[Column] The On-Chain Transformation of Financial Markets Accelerated by the U.S.

The U.S. Securities and Exchange Commission (SEC). Source=Wikimedia Commons Kim Hyobong's Legal Crypto is a column series focusing on domestic and international digital asset legislation and policy trends. Experts including Kim Hyobong, a lawyer at the law firm Pacific, accountant Choi Hee-kyung, and lawyer Woo Ji-won share the latest regulatory developments in digital assets.

Recently, on my way to work, I received a message from a close client who is also considering token securities issuance (STO) that there was an important regulatory change overnight. This was the Innovation Exemption announced by the SEC.

The Innovation Exemption consists of two main components: the first is to exempt a tokenized securities trading platform (Tokenized Securities Venue, TSV) that meets certain requirements from the definition of "exchange" as stipulated in the Exchange Act (§3(a)(1)). The second is to exempt liquidity providers (Covered Firms) supplying their own capital to an automated market-making liquidity pool (hereinafter referred to as "AMM liquidity pool") from the definition of "dealer" under the Exchange Act (§3(a)(5)). Both exemptions will be effective for five years from September 17, 2026, to September 17, 2031.

To put the SEC's first exemption measure in simpler terms, it temporarily exempts regulations for the secondary market of tokenized U.S. stocks where it is difficult to apply existing exchange law regulations, and instead requires a "regulatory sandbox-type market structure" with separate safeguards. This is intended to test the actual market and gather data before designing a more permanent system.

For the Innovation Exemption to apply to TSVs, several conditions must be met:

(1) The smart contracts used in the TSV must be publicly available and auditable.

(2) They must be deployed on an unlicensed public blockchain.

(3) Participants in actual stock trading must be limited to verified authorized participants.

The SEC states that this authorization structure can be utilized to manage risks related to sanctions and money laundering. Therefore, businesses wishing to operate TSVs under this exemption in the U.S. must implement not only smart contract development but also participant identity verification, wallet credentialing, sanctions screening, asset transfer restrictions, and transaction monitoring.

Additionally, one of the most important substantive requirements in this exemption measure is the "same rights and privileges" requirement. TSVs must ensure that the tokenized securities being traded provide the same rights and privileges as traditionally issued securities.

Specifically, it must be confirmed that there are the same equity rights regarding the underlying company, the same rights to receive dividends and voting rights, and the same claims to distribution of residual assets upon liquidation of the company.

If a third party arbitrarily tokenizes a specific listed stock, the TSV must notify the issuer of that stock in writing at least 30 days before the trading start date, and if the issuer submits a written objection, the token cannot be traded on the TSV.

As a result, going forward, the arbitrary tokenization and trading of listed stocks by third parties, regardless of the issuer's intent, may be partially restricted. It is also important to note that this exemption measure applies only to the secondary market, not the issuance market.

The SEC's second exemption measure is the "Covered Firm Exemption." The SEC has exempted liquidity providers supplying tokenized U.S. listed stocks to AMM liquidity pools from dealer regulations if they meet certain requirements. Consequently, it is also possible to make price quotes or commit to trades using their own capital.

However, liquidity providers must limit their activities to trading tokenized U.S. listed stocks related to the AMM liquidity pool provided by the TSV, must trade on their own account, and must not hold or manage customer assets. Additionally, they are required to maintain records regarding liquidity supply contracts, fees, rebates, incentives, and sufficient liquidity, and to notify the SEC of their role.

Meanwhile, the SEC significantly limits the trading volume that such liquidity providers can offer, which is intended to restrict the impact on the traditional stock market if the prices in the tokenized market deviate from those in the traditional stock market. Furthermore, if trading halts occur in the traditional stock market, trading in tokenized stocks will also be halted simultaneously, thus preventing the tokenized market from moving independently from the existing market.

The recent announcement on the SEC's transfer agent system reform, along with the ongoing regulatory measures related to the tokenization of financial products, suggests that the SEC has a larger vision of integrating blockchain and digital assets into the financial market. At this point, with the announcement of a more advanced "token securities policy direction," I hope we can have deeper discussions about the integration of blockchain and digital assets into the capital market.

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