U.S. SEC Considers Conditional Exemption for Tokenized Securities

Key Takeaways

• On May 8, 2025, in a speech addressing regulators and legal professionals, U.S. Securities and Exchange (SEC) Commissioner Hester Peirce endorsed a “regulatory sandbox” environment in the context of tokenization of securities (i.e., converting traditional securities into digital tokens that can be traded on a distributed ledger technology (DLT), like a blockchain), that would allow firms to innovate in a live, but controlled, environment.
• Commissioner Peirce previewed a potential conditional exemptive order currently being considered by the SEC’s Crypto Task Force, which would allow firms to use DLT to issue, trade, and settle securities. Conditions may include (1) providing disclosures to users about a platform’s products, services, operations, conflicts of interest, and risks, including smart contract risks; (2) complying with recordkeeping and reporting requirements; (3) being subject to monitoring and examination by SEC staff; and (4) having adequate financial resources for operations.
• The number and types of tokenized securities listed or traded or trading volume may be limited for exempted entities, but the SEC may raise ceilings for firms that have performed successfully at their initial limits.

On May 8, 2025, SEC Commissioner Hester Peirce delivered a speech at the SEC’s 31st International Institute for Securities Market Growth and Development in Washington, D.C. In her speech, Commissioner Peirce underscored the importance of “well-balanced regulation” of the markets that will give investors the confidence to participate and take risks in the markets, while also fostering dynamic competition among new and existing firms that want to utilize new technologies. Commissioner Peirce stated that keeping the U.S. capital markets preeminent will require continued care and creativity, particularly when rules stand in the way of market experimentation with new technologies and fast-to-market innovations.

Reiterating the SEC’s efforts to revise its approach to crypto regulation, Commissioner Peirce focused on regulation surrounding the tokenization of securities. “Tokenization” refers to the use of DLT to maintain the record of ownership of traditional assets, including traditional securities such as stocks or bonds. It involves formatting these traditional assets as crypto assets, or digital “tokens,” that can be sold, held, or traded on a blockchain or other DLT, which is the underlying technology that supports cryptocurrencies.

Informed by responses to a request for comment in February 2025,[1] Commissioner Peirce stated that the SEC’s Crypto Task Force is considering a potential exemptive order from certain SEC registration requirements and associated rules that would allow firms to use DLT to issue, trade, and settle securities. Currently, firms seeking to operate an automated market making system for tokenized securities may face challenges in complying with the SEC’s Regulation National Market System (NMS), which governs equity securities trading on major stock exchanges. Market intermediaries interacting with the NMS typically must register as broker-dealers, clearing agencies, or exchanges. But since so few securities have been tokenized, firms may not be willing to devote resources to trading and settling such instruments, while companies may hesitate to issue tokenized securities in the first place because so few trading venues exist. Commissioner Peirce stated that exemptive relief could resolve this “chicken-and-egg” problem, while also affording the SEC time to adopt durable modifications to existing rules and regulations.

Inspired by regulatory sandbox structures implemented in other jurisdictions where firms can innovate in a live, but controlled, environment, Commissioner Peirce stated that the goal of the potential exemption is to formulate a commercially feasible approach that protects investors, which includes access to cutting-edge technologies for trading, clearing, and settling securities.

The contemplated exemption would be conditional, and entities would need to comply with market integrity conditions for the prevention of fraud and manipulation. Commissioner Peirce discussed additional potential conditions, including requirements to (1) provide material and relevant disclosures to users about a platform’s products, services, operations, conflicts of interest, and risks, including smart contract risks; (2) comply with recordkeeping and reporting requirements; (3) be subject to monitoring and examination by SEC staff; and (4) have adequate financial resources for operations. There may also be supplemental requirements for participants offering crypto custodial services.  

The potential exemptive order may also include restrictions such as limitations on the number and types of tokenized securities listed or traded or trading volume, which Commissioner Peirce stated could mitigate risks to investors and markets. The SEC could raise these ceilings for firms that have performed successfully at their initial limits.

Conclusion

Describing the idea of conditional exemptions for tokenized securities as a “work in progress,” Commissioner Peirce encouraged feedback and collaboration regarding this potential exemption from market participants worldwide, including those that have designed and implemented regulatory sandbox frameworks in their own jurisdictions. Her speech echoes the SEC’s growing interest in fostering friendlier regulations for digital assets generally, and the SEC’s desire to engage with the industry to alleviate regulatory and compliance burdens that may be considered a barrier to innovation.

[1] See Hester M. Peirce, There Must be Some Way Out of Here (Feb. 21, 2025). Written responses to the request for comment.