Azuma

Did anyone actually read the SEC Exemptive Relief letter for Tokenized Securities? I read the 60 pages today, and the carveout is incredibly limited. Considering the celebrations on X, I thought it would contain something useful, but imo there isn't demand for the model proposed / nor is any incumbant already meeting the requirements as written. I haven't seen anyone properly breakdown what it actually says, so here are the most important parts with my commentary: 1. Permissioned Participants Only. Tokenized Security Venues (TSVs) can "facilitate the permissioned trading of tokenized NMS stock using innovative automated market makers." The key word is "permissioned." It's mentioned multiple times throughout the letter. Permissioned means whitelists, whereby both the LPs and traders are known, KYC'ed and KYB'ed. Onchain stock AMM liquidity/execution is already terrible, and that's without limiting to permissioned entities. Who is actually going to provide liquidity into these permissioned venues? It's not market makers. Market makers prefer CLOBs because they are more capitally efficient. Market makers also prefer bilateral trading via single dealer platforms (or as the cryptonatives call them propAMMs). There is limited supply side liquidity for permissioned AMMs. It's either permisionless AMMs or permissioned structures other than AMMs. 2. What is a Tokenized Security Venues (TSV)? A TSV "brings together buyers and sellers of Tokenized NMS Stock by: (1) providing one or more AMM Liquidity Pool(s) for permissioned participants to interact and agree to terms of a trade and (2) setting standards for persons to access trading on such AMM Liquidity." By this definition, Hyperliquid's CLOB model would not count for exemptive relief. Hyperliquid Spot (not perps) does ~50% the daily volume of Uniswap. But, to put things in perspective, Hyperliquid only has 70 spot pairs(!!). It's obvious, there will be tighter execution and better discovery on CLOB models like that of Hyperliquid. We need permissioned CLOB or propAMM structures included in the definition. In fact, as I'll get to below, the SEC even calls out the fact that AMMs lack best execution protections... whcih could easily be implemeted in CLOB structures! 3. What counts as a Tokenized NMS Stock? First, a Tokenized NMS Stock must be registered with the SEC. Second, a Tokenized NMS Stock "does not include securities where a third party issues a crypto asset representing its own security that provides synthetic exposure to an underlying security, such as a tokenized linked security or a tokenized security-based swap." To be clear, none of the permissionless representations of stocks today are SEC-registered securities @RobinhoodCrypto @coinbase @binance @Ondo @xStocksFi etc. The fact that they are not, means nothing in this letter pertains to them. To be clear, it does NOT mean that these models are inferior (in fact I would argue the opposite, but that's outside this scope.) Lastly, a Tokenized NMS Stock can only trade against "another Tokenized NMS Stock, a non-security crypto asset (e.g., a payment stablecoin issued by a permitted payment stablecoin issuer), or a tokenized money market fund." The phrasing is vague here to me, does "non-security crypto asset" include memecoins??? 4. Lack of Consumer Protections and Risks with AMMs In the US, investors are given best execution protections. Without these protections, market makers can provider inferior execution and manipulate spreads at investors expense. These protections are part of Reg NMS. Alarmingly, the SEC says consumers will NOT have these protections in TSVs: "A TSV could not comply with the requirements of Regulation NMS without significant modifications to its trading model, which may adversely impact TSV Participants." Why are we going down the AMM path? Without these protections, who is going to participate on the demand side? As mentioned above, we have severely limited the supply side, now we are effectively saying to consumers, "Spreads will be wide, good luck." You know what can easily abide by Reg NMS? CLOBs like that of Hyperliquid. With both supply and demand sides hamstrung, we're setting ourselves up for failure. But on a positive note.... 5. The SEC recognizes the benefits of Blockchains! TSVs "offer the potential to benefit investors by enabling investor self-custody, around-the-clock trading, fractional ownership of shares, and near instantaneous settlement.... The use of such technology may also lower operating, recordkeeping, and transaction costs, and improve efficiencies." 6. Long list of Requirements to become a TSV Pages 36-46 are a long list of requirements TSVs must make publicly, including things like, "a TSV must consent to examinations of its books and records by the Commission staff at any time" and "at least 30 calendar days before operating, a TSV must publish a copy of a notice (“Notice”) prominently on its publicly available website." 7. Issuer Protections, Remember AMC / Robinhood?! We all remember the AMC debacle. The SEC is giving AMC exactly what they asked for: required issuer permission for the tokenized security to exist. "If [AMC] provides... written notice to the TSV that it objects to a Tokenized NMS Stock... the TSV cannot make such Tokenized NMS Stock available for trading on the TSV." This line reads almost directly from the AMC incident: "An issuer of the underlying NMS stock may be concerned about the risk of maintaining its shareholder register related to onchain transfers or the potential price dislocation or adverse effects on the price of the underlying NMS stock, particularly given that prices disseminated by an AMM Liquidity Pool are most likely based only on the ratio of the quantities of assets in that liquidity pool." Yet another reason to prefer CLOBs where the prices are not directly linked to a single pool which could be mispriced. 8. Tokenized Stocks must have the Same Benefits Tokenized stocks must have "a right to receive the same dividends... a right to exercise the same voting rights... and a right to receive the same share of the residual assets of the company upon liquidation." Great stuff! Investors in tokenized representations should get everything (and more!) than they would in the traditional form. 9. Extremely High Volume Limits and Other Controls The limits the SEC has set for volume are sky high. The "volume of Tokenized NMS Stock Traded... cannot exceed 0.25 percent of the average daily share volume during the prior month in the relevant NMS stock as reported by an effective transaction reporting plan". The TSV must pause trading" For reference, even the permissionless versions of these tokenized equities are doing less than 0.001% of the volume. Remember today, there are only $3 bn in tokenized equities. The market is $70 trillion. ---------------------------------------------------- Expect a formal comment letter submitted to the @SECGov from myself and @glider__ soon.