Lawmakers and market participants warn tokenized securities exemption could erode investor protections

Discussion of a possible SEC "innovation exemption" for tokenized securities became a recurring focus of questioning as lawmakers and witnesses weighed potential benefits against investor-protection risks.

Ranking Member Brad Sherman accused some tokenization proponents of pursuing political influence to obtain regulatory relief, saying they want to "liberate themselves from all of the rules that protect investors." Joseph Saluzzi of Themis Trading warned members that permitting trading of tokens that lack issuer consent or ownership rights would "mimic the shady, unregulated bucket shops of the past" and could distort price discovery.

Kevin Kennedy of Nasdaq said his firm would reserve judgment until it sees the exemption but emphasized guardrails he would expect: investor protection, institutional-grade safeguards for always-on trading, and preservation of SIP transparency. Mr. McKenzie of Optiver and PTG Markets said tokenization might bring operational benefits such as faster settlement in some idealized implementations, but he and others underscored the need for issuer consent and systems that link tokenized instruments to corporate rights and disclosure.

Members pressed whether removing Rule 611 would be used to facilitate token trading off core market guardrails; witnesses argued that any change should be systemic and paired with reforms to access fees (Rule 610), minimum pricing increments (Rule 612), market-data rules, and continued enforcement via tools like the CAT. No proposal was adopted; the subcommittee asked witnesses for follow-up information and documentation.