Innovation Exemption
Innovation Exemption is a temporary, conditional regulatory relief issued by the U.S. Securities and Exchange Commission (SEC) on September 17, 2026 that permits limited trading of tokenized U.S. stocks on blockchain-based venues without those venues registering as securities exchanges. Granted under Section 36(a)(1) of the Securities Exchange Act of 1934, the exemption applies to what the SEC calls Tokenized Securities Venues (TSVs) and lasts for five years from publication, after which it expires unless replaced by rulemaking, an extension, or legislation.[1][2]
The Innovation Exemption relieves TSVs from the definition of an "exchange" under Section 3(a)(1) of the Exchange Act when they make tokenized National Market System (NMS) stocks available for permissioned trading through automated market makers (AMMs) and liquidity pools. It simultaneously exempts certain liquidity providers—termed "Covered Firms"—from the definition of a "dealer" under Section 3(a)(5) when they supply liquidity in tokenized NMS stock using proprietary capital. The relief is not a formal rulemaking; the SEC framed it as a way to observe emerging venues, gather data, and inform future policy.[2][3]
Background
Tokenization is the process of issuing digital representations of publicly traded securities, real-world assets, or other forms of value on a blockchain network. The SEC has stated that tokenization can modernize core market infrastructure functions—issuance, trading, transfer, settlement, and the recording of ownership—and has the potential to reduce costs, enhance transparency, and expand liquidity, particularly for historically less liquid assets. Advocates have argued the technology could enable faster settlement, around-the-clock markets, lower costs, and easier use of securities as collateral, which is why it has drawn interest from global asset managers, banks, and market infrastructure firms. Citi analysts estimated that tokenized assets could grow into a $5.5 trillion market by 2030.[1][4]
The Innovation Exemption is part of the SEC's "Project Crypto" initiative, launched a little over a year before the exemption with the goal of modernizing rules to move markets onchain. The exemption itself had been in development for more than a year; an SEC spokesperson said the relief was 14 months in the making. Its release came within days of the Digital Asset Market Clarity Act—described as crypto's most consequential push for regulatory certainty—failing in the U.S. Senate, where it drew 49 of the 60 votes required to advance. The CLARITY Act would have established rules for how digital assets, including tokenized securities, are classified and regulated.[3][5]
After the Senate vote, SEC Chairman Paul Atkins posted on X that the agency "will act decisively within the SEC's statutory authority to deliver certainty for American investors and for the entrepreneurs shaping our technological future," and the exemption followed. Because the CLARITY Act failed to advance, the SEC moved to define the regulatory boundary through its existing authority. The action was taken by Atkins and his two fellow Republican commissioners; observers noted that policies established this way could later be reversed. The exemption arrived alongside other crypto-related SEC initiatives, including a major crypto rule proposed the month before to clear a path for crypto offerings without triggering certain oversight, and a September 1, 2026 proposal—the first major overhaul of transfer-agent rules in four decades—to explicitly accommodate blockchain-based recordkeeping of securities ownership. The SEC also planned to host a roundtable on around-the-clock trading.[4]
Statutory Authority
The Innovation Exemption rests on the SEC's general exemptive authority in Section 36(a)(1) of the Exchange Act (15 U.S.C. 78mm(a)(1)), which Congress created through the National Securities Markets Improvement Act. The SEC has noted that it has used this exemptive authority before to allow new products and services to develop, citing money market funds, index funds, and exchange-traded funds as examples that grew from initial use of exemptive relief. The Commission framed the Innovation Exemption in the same tradition—scoped relief used to experiment, learn, and adapt investor protections to new contexts before committing to durable rules.[1]
The same Section 36(a)(1) authority underpinned a separate, unrelated SEC order earlier in 2026. In an Order Granting Temporary Exemptive Relief published in the Federal Register on June 15, 2026 (Release No. 34-105656, 91 FR 36022), the Commission extended compliance deadlines for amendments to Regulation NMS adopted in the September 18, 2024 "Minimum Pricing Increments, Access Fees and Transparency of Better Priced Orders" rulemaking. Those amendments established a $0.005 minimum pricing increment for certain NMS stocks priced at or above $1.00, reduced access fee caps under Rule 610(c) to $0.001 per share for higher-priced stocks and to 0.1 percent of quotation price for stocks below $1.00, and adopted Rule 610(d) requiring exchange fees and rebates to be determinable at execution. Following petitions for review consolidated in the D.C. Circuit—including We the Investors et al. v. SEC and Cboe Global Markets, et al. v. SEC, No. 24-1350—and after the court denied the Cboe petition on October 14, 2025, the SEC granted relief in response to a February 26, 2026 application from MEMX LLC and comment letters from bodies such as SIFMA, Nasdaq, the New York Stock Exchange, and Cboe. Commenters warned that overlapping 2026 deadlines, including the launch of 23/5 trading, would force exchanges, brokers, vendors, and clearing firms to update matching engines, routing logic, and market-data infrastructure simultaneously; SIFMA stated that "market participants need to begin systems work now." The Commission extended the exemptions for Rules 600(b)(89)(i)(F), 610(c) and 612 until the first business day of November 2027, concluding that this would facilitate an orderly transition consistent with investor protection. The order was signed by Assistant Secretary Stephanie J. Fouse.[6]
