SEC Innovation Exemption for Tokenized Securities: What the 2026 Push Means for Issuers and Exchanges

Two parallel developments are converging around tokenized securities in the United States. The SEC is developing what appears to be an innovation exemption framework for digital asset securities, while lawmakers on Capitol Hill are signaling acceptance that tokenization of traditional financial assets—equities, bonds, funds, real estate—is no longer a fringe concept but an infrastructure evolution. Together, these signals suggest the US may be approaching its first structured federal pathway for issuing and trading tokenized securities.

But signals are not rules. As of April 24, 2026, no formal SEC rulemaking has been published and no legislation has been enacted. This article analyzes the legal authorities at play, the likely contours of an SEC innovation exemption, and what affected parties should be doing now—while the framework is still being shaped.

Key Takeaways

• SEC innovation exemption framework in development: The SEC appears to be constructing a conditional exemption pathway for tokenized securities issuers, likely drawing on its existing exemptive authority under Section 36 of the Securities Exchange Act of 1934 (15 U.S.C. § 78mm) and Section 28 of the Securities Act of 1933 (15 U.S.C. § 77z-3).
• Legislative momentum building: Members of the House Financial Services Committee and Senate Banking Committee have signaled support for tokenization frameworks, framing the issue as financial infrastructure modernization rather than crypto policy.
• Investor protection is the non-negotiable: Both the SEC and Congress are conditioning any tokenization relief on maintaining disclosure, anti-fraud, and custody protections equivalent to traditional securities markets.
• Broad impact across market participants: Issuers, broker-dealers, transfer agents, custodians, investment advisers, ATSs, and crypto exchanges offering security tokens all face potential compliance changes.
• Nothing is final: These are policy signals, not enacted rules. Compliance planning should be preparatory, not presumptive.

What Legal Authority Supports an SEC Innovation Exemption?

The SEC has several existing statutory tools to grant regulatory relief without waiting for Congress. Understanding which mechanism the Commission is likely to use matters because it determines the scope, durability, and conditions of any exemption.

Section 36 of the Exchange Act (15 U.S.C. § 78mm) grants the SEC broad authority to exempt “any person, security, or transaction” from any provision of the Exchange Act or its rules, provided the exemption is “necessary or appropriate in the public interest” and “consistent with the protection of investors.” This is the SEC’s most flexible exemptive tool and has been used to accommodate novel market structures in the past—including the initial framework for alternative trading systems before Regulation ATS was formalized.

Section 28 of the Securities Act (15 U.S.C. § 77z-3) provides parallel authority to conditionally or unconditionally exempt securities, transactions, or persons from Securities Act requirements. An exemption under this section could relieve tokenized securities issuers from full Section 5 registration (15 U.S.C. § 77e) while imposing tailored disclosure and investor protection conditions.

No-action letters and staff statements represent a lighter-touch approach. The SEC’s Division of Corporation Finance previously issued no-action relief to TurnKey Jet, Inc. (2019) for a utility token, and the FinHub framework has provided informal guidance on digital asset classification. However, no-action letters lack the legal force of formal exemptive orders and can be withdrawn—making them a less durable foundation for a tokenization framework.

The most likely path for a meaningful innovation exemption is a conditional exemptive order under Section 36, potentially combined with a concept release or proposed rule to solicit public comment. This approach provides binding legal relief while preserving the SEC’s ability to impose conditions around disclosure, custody, settlement, and reporting.

Historical Precedent

The SEC has used conditional exemptions to accommodate market innovation before:

• Regulation ATS (1998): Before Regulation ATS (17 C.F.R. § 242.300 et seq.) was formalized, the SEC granted individual exemptive orders to electronic communication networks (ECNs), creating a transitional framework that evolved into permanent rules
• Special Purpose Broker-Dealer Statement (2021): The SEC’s Division of Trading and Markets issued a staff statement outlining conditions under which a broker-dealer could custody digital asset securities without triggering the full Customer Protection Rule (15 U.S.C. § 78o; 17 C.F.R. § 240.15c3-3)—a conditional relief model that could be expanded for tokenized securities
• Regulation Crowdfunding evolution: Regulation CF (17 C.F.R. § 227.100 et seq.) was amended in 2020 to raise offering limits, demonstrating the SEC’s willingness to iteratively expand exemptions as markets mature

Why Are Lawmakers Supporting Tokenization Now?

Congressional posture toward tokenization has shifted from skepticism to cautious endorsement, driven by three factors:

Institutional adoption has outpaced regulation. Major financial institutions—BlackRock, JPMorgan, Franklin Templeton, and others—have launched tokenized fund products, making it politically untenable to treat tokenization as a purely speculative crypto phenomenon. When traditional Wall Street firms tokenize Treasury securities and money market funds, the “investor protection” argument cuts toward enabling regulation rather than prohibition.

