Three months ago, bringing U.S. equities onto blockchain-based markets still looked more like a vision for the future than an immediate question of market structure. On Sept. 17, that changed. The Securities and Exchange Commission created a temporary framework for limited trading of tokenized U.S. stocks on qualified onchain venues — moving tokenization another significant step from the financial frontier toward the regulated mainstream. I have had a close view of that transition as co-chair of a joint venture between Intercontinental Exchange, the parent company of the New York Stock Exchange, and OKX that is building infrastructure for tokenized and digitally native financial products.

The SEC issued what it calls an “Innovation Exemption,” creating a temporary, conditional framework under which qualified venues, using automated market makers and liquidity pools, can trade certain tokenized stocks listed on American exchanges without registering with the SEC. The exemption lasts five years and permits experimentation with blockchain-based trading while imposing restrictions intended to protect investors.

That is a significant development. But its greater significance may be what it tells us about the pace of technological change.

The debate is no longer whether blockchain technology might someday reach traditional capital markets. The question is how existing markets will incorporate it and what rules will govern that transition.

Andrew Cuomo is the former Governor of New York, and a board member of OKX.

Tokenization does not eliminate financial risk, nor does it make the basic responsibilities of regulators obsolete. Quite the opposite. Markets ultimately function on trust, and new technology succeeds only when investors have confidence that ownership is real, transactions are reliable, markets are fair and bad actors will be held accountable.

I learned that lesson from the other direction.

As New York attorney general during the financial crisis, I saw what can happen when innovation and financial engineering move more quickly than oversight and risk management. Subprime lending and increasingly complex mortgage securities were promoted as innovations that expanded access to credit and distributed risk. Instead, bad underwriting and inadequate safeguards helped transmit risk throughout the financial system.

The lesson wasn't that financial innovation should stop. It was that innovation and regulation have to develop together.

That appears to be the approach the SEC is taking now.

Its exemption isn't a free-for-all. All trading venue participants must be permissioned. Tokenized shares traded under the exemption must provide investors the same rights and privileges as the traditional shares of an equivalent class. Trading venues face limits on the number and volume of tokenized securities they can trade. Issuers can object to the trading of their shares when tokenized by unaffiliated third parties. Smart contracts must be auditable and deployed on public blockchains, and trading in a tokenized security must stop when trading in the underlying security is halted.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

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