How It Works
A Tokenized Securities Venue facilitates buyers and sellers of tokenized NMS stock in two ways: by providing one or more permissioned AMM liquidity pools where participants interact and agree to trade terms, and by setting the standards that determine who may access trading on those pools. An automated market maker uses algorithm-driven automation to manage buyer and seller activity, with the venue managing pools of the necessary assets. Under the exemption, TSVs may both list and trade tokenized securities and operate the AMMs and liquidity pools used to trade them.[2][4]
The relief applies only to "tokenized NMS stock," defined as shares of exchange-listed companies tokenized either by the issuer or by an unaffiliated third party, provided the token carries the same rights as a traditional share. The SEC does not formally designate TSVs; any platform that believes it can meet the definition and comply with the conditions need only provide notice before beginning tokenization operations. The exemption operates in a permissioned environment—the venues are not open, permissionless DeFi—with participants subject to access standards, KYC, and sanctions screening.[5][7]
To manage risk, the exemption is controlled by limits on the number of symbols and the volume traded for tokenized NMS stocks on a TSV, calibrated by limit up/limit down tiers—the price bands used in equity markets to pause trading during large swings. These volume caps are intended to mitigate potential risks and major price swings, addressing the risk that thinner trading activity in tokenized markets can produce increased volatility and greater exposure to large price movements. The SEC characterized the effort as a pilot, not a full replacement for the New York Stock Exchange or Nasdaq.[1][7]
The Innovation Exemption requires U.S. dollar–denominated transaction data—including price, size, time, pool address, end-of-day pool size, and daily volume—to be made publicly available at regular intervals. The SEC intends this transparency to reduce information asymmetries, support monitoring, and allow it to study securities trading conducted under the exemption, including effects on best quotes, manipulation risk, and whether liquidity is siphoned away from lit markets.[1][7]
Conditions and Requirements
To rely on the Innovation Exemption, a TSV must satisfy a set of specified conditions spanning eligibility, technology, disclosure, and market coordination. A venue must be a U.S. person and comply with the economic and trade sanctions programs administered by the Office of Foreign Assets Control (OFAC), and it must permission every participant so that only certain persons may trade. Smart contracts used by a TSV must be auditable, public, and deployed on a public, permissionless distributed ledger. Venues must maintain books and records, provide public notice about their operations and their affiliates' trading activities, and are prohibited from offering financing. TSVs must halt trading in a tokenized NMS stock concurrently with any stoppage of the underlying stock on its primary listing exchange, and the anti-fraud and anti-manipulation provisions of the federal securities laws apply in full.[2][5]
The relief for liquidity providers is tailored. Covered Firms that contribute proprietary capital and may engage in activities indicative of dealing—such as quoting prices to customers or entering agreements to provide committed capital—receive relief from dealer registration conditioned on meeting requirements including disclosure and recordkeeping. Reuters reported that liquidity providers in tokenized stocks obtain a five-year exemption from dealer registration requirements.[2][8]
No Synthetics
Two requirements—both identified as key points of contention—define the boundaries of the relief. First, holders of stock tokens must retain the same rights and privileges as holders of the traditional securities, including the rights to receive dividends and exercise voting rights. The exemption therefore excludes "synthetic security tokens"—derivatives that track a stock's price up and down but do not convey ownership of shares. A TSV must verify that any tokenized NMS stock it makes available provides holders the same rights as an equivalent class of the traditional stock. Chairman Atkins stated that tokens "must provide holders with the same rights and privileges as the traditional securities, including rights to receive dividends and exercise voting rights."[4][3]
An SEC spokesperson said the relief responded to demand for compliant securities tokens in the U.S. and that the agency sees "very little interest on the derivative side in the US," adding that synthetic activity abroad "can remain out in the wilds." The spokesperson declined to say whether the Commission would take a future position on whether synthetic stock tokens would ever be allowed domestically.[5]
Issuers Can Object
