Tokenized Securities Markets Require Strong Investor Protections, Not Broad Exemptive Relief

• SIFMA and its members strongly support innovation in the securities markets. However, the adoption and potential benefits of tokenized securities markets rests on ensuring that they are subject to the same fundamental investor protection and market integrity principles that have helped make the U.S. securities markets the largest and deepest in the world.
• Regulatory treatment should be based on economic characteristics, not on the technology used or categorical labels. This is why the same core regulatory principles must apply equally to all securities – whether in tokenized, book-entry or paper form.
• Broad exemptions for tokenized trading activities could undermine investor protection and lead to market disruptions. Indeed, recent stresses in the crypto markets, including the October flash crash and the Stream Finance collapse, illustrate the potential risks of allowing tokenized securities to trade outside of long-standing securities market protections.
• Exemptive relief involving tokenized securities should be narrowly tailored, grounded in strong reasoning and economic analysis, open to all market participants, and subject to appropriate guardrails. Exemptive relief should also be subject to public notice-and-comment.
• A carefully designed innovation exemption framework can support a broader policymaking process and establish clear minimum guardrails. However, it should be a supplement to, not a substitute for, comprehensive regulatory modernization via notice-and-comment rulemaking.

SIFMA and its members strongly support innovation in the securities markets and believe distributed ledger technology and tokenization offer the opportunity to embrace a wide range of potential benefits. Indeed, SIFMA members are engaged in a variety of initiatives that aim to harness blockchain technology and tokenization to improve the efficiency of the settlement process, streamline recordkeeping and reconciliation, increase collateral mobility across the securities lifecycle, and boost fund liquidity. ¹ However, as we have previously discussed, the future adoption and benefits of tokenized securities markets rests on ensuring that they are subject to the same fundamental investor protection and market integrity principles that have helped make the U.S. securities markets the largest, deepest, most liquid, efficient, and reliable in the world. ²

Broad Regulatory Exemptions for Tokenized Securities Activities Would Create Significant Risks

As SEC Chairman Atkins recently commented, “securities, however represented, remain securities,” ³ reaffirming that the federal securities laws apply equally to tokenized and conventional securities. We fully agree: the use of distributed ledger technology to record an interest in a security does not change the fundamental nature of the asset as a security. Instead, as SIFMA has long held, regulation should be technology neutral and continue to be based on the intrinsic economic characteristics and substance of an asset or transaction, not on categories or labels. ⁴

Nonetheless, SIFMA remains concerned about the potential scope of the possible innovation exemption(s) the SEC is currently assessing, specifically the adoption of certain exemptions from existing securities regulations for some tokenized securities trading activities. The strength of the U.S. securities markets is built on broad investor confidence in their efficiency and resiliency. This investor confidence in turn derives from the well-established investor protections, risk controls, and market-integrity guardrails that are consistently applied and built into every layer of the securities lifecycle through federal securities laws and the rules of self-regulatory organizations. As such, providing broad exemptions from these guardrails for tokenized securities could expose investors and issuers to the risks these measures seek to mitigate, which would erode confidence in U.S. capital markets more generally.

To ensure the introduction of tokenized securities markets provides the integrity, liquidity, and investor protection for which U.S. markets are known, anyone involved in the intermediation of tokenized securities, whether in centralized or purportedly decentralized trading systems, must be subject to core regulatory principles designed to protect investors, ensure reliability and promote market quality (see our September 3^rd blog for a full list of these principles). In the absence of requirements like market interconnectivity, fair access, and price transparency, amongst other protections, there would be a significant risk that the securities markets will fragment and become disorderly, that information asymmetries and conflicts of interest will arise, and that investors, issuers, and other market participants will be harmed, thereby eroding trust in the securities markets with potentially long-lasting negative impacts.

Recent Crypto Market Disruptions Underscore the Importance of Maintaining Core Protections in Tokenized Securities Markets

Recent disruptions in native crypto asset markets, including the October crypto “flash crash” and the November collapse of Stream Finance’s decentralized (“DeFi”) protocol, are timely reminders of why long-standing securities regulatory frameworks designed to preserve market quality and protect investors were originally created. They also show how those guardrails continue to protect investors, ensure market stability and integrity, and mitigate the types of risks that have emerged in unregulated or lightly regulated digital-asset markets.

