By Joe Light
The fight between crypto firms and banks has dominated the crypto landscape this year. Another, and much more consequential battle between the digital-assets industry and traditional finance firms looms large.
In the coming month, the Securities and Exchange Commission is expected to release a long-awaited proposal that could make it easier for Coinbase Global and other firms to offer trading in "tokenized" stocks without immediately needing to comply with the same regulations that traditional finance firms and stock exchanges are subject to.
A so-called "innovation exemption" could give crypto firms the temporary ability to do things such as issue and trade tokenized securities without full registration as brokers or exchanges. The idea is to give them a number of years to experiment before either coming into compliance with the traditional rules or proving they don't need to comply. The SEC is expected include asset caps or other limits on the exemption.
Some traditional finance firms and their main trade group, the Securities Industry and Financial Markets Association, have spent the past several months fighting to make sure the exemption isn't broad. Sifma has argued that an exemption could mean investors don't get the protections usually found in the stock market, such as a guarantee that brokers attempt to get clients the best price on stocks bought and sold.
To the extent more stock trading moves from traditional markets to the blockchain, traditional firms could also see their profits erode.
"We should be paying attention to any efforts, either through exemptive relief or no-action relief, that would create very material exemptions under the securities laws," said Sifma CEO Ken Bentsen at a House Financial Services Committee hearing last week.
The exemption debate is the latest clash between the digital assets industry and traditional finance firms. Since January, banks and the crypto industry have fought over whether a coming bill should include restrictions on whether crypto firms can pay customers a yield for holding so-called stablecoins on deposit. Banks say the yield payments could drain deposits, while crypto firms say the threat is overblown and that banks just don't want the competition.
The coming conflict strikes at the heart of the stock market's structure and whether regulators will slow crypto firms' attempts to upend it. The crypto industry has long argued that stocks should be allowed to trade on the blockchain, which could allow for 24-7 trading, instant settlement, the easier use of stocks as collateral for loans, and fewer intermediaries.
The opportunities in stock and bond trading are vast for firms such as Coinbase, which says it wants to become an "everything exchange" where investors trade traditional stocks in addition to Bitcoin and crypto tokens. The firm rolled out stock trading to customers earlier this year through a traditional broker-dealer subsidiary. The bigger goal is stock trading on blockchains that is integrated with the rest of the crypto ecosystem.
Tokenized stocks already exist to a certain extent. Crypto trading platform Kraken offers trading in tokenized stocks to customers outside the U.S. But rather than equity ownership, with voting rights and traditional regulatory protections, the Kraken product is essentially a synthetic token backed by a stock. Other firms want to put actual stocks directly on-chain.
Last year, Coinbase said in a letter to the SEC that tokenized trading would require relief from many of the requirements traditional broker-dealers face. The company, for example, called the separation of the roles of broker, exchange, and custodian into different firms a "a legacy of a paper-based system" unnecessary in the tokenized universe. Sifma and traditional finance firms responded with letters of their own, arguing that the SEC shouldn't grant the relief and that any changes should be slow.
The agency's exemption in the coming days will probably enable some tokenization projects to move forward but on a smaller scale than what some of the traditional firms had feared.
At a conference last month, SEC Commissioner Hester Peirce likened the innovation exemption to an abandoned storage container sold at auction, where the buyer is "sure it will contain a rare work of art and a trunk full of gold bars."
"So too some people are certain the innovation exemption will cure all their regulatory headaches," she said. "Some people in TradFi [traditional finance], by contrast, seem to think that the soon-to-be-opened storage unit contains a monster that will swallow all of TradFi in one ugly bite."
Peirce said the exemption would be incremental.
At the Digital Asset Summit in New York last week, SEC Chairman Paul Atkins said the agency would release the innovation exemption sometime in the next month. The idea would be to allow firms to perform a "proof of concept" for on-chain trading that could be used to inform a longer-term rule-making process down the road, Atkins said.
It's a small change for now, but one that could one day upend traditional stock trading.
Write to Joe Light at joe.light@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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March 31, 2026 01:31 ET (05:31 GMT)
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