Second, companies must be able to object to having their securities represented as tokens. When a tokenized NMS stock is tokenized by an unaffiliated third party rather than by or on behalf of the issuer, the TSV must provide written notice to the issuer and an opportunity to object before making the stock available for trading. According to an SEC spokesperson, the platform must wait 30 days after the company receives notice before trading the token; if the company objects within that window—an objection can be as simple as stating that it objects—the venue cannot list the token. Issuer silence is treated as tacit permission. The provision partly responds to a July letter from the Securities Transfer Association urging the SEC to make issuer authorization a threshold condition for any tokenized-securities relief. The SEC spokesperson said feedback from the issuer community suggested the technology will be adopted in some form.[3][5]
Officials and Public Comment
Chairman Paul S. Atkins described the exemption as "a significant step forward, within its statutory authority, to bring America's capital markets into the digital age by facilitating onchain trading of certain tokenized stocks." He stressed its interim nature, stating that the Commission "is not cementing today's technology as the standard for tomorrow" and that "this interim measure must be followed by durable rulemaking to ensure that onchain markets remain a viable pathway as our capital markets continue to evolve." He framed the exemption as designed to resolve challenges that had prevented responsible innovation from taking root in the United States while providing investor protections and market integrity standards. Jamie Selway, Director of the SEC's Division of Trading and Markets, called the approval "an important milestone" and said the division "stands ready to work with interested parties seeking to operate a TSV." An SEC spokesperson described the exemption as "a way station to final rulemaking for us. Potentially, it's a way station to legislation for Congress."[2][3][5]
The Commission is expressly soliciting public feedback on many aspects of the Innovation Exemption and has requested detailed, data-supported comments, ideally including metrics, case studies, incident analyses, and operational narratives from live or test environments. The order was to be published on SEC.gov and in the Federal Register, and it solicits comment on possible modifications and potential next steps. The SEC thanked staff in the Division of Trading and Markets and the Office of the General Counsel, along with the Crypto Task Force led by Commissioner Hester Peirce, for their work on the exemption.[1]
Market Context and Reactions
Before the exemption, several U.S. platforms—Coinbase, Robinhood, Gemini, and Payward's Kraken exchange—had launched offshore tokenized equity offerings but had not offered them to U.S. customers. Robinhood Chain launched in July 2026 and featured tokenized debt securities barred to U.S. persons. On the exchange Hyperliquid, HIP-3 markets led by Trade.xyz's equity perpetual futures, including its Nasdaq-100 tracker XYZ100, grew from roughly 2% of the exchange's perpetuals volume at the start of the year to about 50% by July 2026, according to The Block. Data from RWA.xyz showed the total value of all tokenized stocks beginning the year at $688 million and standing just shy of $3 billion by September 2026, with most of that value consisting of synthetics.[5][3]
The exemption's insistence on issuer consent and full shareholder rights followed disputes over synthetic tokens created without issuer involvement. AMC CEO Adam Aron and Robinhood CEO Vlad Tenev clashed publicly on X over the launch of synthetic AMC stock tokens on Robinhood Chain in non-U.S. jurisdictions, with Aron arguing that creating exposure to AMC stock without the company's involvement undermines the traditional relationship between companies and their shareholders. Robinhood subsequently announced plans to let stock-token holders redeem their tokens for the underlying shares on a 1:1 basis and to add voting rights. A trading episode over the weekend of August 30, 2026 illustrated the risks of thin, off-hours tokenized markets: a memecoin called BONER, whose liquidity pool was paired with Robinhood's tokenized Hims & Hers (HIMS), ended up holding more than half the token's supply, and with the stock market closed, tokenized HIMS reached $132.64 while the actual stock had closed at $28.84 on Friday; by Monday afternoon tokenized HIMS had returned to roughly $29 to $30, while BONER had risen more than 1,000% in 24 hours to a market capitalization of about $41.3 million, as reported by The Defiant.[3][5]
Industry response emphasized the pathway the exemption opened for compliant, fully backed tokens. Vlad Tenev wrote on X that "Tokenization is coming to America" and that Americans "can start to reap the benefits of tokenization: instant settlement, 24/7 trading, fractionalization by default and more." Commentators identified the compliance-oriented tokenization firm Securitize as a likely beneficiary and suggested that brokers and infrastructure providers seeking to bring U.S. stocks onchain stand to gain, while traditional trading platforms, brokerages, and transfer agents would face pressure to adapt. Because the exemption requires smart contracts to run on public, permissionless chains, analysts noted potential settlement-layer opportunities for networks such as Ethereum and Solana, even as trading itself remains permissioned. Observers characterized the framework as "conditional access" and a regulatory sandbox of "pilot first, then legislate/rulemake"—described as the first time a U.S. regulator has acknowledged that onchain AMMs can serve as a legitimate experimental venue for the secondary trading of listed stocks.[2][7][9]
