As crypto law falters, SEC opens tokenized stock floodgates

United States crypto legislation might be toast, but America’s securities regulator is opening the floodgates for blockchain-based tokenized stock trades.

Sen. Thom Tillis (R-NC) was one of four Republicans who voted against the U.S. Senate’s digital asset market structure bill (the CLARITY Act) on Tuesday (15), helping to send CLARITY to a decisive and ignominious 49-50 defeat. But in switching his vote from ‘aye’ to ‘nay’ at the last minute, Tillis was able to use a procedural motion to preserve CLARITY’s faint hope of passage at some future date in the current Congress.

Problem is, the congressional calendar is tight, and the Dems’ chief objection to CLARITY as written—getting President Donald Trump to agree to ‘ethics’ provisions with actual teeth—seems extremely unlikely to be resolved. And yet, a group of pro-crypto Dems agrees with Tillis that CLARITY isn’t quite dead yet.

On Wednesday, seven Dem senators issued a joint statement expressing their “continued commitment to pass CLARITY.” They insist they wouldn’t have “spent the last two years working to pass crypto legislation” if they weren’t sincere in seeking to “protect consumers, punish bad actors, create regulatory certainty, and include strong, commonsense ethics provisions for elected officials.”

These Dems say Tuesday’s vote was “a setback, but not the end of that important work. We remain committed to working in a bipartisan fashion to get this legislation passed.”

This message didn’t sit well with some members of the crypto sector, which, on the whole, has tried to pin the entire blame for CLARITY’s failure on Dems, rather than blame the president, who earned over a billion dollars from crypto ventures last year and refuses to hop off this gravy train.

A notable exception came from Galaxy Digital (NASDAQ: GLXY) CEO Mike Novogratz, who tweeted Tuesday that the whole governmental system “feels broken.” Novogratz blamed the GOP for being “afraid of putting real limits” on Trump’s crypto profiteering while accusing Dems of being “scared to be seen doing anything that could be perceived as being soft on the President.”

Curiously (or perhaps not), the president has yet to make any kind of public comment on CLARITY’s failure. His silence suggests he prefers maintaining the highly profitable status quo rather than accept any limits on his crypto activity.

It remains to be seen how savagely the deep-pocketed crypto-focused political action committees (PACs) like Fairshake might target Senate Dems who are up for re-election this November. Some crypto industry figures believe the whole point of the seven Dems’ statement was to “keep the crypto PAC money at bay” rather than reflecting any sincere desire on the legislators’ part to get ‘er done.

Others insist the public’s growing bipartisan dislike of crypto operators is stiffening the spines of elected officials. Pols couldn’t help notice the handful of primary races in the current cycle where incumbents prevailed over crypto-backed challengers by pointing out the big-money crypto support those challengers enjoyed.

Meanwhile, the prices of prominent tokens like BTC and ETH have stabilized somewhat following their Tuesday tumbles, although they’re still well below the highs set a couple weeks ago during their pre-vote surge.

That resilience is impressive considering that the Federal Reserve defied Trump’s urging to cut interest rates, instead raising the rate by a quarter-point on Wednesday. All told, crypto speculators appear relieved there hasn’t been more negative volatility.

The share prices of crypto companies also tumbled Tuesday, and most of these fell a little further on Wednesday as investors pondered the fallout. But share prices rose Thursday as the U.S. regulatory cavalry rode to crypto’s rescue.

Prior to Tuesday’s vote, the chairs of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) signaled their willingness to pick up the ball and run with it should CLARITY fail to pass.

The SEC’s Paul Atkins and the CFTC’s Michael Selig have each made multiple moves within their respective areas of authority to loosen crypto’s regulatory shackles this year, and both issued statements Wednesday indicating their intentions to continue down this path.

Selig tweeted a statement calling CLARITY’s failure “unfortunate” but noted Trump’s promise to “deliver a future-proof crypto regulatory market structure one way or the other, and we will help him get the job done using our existing statutory authorities.”

Atkins tweeted his thanks to those who tried to push CLARITY over the finish line, but added that “I have been unequivocal: with or without legislation, we will act decisively within the SEC’s statutory authority to deliver certainty for American investors and for the entrepreneurs shaping our technological future. Stay tuned.” (Emphasis in the original.)

On Thursday, the SEC issued details of its long-awaited ‘innovation exemption’ plan that will allow digital asset platforms to offer tokenizedversions of publicly traded stocks on a 24/7 basis. The SEC also requested public comment about “possible modifications to the exemptive relief and potential next steps.”

Specifically, the SEC is granting “temporary, conditional exemptive relief to Tokenized Securities Venues [TSV] … from the definition of ‘exchange’ in the Securities Exchange Act of 1934.” These TSVs are now authorized “to trade tokenized National Market System (NMS) stock using innovative permissioned automated market makers and liquidity pools.”

