SEC opens door to tokenised US stocks with strict trading caps

Tokenised stocks have long been considered a clear connection between traditional finance and crypto. The US is now beginning to open that door.

The SEC recently introduced an Innovation Exemption, granting certain platforms a five-year window to trial the trading of US stocks using blockchain. What does this entail in practice?

In essence, rather than buying Apple shares through traditional market infrastructure, investors could eventually hold a blockchain-based digital token representing that same share.

The main idea is to bring crypto's technology into traditional markets, potentially enabling faster settlement and more flexible trading. It seems straightforward.

Not quite. The SEC has put strict guardrails around the experiment.

The framework limits the number of stocks platforms can offer and the amount of trading activity. Initially, platforms can offer up to 75 of the largest US stocks, with trading capped at 0.25% of each stock's average daily volume. Smaller stocks may have slightly more room but still face restrictions.

Robinhood believes these limits could become a problem quickly.

The firm's crypto chief, Johann Kerbrat, told The Block the company's existing stock token business outside the US is already seeing enough activity that it could bump against some of the SEC's thresholds. It is an important caveat to note.

In context, Robinhood's current stock tokens are offered outside the US and structured differently from the SEC's proposal. It is not an apples-to-apples comparison.

That said, the broader point stands.

The SEC is clearly willing to let tokenised stocks develop in the US, but on its own terms, which for now means slowly and under controlled conditions.

This does not mean things might not change. SEC Chair Paul Atkins described the exemption as a bridge towards more permanent rules rather than the final destination. While the brakes are on now, the SEC might release them in the future.

The conversation is shifting from whether stocks can move to blockchain to whether regulators can keep up if investors start using them.