International competitive pressure. The EU’s Markets in Crypto-Assets Regulation (MiCA, Regulation (EU) 2023/1114), which took full effect in December 2024, established a comprehensive regulatory framework for digital assets including provisions relevant to tokenized financial instruments. The UK’s Financial Conduct Authority has advanced its own tokenization sandbox. Singapore’s Monetary Authority has facilitated Project Guardian, a tokenized asset pilot with major global banks. US lawmakers are increasingly framing domestic tokenization rules as a competitiveness issue.

Reframing from “crypto” to “financial infrastructure.” Tokenization proponents in Congress have deliberately distanced the technology from the volatility and fraud associations of the broader crypto market. By framing tokenized securities as modernized settlement infrastructure—reducing counterparty risk, enabling T+0 settlement, lowering issuance costs—advocates have built bipartisan support that pure “crypto regulation” has struggled to achieve.

How Does the Howey Test Apply to Tokenized Traditional Securities?

When a traditional security is tokenized, the Howey test (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)) operates on two distinct levels—and conflating them creates legal risk.

Level one: the underlying asset. If the tokenized asset is already a registered security (corporate stock, bond, fund share), it remains a security regardless of its digital wrapper. Tokenization does not change the legal classification of the underlying instrument. The issuer’s obligations under the Securities Act and Exchange Act carry through to the tokenized form.

Level two: the token itself. The more complex question is whether the tokenization layer—the smart contract, the platform, the secondary market dynamics—creates an independent investment contract. This analysis becomes critical in three scenarios:

• Fractionalization of non-securities: When tokenization creates fractional interests in assets not previously subject to securities regulation (e.g., fractional real estate, fractional art), each fraction may independently satisfy Howey’s four prongs—investment of money, common enterprise, expectation of profits, derived from the efforts of others
• Yield-generating features: Smart contracts that automatically stake, lend, or compound tokenized securities may create investment contract characteristics beyond the underlying asset’s returns, analogous to the analysis in SEC v. Ripple Labs, Inc., No. 1:20-cv-10832 (S.D.N.Y. 2023)
• Platform-dependent value: Where a token’s value is materially dependent on the platform operator’s continued efforts (maintaining liquidity, developing features, securing exchange listings), Howey’s “efforts of others” prong may be satisfied independently of the underlying asset

An SEC innovation exemption could resolve this ambiguity by establishing a “pass-through” classification principle: tokenized versions of registered securities inherit their underlying regulatory classification, provided the tokenization layer meets specified technical and operational standards. This would give issuers and platforms legal certainty without requiring a separate Howey analysis for every tokenized instrument.

What About CFTC Jurisdiction Over Tokenized Commodities?

The SEC’s exemption framework does not exist in a regulatory vacuum. The CFTC retains jurisdiction over commodities and derivatives under the Commodity Exchange Act (7 U.S.C. § 1 et seq.), and tokenization raises jurisdictional questions that any federal framework must address.

Tokenized commodity interests—gold-backed tokens, tokenized commodity futures, or tokenized interests in commodity pools—fall under CFTC oversight. If a tokenization platform offers both tokenized securities and tokenized commodity products, it may face dual registration obligations: as a broker-dealer with the SEC and as a futures commission merchant (FCM) or commodity pool operator (CPO) with the CFTC.

The pending market structure legislation—including proposals to delineate SEC and CFTC jurisdiction over digital assets—could determine how tokenized assets are allocated between the two agencies. Until that boundary is legislatively defined, tokenization platforms handling diverse asset types face regulatory uncertainty that an SEC-only exemption cannot fully resolve.

How Will Broker-Dealers and Trading Venues Be Affected?

Intermediaries face the most immediate operational impact from a tokenization framework:

Broker-dealer registration. Any entity effecting transactions in tokenized securities must register as a broker-dealer under Section 15 of the Exchange Act (15 U.S.C. § 78o) and join FINRA—unless a specific exemption applies. An innovation exemption could create a transitional registration category with modified net capital (17 C.F.R. § 240.15c3-1) and customer protection requirements calibrated to the operational profile of blockchain-based trading.

ATS compliance. Platforms facilitating secondary trading of tokenized securities would likely operate as alternative trading systems under Regulation ATS (17 C.F.R. § 242.300 et seq.), requiring Form ATS filing with the SEC, fair access provisions, and system capacity standards. The question is whether blockchain settlement infrastructure satisfies existing Regulation ATS requirements or requires tailored amendments.

