United States: SEC and CFTC Open Door to Tokenized Markets After Clarity Fails to Advance

By Tamika Bent, Timothy Foley, Sarah Riddell, and Sanjeev Bhasker

The SEC and CFTC have separately granted relief for the advancement of crypto-based trading infrastructure in US markets, in an apparent direct response to Congress’s stalled efforts to move the CLARITY Act forward.

SEC: Temporary, Conditional Exemptive Order for Tokenized Stock Trading Venues

The SEC ordered temporary exemptive relief for the operation of Tokenized Securities Venues (TSVs) for “Tokenized NMS Stocks” (i.e., NMS stocks that have been tokenized by the issuer or a third party). TSVs operate through use of “AMM Liquidity Pools,” via automated market marker (AMM) smart contracts “that enforce [] terms of trading [by] setting token prices based on the ratio of the quantities of the assets committed to a liquidity pool.” The order allows TSVs to operate without requiring (i) the TSV to register as an “exchange” with the SEC (or qualify for exemption therefrom, e.g., by operating an ATS), or (ii) certain liquidity providers to the TSV to register as a “dealer.” Significantly, a TSV need not be, nor involve, an SEC-registered entity, such as a broker-dealer. The relief is subject to several conditions, including notice, disclosure, and recordkeeping requirements, as well as US person status and the absence of disqualifications under the Exchange Act. The relief is time-limited, expiring five years after issuance (i.e., 17 September 2031).

CFTC: Conditional No-Action Letter Broadens Relief for “Passive Software Providers” or “PSPs”

In tandem with the SEC’s exemptive relief, the CFTC issued market-wide no-action relief that expands upon an earlier letter issued to a single crypto wallet developer. Subject to specified conditions, the no-action relief permits all similarly situated developers (or PSPs) of front-end trading software (including self-custodial wallet software) that passively enable access to derivatives markets (including event and perpetual contracts) through CFTC registrants—and their personnel—to operate without registering with the CFTC as introducing brokers or associated persons. With this relief, PSPs may market their services, promote derivatives contracts, introduce users to specific registrants, and solicit users to engage with them, but they may not take custody or control of user assets, generate express buy/sell signals, or exercise discretion over order routing or execution.