During the October 10th crypto flash crash, more than $660 billion in value was reportedly erased within hours as insurance funds were depleted, automated deleveraging cascaded across platforms, and cross-venue feedback loops amplified—rather than absorbed—market shocks. ⁵ Roughly 1.6 million traders suffered losses totaling approximately $19 billion, with Bitcoin, Ethereum, and other assets experiencing significant and sustained declines (on that day, Bitcoin fell 8.7% from its earlier month high and continued to fall thereafter). By contrast, the S&P 500 fell only 3.0% from the earlier October high and ended the month +1.5% from that high. Importantly, the equity markets continued to operate in an orderly manner. This stark divergence underscores how the pre-trade risk controls, Regulation SHO short-selling requirements, Regulation T margin limits, operational-resiliency standards, limit-up/limit-down (“LULD”) bands, and market-wide circuit breakers embedded throughout SEC-regulated markets help stabilize trading during periods of stress. By contrast, crypto markets lack mechanisms to moderate volatility, affirmative market-maker obligations, transparent liquidation protocols, best-price requirements, and meaningful leverage constraints, resulting in a pattern of actions that exacerbated market stress rather than eased it.

The November 2025 collapse of Stream Finance’s decentralized protocol also illustrates how the absence of basic investor-protection and market-integrity safeguards can rapidly magnify losses and spread contagion. After Stream disclosed a roughly $93 million loss tied to an external manager, its stablecoin lost more than 75% of its value in a single day, withdrawals were halted, and cascading liquidity stresses rippled across interconnected DeFi products. While the full extent of the losses remain unclear, the episode clearly demonstrates that in the absence of disclosures, redemption guarantees, risk-management frameworks, and transparent governance, a single failure point can propagate rapidly across a fragmented ecosystem.

If tokenized securities were allowed to trade outside of the core investor and market integrity / quality protections that underpin the conventional securities markets, then these kinds of episodes could easily be replicated in tokenized stock markets and liquidity pools – with potential spillover effects on the prices of shares in conventional markets – creating untold damage to investor confidence in the U.S. securities markets and harming issuers’ ability to rely on these markets to raise capital. It is for this reason that the core investor protection and market quality protections must apply to all markets that trade tokenized securities, including purportedly “DeFi” and hybrid centralized-decentralized (“CeDeFi”) markets.

Equivalent Functions Require Equivalent Regulation: Exemptive Relief for Tokenized Securities Activities Must be Clearly Justified and Narrowly Drawn

The SEC should exercise great caution to ensure that innovation strengthens rather than weakens the regulatory architecture that tens of millions of American families rely on to save and invest, and that issuers rely on to raise capital. That requires them to evaluate whether exempting participants in tokenized securities markets from securities law registration and other requirements is consistent with protecting investors, serving the public interest, and maintaining fair competition across both tokenized and traditional markets.

A baseline assumption for all requests should be that equivalent functions should be regulated in an equivalent manner regardless of the technology used. That means that any platform that exercises ongoing control over any part of the securities transaction lifecycle, including order flow, trading logic and sequencing, access and governance parameters, routing, fee schedules, settlement instructions, and custody arrangements, should be subject to intermediary registration requirements. This should apply irrespective of whether the entities are intermediating activity involving tokenized or conventional securities, and regardless of whether they are operating in ostensibly decentralized markets (including both “DeFi” and hybrid centralized-decentralized markets, sometimes referred to as “CeDeFi”).

Entities in DeFi and CeDeFi markets that facilitate order matching, internalization, smart-contract based routing, or custody of client assets frequently earn fees and transaction-based compensation analogous to conventional commissions, maker-taker rebates, spread capture, custody charges, or financing charges. Those fee-generating activities are directly tied to core intermediation functions that have historically required registration and corresponding supervision, financial responsibility, AML/KYC requirements, and comprehensive books-and-records obligations. Exempting entities that perform analogous functions to intermediaries in conventional securities markets simply because those functions occur through distributed ledger technology would not only by inconsistent with long-standing SEC precedents, but would create regulatory arbitrage, fragment liquidity into isolated pools, undermine price discovery and best execution, and erode investor and issuer confidence. Moreover, that erosion in confidence would likely impact not just the tokenized securities markets but the entire securities market.

