SEC delays "stock-crypto" innovation exemption: who is fiercely opposing it?

Original by Odaily (@OdailyChina)

Author: Azuma (@azuma_eth)

In the early hours of May 23, Beijing time, Bloomberg reported, citing sources, that the U.S. Securities and Exchange Commission (SEC) has delayed the planned launch of its “innovation exemption” program. The program was originally designed to greenlight products related to tokenized U.S. stocks. However, due to numerous concerns raised by market participants, the SEC has decided to pause its advancement.

Following this negative news, the cryptocurrency market experienced a sharp short-term decline. BTC fell below 76,000 USDT, and ETH dropped below 2,100 USDT. Tokens related to the “tokenized U.S. stocks” concept were hit even harder. ONDO quickly gave back the short-term gains it had made yesterday, which were indirectly stimulated by the “CSRC penalizing brokerages like Tiger, Futu, and Longbridge,” standing at 0.382 USDT as of press time, a 24-hour decline of 6.4%.

Innovation Exemption: Brakes Slammed at the Last Moment

Since Chairman Paul Atkins took office, the SEC has shifted away from its previously tough “enforcement-first” approach, leaning towards providing a compliant testing ground for the crypto industry.

Earlier this week, market rumors emerged that the SEC would unveil an exemption proposal as early as this week, aiming to allow trading platforms to offer on-chain token trading services for listed securities (such as NVDA, AAPL, TSLA, etc.) under more lenient regulatory conditions. Driven by SEC Chairman Paul Atkins and Commissioner Hester Peirce, this exemption was intended to provide a legal testing space for tokenized securities. The market interpreted this as a significant signal that U.S. regulators were further shifting towards supporting tokenized securities.

However, this innovation exemption, which was expected to be revealed to the public as early as this week, had its brakes slammed on urgently at the last moment. Sources revealed that the SEC has now returned the draft and has reinitiated intensive consultations with stock exchanges and other market participants.

From a "full green light" to an "emergency brake," what kind of resistance is the SEC facing? In this epic battle over "putting US stocks on the chain," who is so vehemently opposed?

The Main Opposition: Again, Wall Street

Similar to the CLARITY Act, which is also facing resistance (see CLARITY Review Suddenly Delayed: Why Is There Such Deep Division in the Industry?), leading the charge against this exemption proposal are traditional Wall Street powers, most notably Citadel Securities and the Securities Industry and Financial Markets Association (SIFMA).

Months ago, when this policy was still in the trial balloon phase, these traditional financial giants had already submitted strongly worded opposition letters to the SEC. Overall, Wall Street's core arguments against the proposal are mainly concentrated on the following three levels.

First, concerns over potential market liquidity fragmentation. Institutions like Citadel Securities warn that allowing various third parties to bypass the issuer and issue "synthetic US stocks" indiscriminately would lead to the fragmentation of US stock assets scattered across countless DeFi platforms lacking interconnectivity, depth, and price transparency. This would not bring efficiency; instead, it would make it impossible for investors to determine the actual value of their tokenized stock holdings at any given time.

Second, concerns that tokenized US stocks could threaten traditional compliance defenses. On anonymous or pseudo-anonymous public chain networks, how can one ensure transactions of these third-party tokens do not become a hotbed for money laundering? Wall Street giants argue that the current technical capabilities of decentralized platforms are simply insufficient to strictly enforce core investor protection mechanisms like AML and KYC.

Third, existing technological and legal gaps. Citing legal experts, the institutions point out that allowing an unauthorized third-party crypto platform to enable "token holders to enjoy voting rights and dividend distribution" on-chain for companies like Apple or Microsoft poses uncertainties within the current legal frameworks and technical pathways.

Reservations Within the SEC

It's noteworthy that this wave of opposition comes not only from Wall Street's "vested interests" but also includes cautious reservations from within the SEC itself.

Hester Peirce, the SEC commissioner affectionately known as "Crypto Mom" within the crypto community and a long-time ally, publicly stated on X yesterday what some might call a "defection," suggesting that the scope of this exemption should be strictly limited.

Peirce stated that what the SEC should allow are attempts by the “issuer itself or its affiliates” to digitize or tokenize their own stocks on-chain, not to let the market be flooded with synthetic assets issued by third parties outside regulatory control. In other words, the "tokenized US stocks" Peirce hopes to see should be led, authorized, or endorsed by the specific listed company (the issuer) itself and must guarantee investors equivalent rights (such as dividends, voting rights) as ordinary shareholders, rather than the derivative synthetic tokens that track the price performance of the underlying stock, which are more commonly issued by third parties in the current market.

Even Peirce, a consistently aggressive advocate for crypto innovation, chose to side with "limiting the scope of the exemption," highlighting the significant legal and compliance hurdles the proposal faces.

What Does the Future Hold for Tokenized Stocks?

This week's "pause" is undoubtedly a heavy blow to the RWA (Real World Assets) sector, which was on the cusp of a breakout. The sharp short-term decline in related concept tokens like ONDO also reflects that the market's previous expectations for "full on-chain compliance of US stocks" were overly optimistic. However, it is undeniable that regardless of the regulators' wavering stance, the trend of combining US stock assets with blockchain technology has become an irreversible torrent. In the shadow of this regulatory game, both native crypto forces and traditional Wall Street institutions are racing at full speed on their respective tracks.

• On one hand, native crypto forces are creating openings from the bottom up. Projects like Ondo, xStocks, and MSX are actively bringing US stock assets onto the chain. Meanwhile, platforms like Hyperliquid, Trade.xyz, and major CEXs are, through perpetual contracts, indirectly providing global crypto users with windows to invest in US stocks. This grassroots innovation demand is constantly pressuring regulators for clear answers.
• On the other hand, Wall Street itself is also accelerating its layout in related businesses. The Depository Trust & Clearing Corporation (DTCC) plans to officially launch limited production trading of tokenized assets in July this year, with an expansion planned for October. Nasdaq is also intensively developing a blockchain-based stock issuance framework. The Intercontinental Exchange (ICE) has chosen to cooperate with leading crypto exchange OKX to jointly advance the development of tokenized stocks and crypto-related products.

In essence, this delay of the exemption is a fierce collision between the innovative attempts of emerging forces and the defensive mechanisms of traditional powers. Based on the current progress, the SEC has not made a final decision on the revised draft, meaning the "innovation exemption" is not completely dead. However, it is foreseeable that amidst the fierce backlash from Wall Street giants and the revision of opinions within the SEC, even if this exemption eventually resurfaces, its aggressiveness and scope of application may be somewhat "watered down."

The dream of fully liberalizing "tokenized stock" trading may still have a long way to go through regulatory tug-of-war, but the door to asset tokenization has already been forced open and is destined not to close again.