Introduction
The World Federation of Exchanges, representing major operators including Nasdaq, Cboe, and CME Group, is pushing the U.S. Securities and Exchange Commission to restrict special exemptions for cryptocurrency platforms offering tokenized stocks. In a formal letter to the SEC’s Crypto Task Force, the federation expressed alarm about platforms marketing these products as equivalent to traditional stocks while operating outside standard securities regulations, arguing these exemptions create unfair advantages and pose significant risks to market integrity and investor protection. This intervention comes as the SEC contemplates a sandbox framework that would grant temporary regulatory relief to crypto firms, highlighting growing tensions between traditional financial institutions and emerging digital asset platforms.
Key Points
- The World Federation of Exclaims tokenized stock products are being marketed as equivalent to traditional stocks without proper regulatory safeguards
- The SEC is considering a sandbox framework that would grant temporary exemptive relief to crypto platforms while regulators assess long-term policy needs
- Previous attempts to launch tokenized stock products, including Robinhood's European partnership, have already drawn regulatory scrutiny
Traditional Exchanges Sound Alarm on Tokenized Stocks
The World Federation of Exchanges has taken a firm stance against what it describes as “the plethora of brokers and crypto-trading platforms offering or intending to offer so-called tokenised US stocks.” In a letter signed by CEO Nandini Sukumar, the federation stated it is “alarmed” that these products are “marketed as stock tokens or the equivalent to stocks when they are not.” The position, detailed in a late August position paper, represents the collective concern of major traditional exchange operators who see these offerings as potentially misleading investors and undermining market integrity.
The federation’s intervention targets the core marketing claims of tokenized stock products, which often present themselves as direct equivalents to traditional equities while operating outside the regulatory framework that governs conventional securities markets. This distinction is crucial, as traditional stock exchanges like Nasdaq operate under strict compliance requirements designed to protect investors and maintain market stability. The WFE’s letter emphasizes that while supportive of innovation in principle, the current approach to tokenized stocks lacks the proper safeguards that have been developed over decades in traditional finance.
The Battle Over Exemptive Relief
At the heart of the controversy is the regulatory mechanism known as “exemptive relief,” which allows companies to bypass specific legal requirements when the SEC determines it serves the public interest without harming investor protection. The World Federation of Exchanges acknowledges supporting the SEC’s right to use exemptive relief but argues it should only apply where “relief is reasonably necessary for a firm to provide a product or service on a level playing field” and when “found to be consistent with the interests of the public and the protection of investors.”
The federation’s primary concern is that broad use of exemptive relief could allow crypto trading platforms to function in roles resembling national securities exchanges without requiring full regulatory compliance. This creates what traditional exchanges view as an unlevel playing field, where crypto platforms can offer similar products to traditional stocks while operating under different, potentially less stringent rules. The WFE specifically warned against using exemptive relief to “fast-track crypto trading platforms into roles that resemble national securities exchanges” without proper oversight.
SEC's Sandbox Framework and Regulatory Balancing Act
The federation’s stance comes at a critical moment as the SEC weighs a potential sandbox framework that could grant time-limited exemptive relief to crypto platforms offering tokenized stocks. This framework, estimated to arrive within the year, represents part of a broader effort to explore how digital asset markets might operate under modified regulatory conditions. SEC Chair Paul Atkins indicated in October that the agency had been exploring formal “innovation exemptions” that could give crypto firms temporary relief from existing rules.
Under the proposed framework, platforms would be able to pilot products like tokenized stocks under SEC supervision while regulators assess long-term policy needs. This approach acknowledges the innovative potential of digital assets while attempting to maintain regulatory oversight. However, the World Federation of Exchanges appears concerned that even temporary relief could establish precedents that undermine the comprehensive regulatory structure governing traditional securities markets.
The debate over tokenized stocks and regulatory exemptions isn’t theoretical. Earlier efforts to launch such products in the U.S. have already drawn regulatory scrutiny, including Robinhood’s controversial move to offer blockchain-based equities through a Europe-based partner. These real-world examples demonstrate both the market demand for tokenized traditional assets and the regulatory challenges they present. As the SEC moves closer to deciding on the sandbox framework, the tension between fostering innovation and maintaining market integrity continues to intensify.
📎 Source reference: decrypt.co