As Congress Stalls, SEC Hits Go on 'Innovation Exemption'
On Sept. 17, the U.S. Securities and Exchange Commission issued an order granting temporary, conditional exemptive relief designed to facilitate on-chain trading of certain tokenized stocks — a measure the agency is calling the innovation exemption. [1]
This order is the most concrete operational step to emerge from Project Crypto, launched in July 2025 to modernize the federal securities law framework and enable U.S. financial markets to move on-chain.
The timing matters. Earlier in the week, on Sept. 15, Congress did not advance the Digital Asset Market Clarity Act. The SEC is now acting within its existing statutory authority rather than treating legislative delay as a reason for regulatory paralysis. The order relies on Section 36(a)(1) of the Securities Exchange Act, which the commission identifies as the basis for two forms of temporary, conditional exemptive relief.
This action also reflects a broader pivot toward accommodating responsible digital asset activity in the U.S. The agency's stated objective is not deregulation; it is to replace barriers that may prevent responsible innovation with a defined pathway that preserves investor protection and market integrity.
In practical terms, the SEC is moving from asking whether on-chain markets can fit within the federal securities laws to testing how they can do so.
What the Innovation Exemption Does
The order grants two distinct forms of relief. Each addresses a separate registration issue that can arise when securities trading and liquidity provision are conducted through blockchain-based systems.
Relief for Tokenized Securities Venues
First, the order exempts certain trading venues — defined as "tokenized securities venues," or TSVs — from the definition of "exchange" in Section 3(a)(1) of the Exchange Act. For activity within the order's scope and subject to its conditions, a qualifying TSV therefore may facilitate trading without being treated as an exchange solely on account of that covered activity.
This is targeted relief, not a blanket exclusion for every blockchain protocol, marketplace or trading interface. Whether a platform qualifies will turn on the order's definitions, the instruments traded, the participants admitted and the platform's satisfaction of the applicable conditions. Businesses should not assume that calling a system "decentralized" or "tokenized" places it within the exemption.
Relief for Covered Firms
Second, the order exempts certain liquidity providers — defined as "covered firms" — from the definition of "dealer" in Section 3(a)(5) of the Exchange Act. This relief addresses theStephen Aschettinorisk that firms providing liquidity on a TSV could be required to register as dealers based on their covered market activity.
Again, the relief is conditional and activity-specific. A liquidity provider should analyze both its status under the order and its activities outside the TSV. The exemption does not erase dealer-registration questions that may arise from other securities activity, nor does it displace other federal or state requirements that remain applicable.
Together, the two components are designed to solve both sides of the same market-formation problem: A venue needs a lawful operating pathway, and a functioning venue needs liquidity. The order gives each a temporary route forward while the commission evaluates a longer-term framework.
Key Conditions and Investor Protections
The commission paired the relief with specific guardrails. Those conditions are not secondary details; they define the perimeter of the exemption.
Sanctions Compliance
A TSV must be a U.S. person and comply with economic and trade sanctions programs administered and enforced by the U.S. Department of the Treasury's Office of Foreign Assets Control. Operators should expect sanctions screening, wallet and participant diligence, escalation procedures, blocking and rejection protocols, and recordkeeping to be core design requirements, as applicable.
Permissioned Access
A TSV must establish access standards that allow only certain participants to trade tokenized national market system, or NMS, stock. The model contemplated by the SEC is therefore permissioned, not open access. Identity, eligibility and authorization controls should be embedded into onboarding and ongoing monitoring.
No Synthetics
A TSV may trade NMS stock tokenized by or on behalf of the issuer, or a security tokenized by an unaffiliated third party. The tokenized security must provide the same rights and privileges as the traditional security, including dividend and voting rights. Products that merely reference the price of a stock without conveying the corresponding shareholder rights do not satisfy this condition as described by the commission.
Issuer Objection Rights
An issuer must have an opportunity to object to and prevent its security from trading on a TSV. Venue operators and tokenization providers will need a reliable process for notice, objection intake, authentication, implementation and ongoing status management.
Anti-Fraud and Antimanipulation Rules Apply in Full
The SEC expressly states that, without exception, the federal securities laws' anti-fraud and antimanipulation provisions apply in full to securities activity in these markets. The exemption is not a safe harbor for misleading disclosures, manipulative trading, deceptive conduct or deficient surveillance.
These requirements should shape product architecture from the beginning. A platform that cannot control access, establish the legal and operational link between a token and the underlying NMS stock, honor issuer objections, or monitor misconduct may not be able to rely on the relief.