Transfer agent modernization. Tokenized securities on public blockchains effectively decentralize the transfer agent function—recording ownership transfers without a traditional intermediary. Section 17A of the Exchange Act (15 U.S.C. § 78q-1) governs transfer agent registration and duties. The SEC may need to address whether a smart contract can perform transfer agent functions, or whether a registered transfer agent must remain in the loop as a compliance backstop.

Custody and settlement. Blockchain-based settlement enables T+0 finality, compared to the current T+1 standard for US equities (effective May 2024). While faster settlement reduces counterparty risk, it also compresses the window for error correction, trade cancellation, and regulatory intervention. Any innovation exemption will need to address custody standards, potentially revising or building upon the SEC’s approach in Staff Accounting Bulletin No. 121.

Tax Implications for Tokenized Securities

The IRS has not issued specific guidance on the tax treatment of tokenized versions of traditional securities, creating uncertainty in several areas:

• Cost basis tracking: The new Form 1099-DA reporting requirements for digital asset brokers (effective for the 2026 tax year under 26 U.S.C. § 6045) will require platforms to report cost basis on tokenized securities transactions. Platforms must determine whether tokenized securities are reported under existing 1099-B procedures or the new 1099-DA framework—or both
• Wash sale applicability: If tokenized securities are treated as “securities” for purposes of the wash sale rule (26 U.S.C. § 1091), investors cannot claim losses on sales followed by repurchases within 30 days. If they are treated as digital assets outside the wash sale rule (as cryptocurrency currently is), a gap emerges. This distinction has significant tax planning implications
• Fractional interest characterization: Tokenized fractional interests in assets like real estate may trigger different tax treatment (e.g., REIT dividend treatment, passive activity rules) depending on how the tokenized structure is classified

Practical Implications

For issuers: Do not structure tokenized offerings on the assumption that an innovation exemption is imminent. Continue using existing exemptions—Regulation D (17 C.F.R. § 230.501 et seq.) for private placements, Regulation A+ (17 C.F.R. § 230.251 et seq.) for smaller public offerings, Regulation S (17 C.F.R. § 230.901 et seq.) for offshore transactions. Build smart contract architecture with modularity that can accommodate future compliance requirements (e.g., transfer restrictions, KYC/AML hooks, reporting functions). Document the relationship between each token and its underlying asset for Howey defensibility.

For financial institutions: Review OCC Interpretive Letters 1183 and 1184, which clarified national bank authority to engage in certain crypto-related activities, and assess whether current custody and settlement infrastructure can support tokenized securities. Monitor for updated FDIC and Federal Reserve guidance on bank involvement in tokenization.

For broker-dealers and exchanges: Evaluate whether existing ATS registrations and compliance programs accommodate blockchain-based settlement. Prepare comment letter templates for when formal SEC proposals are published—early engagement in the rulemaking process is the most effective way to shape the final framework. Crypto exchanges currently operating without broker-dealer registration should not interpret the innovation exemption discussion as implicit permission to list tokenized securities.

For investment advisers: Fiduciary duties under the Investment Advisers Act of 1940 (15 U.S.C. § 80b-1 et seq.) require advisers recommending tokenized securities to understand and disclose smart contract risks, platform risks, and liquidity risks distinct from the underlying asset. Update due diligence checklists accordingly.

What to Do Now

1. Subscribe to SEC rulemaking alerts from the Division of Corporation Finance and the Crypto Task Force at SEC.gov—formal proposals will have comment periods that represent your best opportunity to influence the framework
2. Track House Financial Services and Senate Banking Committee activity for tokenization-related hearings, markups, and bill text
3. Audit current operations against existing law—do not rely on anticipated exemptions that have not been finalized
4. Engage outside counsel to assess how your specific tokenization activities interact with federal securities laws, CFTC jurisdiction, state money transmitter requirements, and tax reporting obligations
5. Participate in comment processes—when the SEC publishes concept releases or proposed rules, substantive industry comments meaningfully shape final outcomes

Conclusion

The SEC’s reported innovation exemption plan for tokenized securities, paired with growing congressional support for tokenization, represents the strongest signal yet that the US may establish a workable federal framework for digital securities. But the distance between policy signals and enforceable rules is significant. No proposed rule has been published. No legislation has been enacted. The specific terms—eligibility criteria, conditions, limitations, interaction with CFTC jurisdiction—remain unknown.

What is clear is that the legal architecture for an SEC innovation exemption already exists. Section 36 and Section 28 provide ample authority. Historical precedent from Regulation ATS and the Special Purpose Broker-Dealer framework provides a template. The question is no longer whether the SEC has the tools, but when and how it chooses to deploy them—and whether Congress acts first with a statutory framework that supersedes agency-level exemptions.

CryptoLaw.blog will track these developments as they progress from policy discussion to formal proposals.

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This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly — consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.