Main Points:
- Consideration of an exemptive order to ease tokenized securities issuance
- Inspiration drawn from international regulatory sandboxes
- Proposed conditions: anti-fraud protections, disclosure requirements, recordkeeping, and monitoring
- Potential relief from broker‑dealer, clearing agency, and exchange registration
- Emphasis on balancing investor protection with technological innovation
- Plans for bilateral “sandbox” cooperation with foreign regulators
- Context: declining number of U.S. public companies and need for capital‑formation reforms
Exemptive Order to Spur Tokenization
In her May 8, 2025 speech at the SEC’s 31st International Institute for Securities Market Growth and Development, Commissioner Hester Peirce announced that the SEC is “considering a potential exemptive order” to allow firms to use blockchain technology to issue, trade, and settle securities without being subject to certain registration requirements. This order would specifically target companies operating automated market‑making (AMM) systems and decentralized exchanges (DEXs), which currently struggle to comply with Regulation National Market System (Reg NMS) and often face litigation for operating without broker‑dealer or exchange registration.
Under the proposed framework, eligible firms could avoid registering as broker‑dealers, clearing agencies, or national securities exchanges. However, they would still be bound by the Securities Act’s anti‑fraud provisions, market‑manipulation prohibitions, and certain disclosure and record‑keeping requirements. This marks a significant shift from the SEC’s prior enforcement‑heavy approach under former Chair Gary Gensler, which saw over 100 lawsuits against crypto firms.
Learning from Regulatory Sandboxes Abroad
Peirce credited her inspiration to foreign “regulatory sandbox” models, such as those in the U.K., Singapore, and Australia, where innovators can test new financial products under relaxed regulations while the authorities monitor for risk. She argued that a U.S. sandbox for tokenized securities would lower barriers to market entry and foster financial innovation, all within a controlled environment that safeguards investors and market integrity.
International sandboxes have successfully accelerated fintech adoption by granting time‑limited exemptions from certain rules, coupled with strict reporting and oversight. Peirce envisions a U.S. counterpart, where firms would agree to specific conditions—such as real‑time proof‑of‑reserves attestations for custodians, regular risk disclosures, and enhanced cybersecurity protocols—in exchange for limited relief from standard regulations.
Proposed Safeguards: Anti‑Fraud, Disclosure, and Oversight
Although details remain under discussion, Peirce outlined key conditions for exemptive relief:
- Anti‑Fraud and Market Manipulation Protections
Firms must adhere to the anti‑fraud and fair‑dealing standards embedded in the Securities Act and Exchange Act. - Enhanced Disclosure Requirements
Issuers would provide investors with clear information on token economics, smart‑contract risks, and custody arrangements. - Robust Record‑Keeping and Reporting
Participating entities would maintain transaction and order‑book records, submit periodic reports to the SEC, and undergo on‑site or remote examinations. - Financial Resource Requirements
Minimum capital or insurance thresholds to ensure operational resilience and cover potential liabilities. - Custody‑Specific Conditions
Token custodians would meet additional criteria, such as segregation of client assets, independent audits, and disaster‑recovery plans.
These safeguards aim to preserve market integrity and investor protection even as certain registration obligations are relaxed.
Potential Regulatory Relief
If approved, the exemptive order could:
- Eliminate Broker‑Dealer Registration for DEXs and AMMs
- Waive Exchange and Clearing Agency Registration for token trading platforms
- Streamline Disclosure Requirements by focusing on material, principles‑based disclosures rather than voluminous filings
- Enable Faster Time‑to‑Market for tokenized products, reducing legal and operational costs for innovators
Balancing Investor Protection and Innovation
Throughout her remarks, Peirce stressed the need for a measured approach that “balances investor protection with the benefits of cutting‑edge technology”. She warned against “inapt regulations” that predate blockchain and may be rendered obsolete by new technological capabilities. By adopting a principles‑based regulatory philosophy, the SEC can allow market participants to innovate while retaining core safeguards.
Addressing the Decline in Public Companies
Peirce highlighted a broader concern: between 2004 and 2024, the number of U.S. listed companies fell from 5,243 to 4,862. She attributed part of this decline to “excessive disclosure burdens” that divert corporate resources away from growth. Streamlining tokenized securities rules could reverse this trend by lowering the cost of capital formation and providing alternative funding channels for private firms seeking liquidity.
International Cooperation: A Two‑Way Sandbox
In closing, Peirce proposed bilateral sandbox arrangements allowing foreign firms to test tokenized securities offerings concurrently in the U.S. and abroad. Such cooperation would promote regulatory harmonization, encourage cross‑border capital flows, and cement U.S. leadership in fintech innovation. Participants would operate under joint oversight from the SEC and their home regulator, ensuring consistent investor protections while fostering global market access.
Conclusion
The SEC’s exploration of an exemptive order for tokenized securities represents a pivotal moment in U.S. capital markets. By drawing inspiration from successful international sandboxes, imposing targeted safeguards, and emphasizing a principles‑based approach, the SEC seeks to harness blockchain’s potential to reduce costs, increase market efficiency, and expand investment opportunities. If adopted, these measures could catalyze a new wave of token‑based innovation, support capital‑formation efforts, and ultimately, serve both investors and the broader economy.
