Is the SEC's "tokenized securities" exemption really good for the market?

This article is from Brian Huang

Compiled by Odaily (@OdailyChina); Translator: Azuma (@azuma_eth)

Editor's Note: On September 18 local time, the U.S. Securities and Exchange Commission (SEC) officially released an exemptive letter regarding tokenized securities. The market interpreted this move as the SEC "opening the floodgates" on policy, establishing a formal legal pathway for the trend of "stocks on-chain." Buoyed by this news, the cryptocurrency market also received an effective boost, with tokens such as UNI being viewed as direct beneficiaries, surging sharply in short-term trading.

However, is this exemptive letter really as positive as the market expects? In the early hours of September 22, Brian Huang, co-founder of the DeFi protocol Glider, published a lengthy post on X questioning the actual scope of applicability of this letter. Brian even emphasized that "the current exemption model severely lacks market demand, and no institution on the market truly meets all the exemption requirements."

The following is the original content from Brian, compiled by Odaily.

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Has anyone actually read the SEC's exemptive letter on tokenized securities? I read through this 60-page document from start to finish today, and the scope of this exemption is actually very limited.

Given the celebratory mood on X, I originally thought there would be something genuinely useful in there, but in my view, the model as currently proposed neither has sufficient market demand nor does any existing institution truly meet all the requirements laid out in the document.

I haven't yet seen anyone truly break down what this document actually says, so here I'll list the most important sections along with some of my own views.

Permissioned Participants Only

The document mentions that a Tokenized Securities Venue (TSV) may "utilize innovative automated market maker (AMM) mechanisms to facilitate permissioned trading of tokenized National Market System (NMS) stocks."

The key word is "permissioned." This word appears repeatedly throughout the entire letter. Permissioned means a whitelist system — liquidity providers (LPs) and traders alike must undergo identity verification, completing KYC (Know Your Customer) and KYB (Know Your Business) certification.

The liquidity and order execution experience for on-chain stock AMMs is already extremely poor, and that's without permission restrictions. Who on earth would be willing to provide liquidity to such a permissioned trading venue?

Certainly not market makers. Professional market makers prefer central limit order books (CLOBs) because of their higher capital efficiency. Market makers also prefer bilateral trading through a single dealer platform (what the crypto-native space often calls propAMM).

Permissioned AMMs have extremely limited liquidity on the supply side. Either go with permissionless AMMs, or go with permissioned architectures outside of AMMs.

What Is a Tokenized Securities Venue (TSV)?

A TSV is defined as "a venue that matches buyers and sellers of tokenized NMS stocks through the following means."

• Providing one or more AMM liquidity pools for permissioned participants to interact with and agree on trading terms;
• Establishing admission standards for personnel participating in such AMM liquidity trading.

Under this definition, Hyperliquid's CLOB model does not fall within the scope of this exemption. Hyperliquid's spot (excluding perpetual contracts) daily trading volume is roughly 50% of Uniswap's. However, it's worth noting that Hyperliquid currently has only 70 spot trading pairs.

Obviously, CLOB models like Hyperliquid can deliver tighter bid-ask spreads and better price discovery.

We need to incorporate "permissioned CLOB" or "propAMM" architectures into this definition. In fact, the SEC even states outright in the letter that AMMs lack best execution protection — something that is easily achievable under CLOB architecture.

What Counts as a Tokenized NMS Stock?

First, a tokenized NMS stock must already be registered with the SEC. Second, a tokenized NMS stock "does not include crypto assets issued by third parties representing their own securities, nor securities that create synthetic exposure to an underlying security through such crypto assets, such as tokenized linked securities or tokenized security-based swaps."

To be clear, all permissionless stock mapping tokens currently on the market — including products issued by Robinhood, Coinbase, Binance, Ondo, xStocks, and others — are not SEC-registered securities. Precisely because of this, none of the exemptions in this letter have anything to do with them. Of course, this doesn't mean these existing models are at a disadvantage (I'd even argue the opposite, but that's beyond the scope of this discussion).

