The U.S. Securities and Exchange Commission has taken one of its biggest steps yet toward bringing Wall Street stocks onto public blockchains.
It has unveiled a temporary regulatory framework that will allow certain tokenized U.S. equities to trade using infrastructure borrowed directly from decentralized finance.
Former Strategy CEO Michael Saylor has described it as a “major breakthrough.”
Why it is a big deal
Tokenized stocks themselves are not entirely new. Platforms outside the United States have already experimented with blockchain-based representations of publicly traded companies.
The SEC is opening a path for actual secondary-market trading to take place using mechanisms closely associated with crypto and decentralized finance.
A TSV can provide automated market maker liquidity pools in which approved participants buy and sell tokenized shares. AMMs rely on smart contracts and pools of assets rather than the traditional order-book model used by major stock exchanges.
Even more notably, the SEC requires the smart contracts behind these venues to be public and auditable and to operate on a public, permissionless distributed ledger.
The SEC is allowing pieces of the public blockchain infrastructure developed by the cryptocurrency industry to become part of an experimental market structure for U.S.-listed stocks.
SEC Commissioner Hester Peirce and Atkins had previously floated precisely this possibility. Atkins said earlier this year that market participants should be able to experiment with trading tokenized securities through automated market makers and decentralized applications running on public, permissionless blockchains.
Under the SEC framework, tokenization is supposed to change the technological form in which the security is held and traded, not strip away the economic and legal rights attached to the underlying security.
Wall Street meets DeFi
The treatment of liquidity providers is another potentially significant change.
The SEC is also providing temporary conditional relief from the Exchange Act's definition of a “dealer” for certain participants that supply their own tokenized stocks to AMM liquidity pools.
In practical terms, the SEC is experimenting with whether a mechanism widely used to trade cryptocurrencies can also serve as part of the infrastructure for trading regulated securities.
There are major restrictions The announcement does not mean that every U.S. stock can suddenly be freely traded through DeFi.
The number of tokenized stocks available through TSVs and their trading volume will be limited.
The SEC is effectively creating a five-year laboratory in which crypto-native firms and established financial companies can test whether public blockchain infrastructure can handle parts of the U.S. equity market under regulatory supervision.