To avoid that outcome, it is critical that the SEC follow a robust, analytical process when evaluating requests for exemptive relief. As is the case with any market participant seeking exemptive or no-action relief today, the burden should rest squarely on applicants to clearly and convincingly demonstrate why existing requirements are inappropriate or unnecessary when applied to their specific business model and why compliance would be inconsistent with – or unnecessary to achieve – the Commission’s objectives regarding capital formation, market quality, and investor protection.

When making exemptive relief requests, applicants should therefore provide detailed, technical explanations of their system’s role at each step of the securities-transaction lifecycle; identify the specific regulatory provisions at issue; explain why compliance is infeasible; and show how any proposed alternative guardrails would produce outcomes equivalent to those under the current regulatory framework. As SIFMA’s November 26th letter stresses, all proposed exemptions must be subject to rigorous cost-benefit analysis, and the Commission should publish each proposal for notice and comment with adequate time for meaningful stakeholder input. Finally, any relief that is granted should be narrowly drawn, open to all market participants to apply for, and subject to appropriate guardrails to ensure that investors are protected and potential harm to market functioning is mitigated.

An Innovation Exemption Framework Should Set Clear Guardrails and Supplement Broader Policy Efforts

To that end, a carefully designed innovation exemption framework could help in setting minimum guardrails and standards for grants of exemptive relief. We agree with Chairman Atkins that innovation exemptions should “allow companies to experiment “within parameters of time and amount of people, amount of costumers and amount of money.” ⁶ As SIFMA has previously recommended, key guardrails should include: (1) limiting participation in projects receiving exemptive relief to sophisticated investors, at least initially; (2) placing caps on transaction size, customer volume, and project scope to prevent regulatory arbitrage or market fragmentation; and (3) imposing duration limits to prevent long-term operation outside of the established securities legal framework. Projects should also have a defined “exit ramp” into a permanent regulatory regime upon demonstrating the ability to meet core investor-protection and market-operations standards, with any transitional relief being narrowly tailored and phased out quickly. And, as noted above, the SEC should make it clear that all similarly situated entities will be able to apply for the same type of exemptive relief.

It is also important that the SEC clarify that exemptions granted under this framework will supplement and not substitute for a broader process of regulatory modernization. A thoughtfully designed framework could allow firms to test novel digital-asset products and business models in a flexible but controlled environment, while giving the SEC real-time visibility into how these models operate, providing helpful insights that could help in the design of broader regulatory modernization efforts. But there are also limits: controlled sandbox-style environments do not replicate the realities of high-volume trading systems, periods of market stress, or complex cross-market interactions between large numbers of counterparties. This is why market-wide reform or modernization efforts must go through a full notice-and-comment rulemaking process, ensuring that all market participants have an opportunity to provide input.

Finally, the SEC should make clear in any overarching framework that innovation exemptions will only be granted in situations where there is a clear need to resolve genuine “square-peg/round-hole” issues i.e., clerical or administrative provisions of the securities laws that are inappropriate or unnecessary when applied to tokenized assets or distributed ledger technology, or provisions that are arguably less necessary to protect investors, promote capital formation, and secure orderly markets in the context of tokenization. ⁷ The Commission should also clarify that they will not grant exemptive relief that provides categorical exemptions for certain market participants from longstanding statutory definitions of a broker, dealer, or exchange.

Conclusion

As the Commission evaluates requests for exemptive relief and considers whether to establish an innovation-exemption framework, SIFMA urges a careful, deliberate, and investor-focused approach. Tokenized securities and the platforms that intermediate them, whether centralized, decentralized, or operating through hybrid “CeDeFi” models, must be subject to the same core investor-protection and market-integrity principles that have long underpinned the strength, resilience, and global leadership of U.S. securities markets.

To the extent that exemptions from these requirements are deemed necessary to support innovation, they should be narrowly tailored, grounded in strong reasoning and economic analysis, open to all similarly situated market participants, and subject to appropriate guardrails and public notice-and-comment. And innovation exemptions should never serve as a substitute for a broader process of regulatory modernization based on notice-and-comment rulemaking.

SIFMA and its members look forward to continued engagement with the SEC in the months ahead. We share the Commission’s objective: a regulatory environment that fosters responsible innovation while protecting investors and preserving the integrity and competitiveness of the U.S. securities markets into the future.

Author

Peter Ryan is Managing Director and Head of International Capital Markets and Strategic Initiatives, SIFMA

Footnotes