Crypto Companies Under SEC Investigation for Tokenized Stock Offerings

A trade association representing financial firms and securities issuers in the United States has raised concerns about requests made by cryptocurrency companies to offer tokenized stocks. In a letter sent to the Securities and Exchange Commission’s Crypto Task Force, the Securities Industry and Financial Markets Association (SIFMA) expressed significant worries regarding reports of these companies seeking no-action or exemptive relief to enable them to provide tokenized equities or securities to investors.

No-action relief essentially means that the SEC would choose not to take enforcement action against a company regarding any new products it introduces. Exemptive relief, on the other hand, allows the SEC to exempt certain products from securities laws for testing purposes. SIFMA emphasized in its letter that granting such requests could potentially allow cryptocurrency firms to offer securities to the public without adhering to the regulatory structure set in place by federal securities laws. This could potentially jeopardize essential investor safeguards.

SIFMA urged the SEC to dismiss these requests, arguing that addressing these policy queries immediately through no-action or exemptive relief requests may not adequately consider potential consequences. The group underscored the necessity for a more substantive notice and comment process. This position follows comments made by SEC Commissioner and Crypto Task Force chair Hester Peirce in May indicating that the SEC is contemplating issuing an exemptive order for companies utilizing blockchain technology in the issuance, trading, and settlement of securities.

Peirce highlighted that firms interested in establishing platforms for tokenized securities might have to register with the SEC, a process that could prove to be prohibitively costly for many companies. This could lead to fewer platforms being available for trading tokenized securities. Exemptive relief, according to Peirce, could help address this challenge by enabling firms to operate without conforming to regulations that were established before the emergence of the technologies being tested.

Alexander Grieve, the vice president of government affairs at Paradigm, a venture firm, suggested that the concerns voiced by SIFMA members stem from a desire to safeguard their position in the market. The introduction of tokenized securities could potentially disrupt the traditional financial industry by allowing numerous platforms to offer trading on stocks. This is a common reaction in the financial world, where incumbents often resist regulatory changes and technological advancements that challenge existing norms.

Bill Hughes, a lawyer and global regulatory lead at ConsenSys, a blockchain software company, echoed the view that SIFMA’s key argument is logical and rooted in procedural issues. He stressed that any changes to the rules dictating how retail investors access securities should be made through transparent notice and comment rulemaking procedures, not via specific exemptive relief or no-action assurances. Hughes also pointed out the difficulties involved in regulating assets that straddle the less intermediated and controlled cryptocurrency realm and the heavily intermediated and controlled traditional financial markets.

Popular cryptocurrency exchanges Coinbase and Kraken have expressed interest in launching tokenized securities trading in the United States with the approval of the SEC. Coinbase’s chief legal officer, Paul Grewal, stated that the exchange was actively seeking approval to list “tokenized equities,” identifying it as a significant priority. Kraken recently began offering tokenized stock trading on its platform, providing tokens that represent shares in major American companies like Apple and Microsoft. However, this service is not yet accessible to users in the US, Canada, the EU, the UK, or Australia.