U.S. SEC to again delay ‘innovation exemption’ for tokenization amid Wall Street, White House concerns

The Securities and Exchange Commission (SEC) is set to further delay its anticipated “innovation exemption” designed to accelerate tokenized securities trading after concerns emerged from both the White House and Wall Street over the proposal’s legal footing and potential market impact, according to three industry sources familiar with the matter.

The exemption, which had been expected to be released in part as soon as this Friday, would have eased regulatory hurdles for firms seeking to issue and trade tokenized securities on blockchain rails under existing securities laws. The SEC had announced an open meeting this Friday to discuss its planned “Reg Crypto” rulemaking, a parallel but unrelated effort to create rules for projects looking to fundraise using tokens. The commission was also expected to share details about the innovation exemption at the same meeting, but not release it through a formal notice-and-comment process. The commission canceled that Friday meeting late Thursday.

One person familiar with the discussions said the White House worried the proposal could “kick a hornet’s nest” while Congress is still negotiating the Digital Asset Market Clarity Act, potentially complicating efforts to advance broader crypto legislation.

The source also said SEC staff have become increasingly focused on the agency’s legal authority to issue such broad relief, including whether it has completed sufficient economic analysis and followed the procedural steps required to justify an exemption. Industry insiders have been instructed that this effort may need to wait for the outcome of the Clarity Act.

Resistance came from traditional financial institutions as well.

SIFMA, the Wall Street trade group whose members include major broker-dealers and investment banks, has emerged as one of the main groups halting the SEC’s initiative, according to an industry source familiar with the discussions. SIFMA did not immediately respond to a request for comment.

The group’s concerns centered on how blockchain-based trading venues would fit within existing equity-market rules, particularly brokers’ obligations to seek the best execution for customers, the source said.

Under today’s market structure, Regulation NMS links prices across exchanges and generally requires brokers to execute trades at the best available protected quotation. That framework becomes less straightforward if tokenized securities trade through decentralized venues or automated market makers (AMM), where pricing and execution costs may differ from traditional exchanges.

In June, the SEC proposed eliminating Rule 611 of Regulation NMS — the so-called Order Protection Rule — a move widely viewed as removing one of the biggest regulatory obstacles to tokenized securities trading.

SIFMA has also argued that broader market-structure changes should not be implemented through exemptions or no-action relief, which has been the plan for the SEC’s limited tokenization regime.

In a June 30 letter submitted to the SEC, the trade group said “these types of significant structural changes should be considered and made through an open and transparent process” that allows for public notice, comment and industry participation.

An SEC spokesperson didn’t immediately respond to questions about the timing decisions around the new crypto policy.

The SEC previously seemed ready to release the exemption in May of this year, after repeatedly pushing back its self-imposed deadline to do so. At the time, it seemed the proposal could allow security token issuers to offer assets without necessarily controlling the underlying security.

The possibility that the innovation exemption could allow for such synthetic security tokens sparked concerns from companies that issue securities.

The SEC ultimately did not release the proposal. At the time, SEC Commissioner Hester Peirce told CoinDesk that she did not expect the innovation exemption to include these synthetic tokens. In a post on social media, she added that she expected the exemption to allow for tokens that “would facilitate trading only of digital representations of the same underlying equity security that an investor could purchase.”

The delay comes as tokenization has emerged as one of crypto’s fast-growing trends, captivating Wall Street’s attention with the prospect of moving stocks, bonds and funds onto blockchain rails.

Exchange giants like the Nasdaq and New York Stock Exchange have unveiled plans for developing infrastructure for tokenized securities, while the Depository Trust & Clearing Corporation, the backbone of Wall Street’s securities trading, processed its first series of live production trades with tokenized securities last month as part of a test phase.

It’s potentially a huge market: analysts at global bank Citi projected that tokenized assets could become a $5.5 trillion market by 2030.

The SEC, under chairman Paul Atkins, has increasingly signaled support for tokenization, framing blockchain rails as a way to modernize financial markets. However, there’s been a growing debate over how those financial assets may come onchain and how blockchain-based markets can fit into the existing U.S. market structure and securities rules.