Lawmakers weigh tokenization push as SEC preps innovation exemption plan

As the U.S. Securities and Exchange Commission prepares to roll out a potential innovation exemption for tokenized assets, lawmakers signaled growing acceptance that traditional markets are moving toward tokenization. At the same time, they raised concerns about how to balance that shift with investor protection.

On Wednesday, members of the House Financial Services Committee met for a hearing titled 'Tokenization and the Future of Securities: Modernizing our Capital Markets." The hearing comes amid a growing push from crypto firms and traditional financial institutions to bring tokenized securities to market.

"No doubt tokenization of securities is coming," said Rep. Andy Barr, R-Ky., during the hearing. "It's here, and our modernization of our securities regulation is required, both in terms of preserving that gold standard of investor protection, but also making sure that the United States is leading the way."

The SEC has greenlit several entities to move forward with tokenized securities, while also asserting that those assets are still securities and need to follow securities law.

In December, the SEC authorized the Depository Trust & Clearing Corporation to tokenize certain highly liquid assets on pre-approved blockchains under a three-year authorization period. Later, the New York Stock Exchange said it was developing a platform for the trading and onchain settlement of tokenized securities, which could allow for 24/7 trading.

More recently, the SEC approved a rule change that would allow Nasdaq to support the trading of tokenized shares.

SEC Chair Paul Atkins has said the agency will soon seek public comment on a range of issues tied to future rulemaking, including a proposed innovation exemption that could function as a regulatory sandbox for onchain assets.

Still, some lawmakers remain wary. California Democrat Rep. Brad Sherman raised concerns over the proposed exemption and it not being brought up through legislation.

"I'm concerned that we're creating a two-tiered market where tokenized securities on blockchain platforms are exempted from core securities regulations," Sherman added.

Questions and concerns remain

Tokenization could make trading more efficient, allow for faster trading, and allow for more investors globally to participate in the markets, said the top Democrat of the committee, Rep. Maxine Waters. She also voiced concerns about whether tokenization is of use to businesses and investors, not just the "middlemen."

"Leading up to the 2008 financial crisis, we were told that securitization and new financial technologies would make borrowing easier, spread risk, and lift everyone up," she said. "What they actually did was allow Wall Street to build a process that legitimized predatory loans, stripped wealth from middle-class homeowners, and created the conditions for the worst economic catastrophe since the Great Depression."

Waters also brought up an ongoing concern among lawmakers over President Donald Trump's crypto conflicts of interest. Trump has reportedly raked in about $1.4 billion from his crypto ventures, including from his family's World Liberty Financial, Bloomberg estimated earlier this year.

"When officials in the government who are approving the rules also profit from the market those would regulate, the American people rightly ask whose interests truly comes first," Waters said.

The push toward tokenization has also faced resistance from some traditional finance groups, which argue that stronger regulatory guardrails are needed for blockchain-based securities.

The Securities Industry and Financial Markets Association has been vocal in its concerns over the past year about the possibility of exemptive relief. The organization, which represents traditional finance firms, previously urged the SEC to take a transparent process through public comment and engagement, instead of solely granting that relief.

"This is an ever-evolving industry, and so it's absolutely essential that we are constantly evolving," said SIFMA President Kenneth Bentsen, Jr., when testifying during Wednesday's hearing. "But at the same time we want to do it on the basis of the legal and regulatory framework that we have."

Meanwhile, industry advocates say regulatory clarity is critical to keeping innovation in the U.S. In prepared testimony, Blockchain Association CEO Summer Mersinger warned that without clearer rules, development will continue to shift overseas.

"We must act now to foster that growth with regulatory clarity," Mersinger said. "If we fail to establish regulatory clarity, the outcome is certain: innovation in this space will continue, but it will happen abroad, and America will be left behind."