SEC Proposes Exception for Tokenization and Digital Securities in Regulation
In a bid to support the growth of tokenization and distributed ledger technology (DLT)-based securities, Commissioner Hester Peirce of the Securities and Exchange Commission (SEC) has proposed an exemptive order framework. This framework aims to provide regulatory relief for certain digital assets, opening access to the exemption for all market participants, not just a limited subset.
The proposed framework, if implemented, would offer a broad, transparent exemption mechanism for DLT securities. This is a departure from international sandbox programs that emphasize limited pilots under regulatory supervision.
Key Features of the Exemptive Order Framework
The exemptive order framework, as outlined by Commissioner Peirce, requires a transparent, public, and substantive notice-and-comment process with broad industry input. It also mandates public disclosures about issuers, token structure, trading venues, and investor protections.
Unlike regulatory sandboxes in Europe, Hong Kong, Singapore, and the United Kingdom, the exemptive order framework would provide open exemption for all eligible DLT-based securities, rather than limiting testing to selected innovative projects.
Balancing Innovation and Investor Protection
The goal of the proposed framework is to formulate a commercially feasible approach that protects investors and enables the use of cutting-edge technologies for trading, clearing, and settling securities. Commissioner Peirce has emphasized a principle-based approach to disclosures, focused on material issues, and not using detailed checklists.
A Hybrid Model for the US
Recent U.S. legislative drafts like the Responsible Financial Innovation Act signal a commitment to clarifying digital asset regulation. This includes mandating the SEC to create a micro-innovation sandbox and establish clear investment contract rules. This indicates a hybrid model in the U.S., combining exemptive relief with sandbox-like initiatives to promote innovation without sacrificing regulatory clarity or investor protection.
The Future of DLT Securities
The success of the DLT Pilot Regime, Project Ensemble, Project Guardian, and the Digital Securities Sandbox (DSS) in other jurisdictions shows the potential for DLT securities. However, the sector will remain small if issuers see a lack of secondary markets. Compliance with existing regulations could potentially cancel out some potential efficiencies enabled by new technologies such as DLT.
Commissioner Peirce's proposal for an exemptive order framework for DLT-based securities could help alleviate these issues, providing a more conducive environment for the growth and adoption of DLT securities. The SEC's Tokenization Roundtable event next week is likely to provide more insights into the commission's plans.
References:
- Commissioner Peirce's Remarks at the Tokenization Roundtable
- SIFMA Letter to the SEC on Proposed Exemptive Order Framework for DLT Securities
- Responsible Financial Innovation Act
- SEC's Micro-Innovation Sandbox
- SEC's Investment Contract Rules
- Commissioner Peirce's proposed exemptive order framework for DLT securities aims to offer a broad, transparent exemption mechanism, departing from international sandbox programs that focus on limited pilots under regulatory supervision.
- The exemptive order framework, as outlined by Commissioner Peirce, calls for a notice-and-comment process with broad industry input, mandating public disclosures about issuers, token structure, trading venues, and investor protections.
- The proposed framework seeks to strike a balance between fostering innovation and protecting investors, encouraging the use of cutting-edge technologies in trading, clearing, and settling securities while maintaining regulatory clarity and investor protection.