Finally, tokenized NMS stocks can only be traded in pairs with the following assets — "another tokenized NMS stock, non-security crypto assets (such as payment stablecoins issued by compliant payment stablecoin issuers), or tokenized money market funds."

The wording here is somewhat ambiguous — whether "non-security crypto assets" includes meme tokens is an unresolved question.

Lack of Consumer Protection and the Inherent Risks of AMMs

In the United States, investors are protected by the "Best Execution" principle. Without these protections, market makers could provide inferior order execution or even manipulate spreads at the expense of investors. These protections are all part of the Regulation NMS (Reg NMS).

Strikingly, the SEC explicitly states that consumers will not have these protections in a TSV: "Without substantially modifying their trading models, TSVs would be unable to comply with the requirements of Regulation NMS, which could adversely affect TSV participants."

Why are we fixated on the AMM route? Without such protections, who on the demand side would buy in? As previously mentioned, the supply side has already been severely crippled, and now consumers are essentially being told "spreads will be very wide" — so we're on our own.

Do you know what model can easily satisfy Reg NMS requirements? That would be CLOBs like Hyperliquid. When both the supply side and demand side are constrained, this (AMM) framework is destined to struggle.

That said, the document isn't entirely without positives... The SEC has finally recognized the technical value of blockchain!

The document states that TSVs "have the potential to bring tangible benefits to investors, including enabling investor self-custody, 7x24 round-the-clock trading, fractional share ownership, and near-instantaneous clearing and settlement... Applying such technology can also reduce operational, recordkeeping, and transaction costs, and significantly improve efficiency." This part is quite positive.

The Lengthy Checklist of Requirements to Become a TSV

Pages 36 to 46 of the document list a long series of compliance requirements that a TSV must publicly fulfill, including such items as "the TSV must agree to Commission staff reviewing its books and records at any time," and "at least 30 calendar days before commencing operations, the TSV must publish a copy of the Notice in a prominent location on its public website," among others.

In short, becoming an exemption-eligible TSV is not something you can just apply for and immediately start operating.

Issuer Protection — Remember AMC vs Robinhood?!

We all remember the AMC saga, and now the SEC has basically given AMC exactly what it demanded at the time — whether a tokenized security can exist requires the issuer's permission.

The document stipulates that if an issuer (say, AMC) sends written notice to a TSV stating its objection to a particular tokenized NMS stock, then the TSV cannot allow that tokenized NMS stock to trade on its platform.

The following sentence reads as if written directly in response to the AMC incident: "Issuers of underlying NMS stocks may be concerned about the risks of maintaining shareholder registries associated with on-chain transfers, or the risk of price dislocations in the underlying NMS stock and adverse effects on its price, especially given that the price published by an AMM liquidity pool is likely based solely on the ratio of the two assets in that pool."

This is yet another reason favoring CLOBs, because in a CLOB, the price is not determined directly by any single liquidity pool that could potentially be mispriced.

Tokenized Stocks Must Have Equal Shareholder Rights

Tokenized stocks must have "the right to receive equivalent dividend distributions... the right to exercise equivalent voting rights... and the right to receive an equivalent proportional share of remaining assets in the event of corporate bankruptcy liquidation."

This is excellent! Investors in tokenized assets should receive all the rights they would have in traditional form, and even more.

Very high trading volume caps, and other control measures

The SEC's trading volume cap is actually quite high. The document stipulates that trading volume in tokenized NMS stocks must not exceed 0.25% of the average daily stock trading volume of the relevant NMS stock over the preceding month, as disclosed by an effective transaction reporting plan.

Additionally, the TSV must be able to suspend trading. For reference, even the current permissionless stock tokens have trading volumes of less than 0.001% of the corresponding stock's trading volume. Remember, the entire tokenized stock market is currently only about $3 billion in size, while the traditional stock market is $70 trillion.

Based on the multiple issues above, I and Glider expect to formally submit a comment letter to the SEC soon, in order to seek greater exemption space for the industry.