A group representing leading stock exchanges has called on the SEC to rethink its proposed “innovation exemption” for brokers and cryptocurrency firms looking to offer tokenized stocks.

The World Federation of Exchanges (WFE) expressed its concerns in a letter to the SEC, stating it was “alarmed” by the number of brokers and crypto platforms either currently offering or planning to offer tokenized U.S. stocks.

“These products are marketed as stock tokens or the equivalent to stocks when they are not,” the WFE warned. “This development poses multiple and interconnected risks.”

Numerous crypto exchanges are aiming to provide tokenized stocks in the U.S., giving investors a way to gain exposure to public firms without directly owning shares. These offerings claim to offer quicker transaction settlements compared to traditional stock exchanges and can be traded continuously, beyond conventional market hours.

Any crypto entities that are not registered as broker-dealers must seek exemptions from the SEC, which has been considered by its chair, Paul Atkins.

Key Points from WFE

The WFE, whose members include Cboe and Nasdaq, supported the notion of exemptive relief from the SEC, but cautioned that using it broadly could threaten investor safety and the integrity of the market.

“We firmly believe that this authority is most effectively utilized when applied as a targeted measure rather than as a means to bypass or expedite exemptions to established regulatory standards.”

The WFE acknowledged that tokenization could represent a natural advancement in capital markets and is in favor of innovation; however, it must be implemented responsibly to ensure the safety of investors and preserve market integrity.

The WFE advised the SEC to pursue a public rule-making process to acquire feedback instead of attempting significant alterations through exemptive relief. It suggested the potential establishment of a sandbox regime or similar innovation facilitator.

Back in August, the WFE also pressed the SEC, the European Securities and Markets Authority, and the International Organization of Securities Commissions for stronger regulatory measures regarding tokenized stock offerings, citing a lack of protective mechanisms for investors.

SEC’s Position on Tokenized Stocks

Atkins, a former crypto lobbyist, has voiced considerations for the introduction of an “innovation exemption” to grant crypto firms relief from particular regulations, thus accelerating the deployment of crypto and blockchain products in the market.

“An innovation exemption could help fulfill President Trump’s vision to turn America into the crypto capital of the world by motivating developers and businesses willing to comply with specified conditions to innovate utilizing onchain technologies within the U.S.,” he stated during a recent meeting with crypto executives.

U.S. trading platforms have started preparing to offer tokenized stocks under the SEC’s crypto-friendly approach. For example, Robinhood Markets launched hundreds of tokenized stock options for European clients in June, aiming to replicate this offering in the U.S. following a similar initiative by Kraken.

Additionally, Coinbase allegedly sought SEC approval in June to provide tokenized stocks, with its legal chief, Paul Grewal identifying this as a “major priority” for the exchange.

Even traditional firms are entering the market; in September, Nasdaq requested a rule revision from the SEC to enable the listing of tokenized stocks.