SEC must not let crypto companies ‘bypass’ rules, stock exchanges say

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By Elizabeth Howcroft and Hannah Lang

(Reuters) -The Securities and Exchange Commission’s possible plan to grant crypto companies relief from regulation to sell “tokenised” stocks risks harming investors, a group of stock exchanges said in a letter to the U.S. regulator this week.

Several crypto companies plan to sell crypto tokens linked to listed equities to retail investors who want to get exposure to stocks without owning them directly. But to sell the products in the U.S., crypto companies which are not registered as broker-dealers would need the SEC to give them a no-action letter or an exemption.

SEC Chair Paul Atkins has said the agency is working on crafting an “innovation exemption” from securities laws which would enable crypto players to experiment with new business models.

The World Federation of Exchanges (WFE), a group whose members include the U.S. Nasdaq and Germany’s Deutsche Boerse, said in a letter dated November 21 that an exemption could create market integrity risks and undermine investor protections.

“The SEC should avoid granting exemptions to firms attempting to bypass regulatory principles that have safeguarded markets for decades,” WFE CEO Nandini Sukumar told Reuters.

The SEC, which published the WFE’s letter on its website, declined to comment.

SEC’S NEW APPROACH TO CRYPTO

The letter from the WFE, which said in August it was alarmed by platforms offering tokenised stocks, did not name specific companies seeking relief, or which rules they were seeking relief from.

Tokenising equities typically involves creating crypto tokens which are pegged to a pre-existing stock.

Under President Donald Trump, the SEC has overhauled its approach to crypto, in a victory for the nascent industry which has emerged as a major lobbying force. 

The wider finance industry, including banks, are exploring ways to introduce crypto-related products and services into their businesses.

The WFE’s letter said it was “pro-innovation” and referred to tokenisation as a “natural evolution in capital markets”. 

Still, its letter is a sign of the mainstream finance industry beginning to push back against some of the crypto world’s wishlist, especially as parts of the crypto sector start to compete directly with their own businesses.

“We and the crypto platforms should be competing on a level playing field, we should be subject to the same rules,” said James Auliffe, who runs the WFE’s technology working group.

Issuers of tokenised stocks say that integrating blockchain – the technology behind crypto – into equity markets could make trading more efficient. 

Auliffe said that stock exchanges are still looking for scenarios in which the benefits of shifting stock trading onto blockchain outweigh the costs. “What you can see from the fact that no one’s done it, is that equity markets in particular are very very efficient already,” he said.

(Reporting by Elizabeth Howcroft in Paris and Hannah Lang in New York; Editing by Tommy Reggiori Wilkes and Emelia Sithole-Matarise)