This ‘temporary’ exemption starts now and will expire five years from now, but there are some caveats. For one thing, before a TSV can offer a product that’s “tokenized by an unaffiliated third party,” aka not the issuer of the non-tokenized shares, the TSV has to provide the issuer with “written notice and an opportunity to object.” (More on real-world examples of this below.)

TSVs must ensure that tokenized equities offer holders “the same rights and privileges as does traditional NMS stock of an equivalent class.” The SEC is not authorizing ‘synthetic instruments’, aka tokenized products that simply mirror a stock’s price on more traditional exchanges.

For the time being, there will be unspecified “limits on the number of symbols and volume traded” for tokenized stocks. If trading of a stock is halted on its primary listing exchange, trading of the tokenized version must also halt.

If TSVs employ smart contracts, they must be “auditable, public and deployed on a public, permissionless distributed ledger.” However, the actual trading will occur on a permissioned ledger so the SEC can ensure that only authorized individuals/entities are participating.

The SEC is also tossing a bone to liquidity providers in an AMM Liquidity Pool used by TSVs in their tokenized stock offerings. These liquidity providers will be temporarily/conditionally exempted from the definition of ‘dealer’ in section 3(a)(5) of the Exchange Act.

In a video tweet accompanying the announcement, Atkins stated that stock issuers will have “the opportunity to opt out” of a third-party tokenizing their shares. But as with the official release, the opportunity to object is clear; it’s less clear whether this objection amounts to a veto over third-party tokenization.

Atkins said the tokenized exemption was “intentionally limited in scope,” reflecting the need for “a defined window in which the market may develop while the commission evaluates future rulemaking. We are not cementing today’s technology as the standard for tomorrow.”

The ‘cement’ on this exemption is definitely a lot less solid than it would have been had it been contained within legislation approved by Congress. As an SEC rule, it can be revoked at whim by future SEC chairs appointed by future occupants of the White House.

Apart from praying for a GOP win in 2028, Atkins is clearly gambling on the fact that history shows once the reality at ‘ground level’ has been transformed, it can prove hard to undo. Whatever the future holds, crypto bros are nonetheless rejoicing at the SEC coming to their rescue following Tuesday’s Capitol Hill humiliation.

The unaffiliated stock issuer angle was the subject of a recent social media flame war between senior execs of movie theater chain AMC Entertainment (NASDAQ: AMC) and the Robinhood (NASDAQ: HOOD) trading platform. Robinhood, which has led the way in tokenizing equities irrespective of whether the issuer is cool with it, recently began offering a tokenized AMC offering without AMC’s permission.

AMC CEO Adam Aron tweeted his outrage at Robinhood for tokenizing AMC stock, asking, “how can it possibly be legal? We have no connection to this at all, and do not condone it in any way.” Robinhood’s chief legal officer, Dan Gallagher, responded with a dismissive tweet, telling Aron to “send your lawyers and we’ll educate them.”

Robinhood CEO Vlad Tenev later issued a lengthy tweet in which he claimed “the answer to the issuer consent question depends on which structure you’re actually talking about.” Tenev said Robinhood’s tokenized equities are “separately issued instruments backed 1:1 by underlying shares, providing economic exposure without changing an issuer’s cap table or the rights attached to its shares.”

(For the record, Robinhood’s own documentation on its ‘stock tokens’ calls them “debt securities” that provide “economic exposure to underlying securities like US shares and [exchange-traded funds], but [do] not grant investors any legal or beneficial rights in, or against the issuer of, those underlying securities.” The tokenized equities aren’t available to customers in the U.S., Canada, Switzerland and the UK.)

Tenev summed up Robinhood’s approach by saying, “market infrastructure evolves with technology … A company should control the rights attached to its shares—not every lawful use of those shares once they’re in investors’ hands. Going onchain shouldn’t give the issuer a veto it never had offchain. And issuers certainly shouldn’t block an entirely new group of investors simply because they don’t understand the technology yet.”

On Thursday, Robinhood tweeted that it “supports” the SEC’s tokenization initiative, saying Americans deserve all the benefits tokenized stock has to offer. Tenev added his praise for SEC’s leadership, calling it “a good day for US innovation.” 

AMC’s Aron tweeted his “highest praise” for Atkins re his “wise decision” on tokenization, singling out the ‘issuers can object’ angle for putting “companies in charge of their own securities and capital structures.”

But Aron also tagged Tenev and Gallagher, noting their praise for Atkins’ initiative, and calling on them “to adhere to the exact same standards internationally. How hypocritical would it be if Robinhood’s stock tokens abroad were to differ materially from stock tokens in the U.S. on these hyper-important matters of investor protections, synthetics and issuer objections.” Neither Robinhood exec has so far replied to Aron’s challenge.

Nobody puts CFTC in the corner!

