Proposed Exemption for Digital Tokenization and Securities Based on Distributed Ledger Technology by the Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is exploring a potential exemptive order that could pave the way for certain firms to use distributed ledger technology (DLT) for issuing, trading, and settling securities. This move aligns with the SEC's broader efforts to create exemptions and safe harbors tailored for digital assets and blockchain-based securities.
Commissioner Hester Peirce, a key proponent of this initiative, has expressed that the SEC is inspired by sandbox environments from other jurisdictions and is considering relaxing some registration requirements and rules to support tokenization and DLT-based securities.
The proposed framework is primarily a regulatory clearance and exemption framework for digital securities transactions using DLT. It focuses on managing securities law compliance while enabling innovation. Key elements under discussion include a fit-for-purpose registration exemption for securities distributions using digital assets, a time-limited safe harbor for immature digital assets, and a principle-based approach to disclosures.
Compared to sandbox environments in other jurisdictions, the SEC's approach is more focused on registration exemptions for issuance and trading of securities using DLT. For example, the European Union's DLT Pilot Regime is more focused on operational testing of market infrastructure and interoperability under temporary regulatory relief, while the UK's Digital Securities Sandbox (DSS) is more aligned with the SEC’s potential exemptive order concept by providing regulatory relief aimed at issuance and trading of digital securities.
Commissioner Peirce has also emphasized the importance of collaborations with other jurisdictions beyond the US-UK initiative. The SEC's Tokenization Roundtable event is scheduled for next week, where Commissioner Peirce is expected to receive feedback on these proposals.
Participation in the new sandbox would include requirements for market integrity compliance, disclosures, record keeping and reporting, adequate financial resources, custody transparency, and oversight by the SEC. However, Commissioner Peirce has acknowledged a 'chicken and egg' situation where companies exploring tokenization might be unwilling to register as a broker-dealer, exchange, or clearing agency due to the small market for tokenized securities, and the sector will remain small if issuers see a lack of secondary markets.
Several jurisdictions, including Europe, Hong Kong, Singapore, and the United Kingdom, have launched sandboxes dedicated to tokenization. These include the DLT Pilot Regime, Project Ensemble, Project Guardian, and the Digital Securities Sandbox or DSS. Commissioner Peirce's speech highlighted the goal of formulating a commercially feasible approach that protects investors and enables the use of cutting-edge technologies for trading, clearing, and settling securities.
- The SEC's proposed regulatory framework for digital securities transactions using distributed ledger technology (DLT) prioritizes the creation of registration exemptions for securities issuance and trading, emphasizing innovation while maintaining securities law compliance.
- Commissioner Hester Peirce's speech at the upcoming Tokenization Roundtable event seeks insights from various stakeholders about potential regulatory clearance and exemption frameworks for tokenization, particularly focusing on the integration of DLT in the news of business and finance.
- As the SEC considers relaxing rules to support tokenization and DLT-based securities, collaboration with other jurisdictions, such as Europe, Hong Kong, Singapore, and the United Kingdom, will be crucial for designing a commercially viable approach that balances regulation, technology, and the needs of the business sector, while ensuring investor protection.
