SEC ‘Innovation Exemption’ for Tokenised Stocks: Wall Street Flags a Backdoor to Light-Touch Crypto Rules

U.S. crypto regulation has hit a new flashpoint. SEC Chair Paul Atkins is promoting an “innovation exemption” that would allow crypto firms to offer tokenised stocks to retail clients without fully complying with traditional broker-dealer or exchange requirements. The World Federation of Exchanges (WFE) – whose members include Nasdaq and Deutsche Börse – has responded with a sharp warning that such relief could let crypto trading venues skirt the safeguards that have underpinned regulated securities markets for decades.

For compliance teams, this is a critical test of the “same activity, same rules” principle: will tokenised equities be brought under the standard securities framework, or will crypto platforms obtain a bespoke, lighter regime?

Key Facts at a Glance

• Reuters disclosure
  According to reporting by Reuters, the SEC is considering either exemptive relief or no-action letters that would permit crypto firms to distribute tokens referencing listed equities to U.S. retail investors, even where those firms are not registered broker-dealers.
• WFE’s formal pushback
  In a letter dated 21 November, the WFE urged the SEC to avoid broad exemptions for tokenised stocks, arguing that such carve-outs could damage market integrity and undermine investor protection. The WFE stressed that crypto platforms must not be allowed to bypass principles that have “safeguarded markets for decades.”
• Tokenised stocks as “synthetic” equity exposure
  The WFE and ESMA have repeatedly highlighted that many tokenised equity products merely mirror the share price of an underlying listed company without granting shareholder rights, governance participation, or effective legal recourse. This creates a misleading impression that users “own” the actual stock.
• “Project Crypto” and the innovation exemption
  In his “Project Crypto” speeches, Atkins presents the exemption as a controlled experiment with new token structures, meant to inform future rule-making. In practice, it signals a more industry-aligned, accommodative approach to crypto under the current U.S. administration.

Why Tokenised Stocks Are So Controversial

From a Scam-Or Project compliance standpoint, the WFE’s letter reads as more than routine lobbying. It is effectively a public alert that the SEC may be about to create a parallel regulatory track for tokenised equities.

If crypto venues can distribute equity-linked tokens directly to retail investors without:

• registering as broker-dealers, or
• listing those products on regulated securities exchanges,

then core elements of the U.S. securities regime – including disclosure standards, best execution obligations, market surveillance, and customer-protection rules – risk being displaced onto largely opaque, offshore-leaning crypto infrastructures.

Crucially, the dispute is not about tokenisation in itself. Both WFE and ESMA have framed tokenisation as a natural progression of capital markets – provided it is deployed inside the existing securities law framework (for example, DLT-based settlement under full regulatory oversight).

The real dividing line runs between:

Tokenised equities that simply track prices but do not embed shareholder status or protections look less like modernised securities infrastructure and more like synthetic exposure products circulating in lightly supervised markets.

Securities Law Tests: Form vs. Substance

Under the Howey and Reves tests, most equity-linked tokens promoted as investment products are, in substance, securities. Granting a dedicated “innovation exemption” for these instruments risks conveying that the technological wrapper (token vs. conventional share) is more important than the economic reality (exposure to an issuer’s equity).

That would run against decades of U.S. securities-law doctrine designed to prevent regulatory arbitrage through formalistic structuring.

Compliance Assessment & Practical Implications

From the perspective of Scam-Or Project, several key risk areas emerge:

1. Regulatory Arbitrage by Design

Crypto firms are effectively asking the SEC to legitimise a model that competes head-on with regulated exchanges and brokers while avoiding the corresponding:

• exchange or ATS licensing, and
• broker-dealer registration and conduct rules.

2. Unequal Investor Protection

Retail investors could find themselves under a weaker protection regime solely because they accessed “stocks” via a token app instead of a traditional brokerage. The label “stock” may remain the same, but the legal and supervisory environment may be materially inferior.

3. Global Spill-Over Effects

Any SEC signal endorsing tokenised equities is likely to be leveraged by platforms serving EU and other jurisdictions, even where local regulators – notably ESMA – have already warned that these products can cause significant “investor misunderstanding” and mis-selling risks.

Scam-Or Project’s Position

In Scam-Or Project’s view, tokenised equities should be subject to the same – or stricter – regulatory obligations as the underlying shares. Key principles:

• Same activity, same rules: Equity-linked tokens should not enjoy a lighter regime merely because they are issued on a blockchain.
• Targeted sandboxes, not blanket relief: If the SEC wants to promote experimentation, it should use tightly scoped regulatory sandboxes with clear boundaries, robust reporting, and hardwired investor-protection safeguards.
• No broad no-action comfort: Open-ended no-action letters that allow crypto platforms to repackage listed equities and avoid the core architecture of U.S. securities law would create a two-tier system of investor protection and invite arbitrage.

Call for Information

Scam-Or Project invites:

• insiders at crypto platforms developing tokenised-equity products,
• executives and compliance officers at regulated exchanges, brokers, and custodians, and
• policymakers or supervisory staff involved in this debate

to share documents, internal risk assessments, communications, or policy drafts concerning:

• tokenised stock initiatives, and
• any SEC outreach or discussions related to the proposed “innovation exemption.”

Information can be provided securely and anonymously via the whistleblower section of the Scam-Or Project website.