The US Securities and Exchange Commission’s staff and crypto exchange Kraken recently discussed various issues related to the tokenization of traditional assets and the regulatory framework for these assets. Kraken Meets With Crypto Task Force On Monday, Kraken and the US SEC Crypto Task Force’s staff met to discuss the tokenization of traditional assets and a potential tokenized trading system in the US. The Commission’s staff had a meeting with representatives from Payward, Inc., Kraken Securities LLC, and law firm Wilmer Cutler Pickering Hale and Dorr LLP. According to the SEC’s memorandum, the agenda included approaches to address issues related to the regulation of crypto assets and the legal and regulatory framework for operating a tokenized trading system. Notably, the topics also included an outline of the core components of the proposed tokenized trading system’s architecture, addressing potentially relevant provisions under the federal securities laws, examining how the SEC can provide regulatory clarity and facilitate innovation, and discussing the benefits of tokenization. The reunion follows the crypto exchange’s interest in launching tokenized stocks of popular equities outside of the US. In May, Kraken announced its plan to allow non-US customers to trade a tokenized version of popular equities, offering over 50 stocks and Exchange-Traded Funds (ETFs), like Apple, Tesla, and Nvidia. Kraken’s tokenized equities enable users in Europe, Latin America, Africa, and Asia to invest in US stocks even when the US stock market is closed, with lower trading costs and faster settlement. Similarly, Coinbase is seeking the SEC’s approval to offer tokenized stocks to its customers. In June, Coinbase’s Chief Legal Officer (CLO), Paul Grewal, told Reuters that the emerging sector is a “huge priority” for the crypto exchange. Nonetheless, Coinbase would need to be granted a “no action letter” or exemptive relief from the Commission, as typically, companies that offer trading in securities must be registered as broker-dealers under the securities regulator. “With a no-action letter, an issuer of a tokenized equity or a platform that wishes to offer secondary trading in those equities can have some confidence, some comfort, that the SEC has adopted its view of why this product is compliant,” Grewal stated, noting that, “it’s that confidence that has been lacking so far, and I think really held back a lot of the institutional adoption” of crypto and blockchain technology. Industry Concerns For Tokenized Equities Kraken’s push for regulatory clarity regarding tokenized stocks also follows recent concerns from the world’s biggest stock exchanges. On August 25, Reuters reported that the World Federation of Exchanges (WFE) called on securities regulators to crack down on tokenized equities, arguing that the blockchain-based tokens “create new risks for investors and could harm market integrity.” The letter was reportedly sent to the SEC’s Crypto Task Force, the European Securities and Markets Authority (ESMA), and global securities watchdog IOSCO’s Fintech Task Force on August 22. The coalition expressed its concerns that these tokens “mimic” equities without providing the same rights or trading safeguards. Earlier this year, the World Economic Forum outlined some of the major challenges for tokenized equities adoption, including the lack of sufficient secondary-market liquidity and a clear global standard. “We are alarmed at the plethora of brokers and crypto-trading platforms offering or intending to offer so-called tokenised U.S. stocks,” the WFE wrote in the recent letter, suggesting that issuers of stock could suffer reputational damage if the tokens fail. The WFE urged regulators to apply securities rules to tokenized assets, clarify legal frameworks for ownership and custody, and prevent them from being marketed as equivalent to stocks.
