his consideration of an “innovation exemption” to alleviate certain regulatory burdens for crypto firms, thereby accelerating the introduction of crypto and blockchain-based products to the market.

“An innovation exemption could help fulfill President Trump’s vision to make America the crypto capital of the planet by encouraging developers, entrepreneurs, and other firms that are willing to comply with certain conditions to innovate with onchain technologies in the United States,” Atkins stated at a meeting with crypto executives in June.

Several US trading platforms are positioning themselves to offer tokenized stocks under the current, relatively crypto-friendly SEC. Robinhood Markets began offering hundreds of tokenized stocks to European investors in June, with plans to expand the offering to the US market. This follows a similar move by Kraken the previous month.

Coinbase has also reportedly sought SEC approval to offer tokenized stocks, with its legal chief, Paul Grewal, identifying it as a “huge priority” for the crypto exchange.

Companies outside the crypto space are also becoming involved. In September, Nasdaq requested a rule change from the SEC to allow the exchange to list tokenized stocks.