What This Means for Fintech Companies and Digital Asset Businesses
The immediate opportunity is meaningful, but it is not self-executing. The practical question is whether your business model can fit within the exemption's perimeter and operate within its controls.
If you operate, develop or support a trading platform, map the platform's functions against the TSV definition and the Section 3(a)(1) exchange analysis. Review who may access the venue, which tokenized NMS stocks may trade, how issuers can object, and how the platform will suspend or remove an instrument when required. Product, legal, compliance and engineering teams should perform that analysis together.
If you are a tokenization platform or service provider, document the chain of rights connecting the on-chain instrument to the underlying NMS stock. Confirm how dividends, voting rights, corporate actions, transfers and reconciliations will work in practice. The "no synthetics" condition makes legal equivalence and operational fidelity central — not merely technical minting.
If you are a crypto or digital asset business expanding into securities, do not treat the order as a broad digital asset safe harbor. Inventory each activity performed by the entity and its affiliates, including brokerage, custody, settlement, staking, lending, market making and proprietary trading, and identify which activities are covered by the order and which remain subject to existing law.
If you expect to provide liquidity, assess whether you qualify as a covered firm and whether the contemplated activity falls within the temporary dealer relief. Separate covered TSV activity from other securities activity, and maintain governance capable of proving that separation. Dealer, broker, investment adviser and state law analyses may still be required depending on the facts.
If you are an institutional investor, evaluate the venue's access standards, custody model, asset rights structure, settlement finality, corporate action processing, cybersecurity, sanctions controls and market surveillance capabilities. Tokenized form does not eliminate counterparty, operational or legal risk; it changes where those risks sit.
For all market participants, the near-term task is to create a written eligibility and controls matrix. Identify every condition, assign an owner, specify the technical and legal evidence supporting compliance, and establish a process for monitoring changes to the order or subsequent commission action.
Compliance Considerations and Open Questions
Several important questions remain. SEC Chairman Paul Atkins' statement accompanying the order describes the relief at a high level, but implementation will depend on the order's operative definitions, conditions and procedures.[2] Market participants should review the order itself before relying on the exemption and avoid filling gaps with assumptions.
Among the issues that will require close attention are the precise eligibility standards for TSVs and covered firms; the boundary between covered and noncovered activity; the mechanics for issuer notice and objection; the evidence needed to demonstrate that a token carries the same rights and privileges as the traditional security; and the interaction with brokerage, custody, clearing, transfer agent, investment adviser, state law and self-regulatory organization requirements.
Operational questions are equally important. Permissioned access will require decisions about identity verification, wallet controls and participant monitoring. OFAC compliance in blockchain-based environments may require risk-based screening and transaction controls. Market integrity obligations will require surveillance calibrated to on-chain execution without losing visibility into related off-chain activity.
The temporary nature of the relief creates another planning issue. Companies must consider what happens if the exemption expires, is amended or is replaced by rules with different requirements. Contracts, technical architecture and launch plans should include change-management and wind-down mechanisms rather than assume that today's conditions will remain fixed.
The SEC has invited public comment on all aspects of the innovation exemption. Businesses should use that process to identify practical impediments, propose workable controls and build a record for durable rulemaking. Concrete comments — supported by operating models, cost information and investor-protection analysis — are likely to be more useful than general statements for or against tokenization.
Looking Ahead
The direction of travel here is unmistakable. The SEC is using its existing authority to create a controlled path for on-chain trading while Congress continues to debate a broader digital asset market structure. The innovation exemption does not replace the Clarity Act or another comprehensive legislative framework, but it reduces the likelihood that legislative delay will freeze market development.
The commission is also signaling that it does not intend to cement today's technology as the standard for tomorrow. A temporary, permissioned environment can generate the market experience needed to evaluate custody, settlement, surveillance, governance and investor protection before the agency writes permanent rules.
But this is a bridge, not a destination. Temporary exemptive relief can open a market; only durable rulemaking can give participants the certainty needed for sustained investment and scale. The public comment process will therefore be consequential, both for the terms of any next-stage relief and for the shape of a lasting on-chain market framework.
Companies should proceed with discipline. Confirm eligibility, design to the conditions, preserve evidence of compliance and plan for regulatory change. With those cautions, the significance of the development should not be understated: The SEC has moved on-chain trading of tokenized securities from a policy aspiration toward an operational regulatory pathway.
Endnotes
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