If you had Bitcoin out and tokenization in for your fall 2026 office pool, you’re probably feeling pretty good right now. And save for the CLARITY Act, things might feel like one big Love-In, with crypto and Wall Street equally excited about the early initiatives for tokenized stocks.
Of course many market observers may be forgiven for wondering who the heck cares. After all, the ability to trade equities more efficiently is all very nice, but to many this sounds more like something to win over the pocket-protected denizens of the back office. And frankly most people feel like they can buy their shares of Amazon just fine.
But that masks two significant battles that will be fought vigorously over the coming months. First, the availability of those coveted pre-IPO tokenized stocks for names like OpenAI — already trading offshore, and loudly disavowed by the issuers. And second, the rules governing which kinds of firms can facilitate tokenized stock trading in the future — a fight with multibillion dollar consequences.
The debate over the latter question has resulted in sparks flying over the so-called “innovation exemption,” the nature of which represents one of the great unsolved mysteries of our day.
First, it would be hard to find another topic with more “oh boy here it comes” buildup and less reveal. After more than a year of comment letters aimed at a rule nobody outside the SEC had seen, the Commission promoted the innovation exemption as coming soon in December, “on the cusp” in April, “as soon as this week” in May, and “as soon as this Friday” a few days ago.
And then … nada. Not even an official explanation. Leading one to suppose that the big happy capital markets family smiling for the tokenization photo is having a massive food fight behind the scenes. The mysterious innovation exemption is a kind of Beltway Bigfoot: plenty of reported sightings, but no clear text or timeline ever seen in public.
Yet regardless of what nodding faces we might see at the White House this week, behind the fabled innovation exemption lies a high-stakes battle for the future of tokenized stock trading in America that will have to be decided.
Three Battlefields
The most visible battle is over which kinds of tokenized stocks should exist at all. Everyone already agrees that stocks can be tokenized where the issuer signs off; the current battle revolves around whether a third party can tokenize an Apple share without Apple’s consent.
The second debate centers on Rule 611, the price protection rule that says your brokerage can’t fill your order at a worse price than the best public quotation. (Notably the parallel “best execution” protections for investors would survive.) The SEC has formally proposed rescinding 611, with public comments just in.
The innovation exemption is the third battle, and asks how tokenized US stocks will trade in the future. The issue is this: current law states that the brokerage that takes your buy order, the exchange that matches it, and the dealer on the other side can’t be the same company, with the objective of ensuring better investor protection. This is why Wall Street brokers don’t own their own stock exchanges.
In contrast, the crypto exchanges — which naturally evolved outside of the traditional equities framework — provide all three functions in-house for crypto tokens. The Exchange Act prohibits the integrated trading of traditional equities. But given the rapidly expanding introduction of tokenized stock trading in the US, the crypto exchanges are now looking to extend their “one-box” model via the innovation exemption to the trading of tokenized stocks.
While there are obvious public policy issues here, not incidentally there are also billions of economics at stake. Often the source of its own debate, the current ecosystem generally involves the payment of billions in fees from the wholesalers providing liquidity to the brokers whose clients are buying and selling, known as payment for order flow. Hence the one-box model utilized by the crypto exchanges — if extended to the trading of tokenized US stocks — could put a big dent into the economics of the current wholesaler business model.
The Great Innovation Exemption Debate
The case for maintaining the existing separation between brokers, dealers and exchanges for tokenized stocks consists of a combination of (a) if it ain’t broke don’t fix it, (b) don’t let the players call their own fouls, and (c) this isn’t the SEC’s call. First off, the separation rules were intended to protect the stock investing public and have worked well for nearly a century. Second, tokenized stocks are still stocks and shouldn’t be treated differently just because they run on different rails. And third, something this big requires Congressional action.
These voices — including market leader Citadel Securities and Wall Street industry groups like SIFMA — made this case forcefully throughout the public comment process and will certainly continue to do so.
On the one-box side, the case involves (a) the application of the new technology underlying tokenized stocks to investor protection, (b) the need for continued American leadership in capital markets, and (c) the precedential value of earlier SEC rulemaking. First, tokenization solves for several of the problems that the separation rules were designed to protect against with conventional stocks. Second, the 1934-era rules are obsolete in certain respects and federal policy should reflect the need to support US leadership in capital markets efficiency. And finally, the SEC has in fact adapted trading rules before when it approved the introduction of electronic stock networks via Reg ATS in 1998.