It’s possible that CFTC Chair Selig didn’t want to step on his SEC counterpart’s big day by rolling out some major news of his own. But Thursday did bring word that the CFTC has issued a no-action position “for the benefit of providers of passive software.” (Full guidance here.)

Specifically, the CFTC’s Market Participants Division “will not recommend the Commission take enforcement action against any such provider or their relevant personnel for failure to register as an introducing broker or associated person of an introducing broker. This applies solely in relation to their provision and marketing of software to facilitate trading by the provider’s users with registered futures commission merchants, introducing brokers, and designated contract markets.”  

Translation: developers who build non-custodial applications that “passively enable trading in Commission-regulated derivatives products, including through self-custodial crypto asset wallet software,” don’t need to register with the CFTC as an introducing broker (someone who takes customer orders for futures, options, swaps and other CFTC-regulated products but relies on a CFTC-registered entity to actually conduct the transactions).

The announcement follows a similar no-action position against digital wallet software devs Phantom Technologies this spring. On Thursday, Phantom founder/CEO Brandon Millman tweeted his gratitude to the CFTC “for working with us to chart a new path for non-custodial software providers to connect people with regulated markets, all while the provider never holds users’ funds or makes decisions about their trades. Now the CFTC has opened that same path to other software providers, and that’s a win for the whole industry.”

Bipartisan support for tax bill, but does it come too late?

CLARITY’s demise didn’t stop the House of Representatives’ Ways & Means Committee from advancing its Digital Asset Tax Certainty Act on a bipartisan basis, with 38 members of both parties voting ‘aye’ and only five Dems voting ‘nay.’

The vote came following a Wednesday markup session that addressed issues including a de minimis exemption for network fees and transactions worth less than $10. The bill would also treat rewards from block reward mining and staking as ordinary income, although the original plan to allow the option of deferring taxes on these rewards was scuttled to appease Dems who expressed concerns.

GOP members of the committee insist that the revised Act doesn’t take a stand on when rewards become income. Regardless, the elimination of the original deferral language sparked pushback from crypto advocates who warn that the Act’s passage would mean Congress was enshrining “the same mistaken premise” made by the Internal Revenue Service (which maintains that token rewards don’t need to be sold for cash to count as income).

The bill would also apply existing ‘wash sale’ securities rules to token trading, as well as eliminate the need for individuals to report gains or losses on U.S.-dollar regulated stablecoins. Reduced penalties would be offered to individuals who voluntarily confess their failure to cite digital asset profits in previous tax returns and agree to pay what they owe.

The committee vote sets up a vote by the full House, which has already shut down until after November’s midterm elections. That leaves only the post-midterms ‘lame duck’ session of Congress in which to hold a floor vote, after which the bill must be sent to the Senate.

All of which means this bill has a mountain to climb and not a lot of time to reach the summit. There will also be other, far more pressing items on the agenda following the election. But with this bill offering none of the ethical trip wires that felled CLARITY, faint hope abides.

Operation Strategic Bitcoin Resolve: a suicide mission?

Another crypto-focused bill that took one step forward on Wednesday was the American Reserve Modernization Act, the bill that seeks to codify Trump’s 2025 executive order establishing a Strategic Bitcoin Reserve (SBR).

The SBR comprises all the BTC the federal government has amassed over the yearslso apply to the Digital Asset Stockpile (DAS), a separate entity named in Trump’s EO that consists of all the other tokens in the government’s possession

On Wednesday, the House Financial Services Committee approved the Act on a party-line 28-21 vote. The Act would prohibit the government from selling any BTC for a 20-year period, and even then, there would be some procedural hurdles to clear pre-sale. No such limit would apply to the DAS.

The bill also contains provisions aimed at preventing the theft of tokens in the government’s possession. In March, the feds arrested the son of a government contractor tasked with safeguarding the government’s digital assets who’d stolen over $46 million worth of these assets from under the feds’ noses.

But the revised bill approved by the Committee no longer includes language that would have authorized the government to study the feasibility of acquiring additional BTC using “discretionary surplus remittances from Federal Reserve Banks or revaluation of gold certificates held by the Federal Reserve Banks.”

That will come as a blow to Sen. Cynthia Lummis (R-WY), who introduced earlier versions of the Act that would have required the government to buy up to a million BTC by revaluing the nation’s gold certificates to their current value. The Act still allows the government to conduct a study to see how additional BTC might be acquired

The vote’s partisan split doesn’t bode well for the Act’s capacity to pass a vote by the full House. A companion bill has also not yet been passed by the Senate and seems unlikely to be, given the calendar math described above. There’s also the belief that Dems will have fewer reasons to surrender to GOP railroading if the midterms result in their party retaking control of one or both legislative chambers, which, judging by the economic indicators, seems more likely by the day.

Watch | Tokenization on public blockchain: Transforming RWAs and finance

Source: coingeek.com