It's here — SEC releases long-awaited innovation exemption to 'bring America's capital markets into the digital age'

The Securities and Exchange Commission released its long-anticipated "innovation exemption", positioning the measure as a response to the Senate's failure to advance sweeping cryptocurrency legislation.

On Thursday, the SEC debuted its exemption, which Chair Paul Atkins says will bring capital markets in the U.S. into a new digital era by allowing onchain trading of tokenized stocks. 

"Earlier this week, Congress was unsuccessful in advancing the Clarity Act despite the tireless efforts of many," Atkins said in a statement. "So today, the Securities and Exchange Commission is taking 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 through the 'Innovation Exemption.'"

The exemption goes into effect immediately and people can also submit comments, with more permanent rulemaking coming down the pipe, an SEC spokesperson said.  

The five-year exemption had been in the works for over a year and was spurred by market interest, the spokesperson said on a call with reporters. Chair Atkins has been heralding news of the innovation exemption for the better part of this year as the agency has taken several steps in its "Project Crypto" mission to modernize its rules around new technology. 

The exemption would exempt certain trading venues, called tokenized securities venues, from being defined as an exchange and also exempts specific liquidity providers from being defined as a dealer under securities law when they trade stocks or provide liquidity through automated market makers, i.e. smart contracts. 

Those exempt venues would have to comply with sanctions rules, Atkins said. The exemption does not include synthetics — financial instruments that replicate the price of an asset without directly owning it — and issuers can deny their security from trading on the venue. 

Locked in 

The SEC's move comes just days after the Senate voted 49-50 against the Clarity Act, which would regulate the digital asset industry comprehensively for the first time at the federal level. 

On Wednesday, Atkins warned that he would "act decisively within the SEC's statutory authority to deliver certainty for American investors and for the entrepreneurs shaping our technological future" and said to "stay tuned."

In the absence of legislation, the SEC has gotten a head start by beginning to lay the groundwork for crypto rulemaking before the end of the year. This includes plans to change its rules on how much liquid capital brokers must maintain, as well as record-keeping and exchange rules for digital assets.

Earlier this year, SEC Chair Paul Atkins laid out his plans for a "token taxonomy" that delineates between what cryptocurrencies would be securities. The SEC and Commodity Futures Trading Commission have also said they've joined forces to modernize digital asset regulation called "Project Crypto."

On Wednesday, CFTC Chair Michael Selig said his is "locked in and ready to ship its rules for the new frontier of finance."