Issuers Object to OKX-ICE’s Stock Tokenization Plans
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WHAT HAPPENED
At least 16 issuers opt out of OKX-ICE’s tokenized stock platform. Microsoft, Apple, Google, Goldman Sachs, CoreWeave, and Broadcom are among at least sixteen issuers that have notified OKXICE TSV, a joint tokenized stock venture between crypto-exchange OKX and NYSE parent Intercontinental Exchange, that they object to their stocks being tokenized.
The full list of issuers who have opted out: Microsoft, Apple, Google, Goldman Sachs, CoreWeave, Broadcom, UnitedHealth Group, Rocket Lab, Qualcomm, Caterpillar, McDonald’s, Western Digital, Nasdaq, Verizon, Cerebras Systems, and Applied Optoelectronics.
The Securities & Exchange Commission released its “innovation exemption” on September 17 shortly after the CLARITY Act’s failure to advance in the U.S. Senate. The exemption creates a pathway to allow for legal, regulated secondary trading of tokenized securities outside of the Reg NMS system by allowing for the creation of Tokenized Securities Venues (TSV), a new type of onchain trading venue.
Under the innovation exemption, the TSV must enact trading volume limits, enforce market-wide halts, and ensure that security tokenholders have performed know-your-customer (KYC) onboarding. So far, at least three separate entities have notified the SEC that they intend to launch TSV: Canton (with “TSV LLC”), Perpetuals.com, and OKXICE.
OUR TAKE
For years, crypto and blockchain advocates have pushed for the ability to trade stocks onchain, and in September the SEC finally delivered a pathway, but one that has set up a new battlefield with several fronts.
Third-party sponsored vs. Issuer-sponsored. The issuers who opted out are utilizing an escape valve the SEC allowed when it included the right for third parties to tokenize securities, not just their original issuers. Proponents of third-party tokenization, whether by utilizing swaps, a debt-security structure, or some type of SPV wrapper, argue that they provide what investors want most: access to economic exposure in many investments. Firms like Kraken (xStocks), Ondo Finance, Coinbase, Robinhood, and OKXICE have pursued this path; all but Ondo are exchanges. On the other side, firms like Superstate, Securitize, Figure, and Bullish (Equiniti) argue that third-party issued tokens do not convey all the features of a security, such as legal, economic, and governance rights. We’ve written about this dispute extensively, and the 16 opt-outs from OKXICE’s third-party tokenization is just the latest salvo.
DeFi vs. TradFi. The innovation exemption also draws a fascinating middle ground between DeFi and TradFi. What the innovation exemption allows for is more aptly described as onchain finance than decentralized finance. The TSV, whether comprised solely of one AMM or a conglomeration of AMMs, issuers, transfer agents, or other involved parties, must notify the SEC of its intentions, provide certain reporting, and crucially perform certain responsibilities that can only be performed with a level of control. The TSV is not quite an exchange or an ATS, but it’s also not quite DeFi in the commonly understood sense. Trade halts, KYC, and volume limits are not things that permissionless DeFi can perform today. The requirement that trading be limited to those who have been KYC’d, in particular, will make legal, American tokenized securities substantially less composable in the broader onchain environment, at least in the near term. But the TSV can ultimately allow for trading outside the Reg NMS system and does not need to register as a national securities exchange or alternative trading system (ATS). Not quite DeFi, but not quite TradFi.
An interesting aspect of the approach taken by the SEC is that the “innovation exemption” offers exemptive relief in an unconventional way. The Commission did not look at an entity or set of entities and say “you’re exempt for these reasons.” In fact, the term TSV was invented by the SEC in the order itself, and no “TSV” exists yet. So, rather than a typical exemptive relief, the Commission has presented a new pathway, one that seems to thread the needle between rules, statutory authorities, and a maze of stakeholders. Whether this approach can be successful in promoting an innovative and experimental new environment for securities trading remains to be seen, and the answer to the question will ultimately determine the outcome of the third front in the tokenized securities battle.
Onshore vs. Offshore. Onshore tokenized securities under the innovation exemption face an uphill battle in the market. If they cannot deliver a better product and comparable user experience to an offshore, third-party issued tokenized security that is fully composable in DeFi once accessed via VPN, then the whole experiment could fall flat. It’s very early still in the application of the innovation exemption, and we and many others will have more to say and announce in the coming weeks and months, but it is crucial that the innovation exemption yields tangible benefits, at least in actionable learnings to inform next steps in designing a viable onchain securities market, if that onchain securities market is to be built in the United States and not in Malta, Abu Dhabi, or the Caymans.
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