These firms also utilized the comment process to actively press their case, led by big-name firms like crypto leader Coinbase and venture titan Andreessen Horowitz.
The War of the Three Armies
American institutional crypto won the first war. Many of the overseas first-wave crypto shops are but a memory, but clearly crypto is now about as Main Street as you can get, with firms as apple pie as Fidelity and Schwab now providing trading for tokens.
Now the next war looms: who will lead the next generation of blockchain-based stock trading?
Naturally the back and forth in the public comments had blue chip names — and highly substantive arguments — on both sides of the coin. But in fact there are actually three armies in the current battle: the Wholesalers, the Crypto Exchanges, and the Infrastructure Platforms.
The Wholesalers execute the retail stock trades purchased from the big retail brokers, a practice incentivized by the current separation rules governing traditional stock trading. For them, if the crypto exchanges were allowed to expand their current ability to execute retail orders in-house (i.e., internalize) to equities, the wholesalers could find some portion of their execution businesses disintermediated.
The Crypto Exchanges currently act as broker, dealer and exchange all-in-one, effectively outside of the traditional separation rules for equities. Their objective is to expand their already tokenized market model into equities, presumably providing them with significant edge. All consistent with their broader strategy of offering their younger-skewing customer base an all-in-one exchange model.
But there’s a third army here made up of firms all of which opted out of the comment battle entirely. The Infrastructure Platforms — including NYSE, Nasdaq, DTCC and the custody banks — own most of Wall Street’s trading rails, and rather than fight the innovation exemption via public comment they instead built their own rails for tokenized stocks. Nasdaq won the SEC’s blessing this spring to trade tokenized stocks and major ETFs on its existing order book, NYSE followed, and DTCC ran its first live production trades in July.
All of this was completely non-controversial by design: the same shares of already-public companies, trading in the same place. So while the mechanics are blockchain-based, no new security is created and no issuer consent is required.
Interestingly, when the innovation exemption was due to be published in May, Bloomberg reported that the backtrack stemmed from officials weighing input from “stock-exchange officials, public companies and other market participants.” Which suggests that the Infrastructure Platforms may well have proven the most effective in raising policy objections to the anticipated innovation exemption.
What Happens Next?
The war over the innovation exemption won’t be over any time soon: all of the main parties involved are DC-savvy giants with massive PR capabilities, hordes of highly compensated lobbyists, and legions of fancy lawyers. So the odds of a knock-out punch anytime soon are quite low; all sides have tremendous staying power.
So beyond this week’s White House summit, what happens next?
The first lens relates to the process. In the two vocal debates — token stock permissibility and Rule 611 — there are formal procedures playing out in public. The token issue gets adjudicated by rule filings with statutory clocks, while Rule 611 plays out via formal notice and comment rule making — both entirely public.
Whereas the innovation exemption runs off-road. The SEC’s crypto task force made a request for public input in early 2025, but beyond that there’s no formal roadmap — and none is required. Which is also why the exemption can be teased and then buried multiple times without explanation.
Nature, as everyone knows, abhors a vacuum. So the innovation exemption war will likely play out via a combination of public advocacy, behind the scenes political pressure, and almost certainly the courts given the legal issues raised in the comment letters.
All of which means the Crypto Exchanges have every incentive to push for as quick a SEC resolution as possible, for the simple reason that the midterms are less than three months away, and a change in House leadership would spell far stronger headwinds for the exemption to take effect.
When You Play the Game of Tokenized Thrones
While the fate of the pre-IPO equities is admittedly sexier, it’s the far more enigmatic innovation exemption that will determine the winners and losers in a market ecosystem that trades trillions of dollars each week and touches every investor and public company in America. And when you play the Game of Tokenized Thrones, the separation-of-functions question is binary — there is no middle ground.
About the Author
Michael Kraines has spent more than thirty years in financial services as a corporate attorney, Wall Street investment banker, FinTech President and CFO, and board director.
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