Coinbase Seeks SEC Approval for Blockchain-Based Stock Trading: A Game Changer for the Industry
Coinbase, the popular cryptocurrency exchange, is seeking approval from the U.S. Securities and Exchange Commission (SEC) to offer "tokenized equities" to its customers, according to the crypto exchange's chief legal officer. If granted, the move would allow Coinbase to effectively offer stock trading via blockchain technology, placing it in direct competition with retail brokerages such as Robinhood and Charles Schwab, and could open a new business segment for the company.
The concept of tokenizing equities involves converting shares of a company into a digital token, similar to how cryptocurrencies are traded. Instead of holding the securities directly, investors hold tokens that represent ownership of the securities. Proponents have said that tokenized equities could reduce trading costs, enable faster settlement, and facilitate around-the-clock trading. However, critics have pointed out that there are still many gaps that need to be addressed before tokenized equities can be commonly traded, including a lack of sufficient secondary-market liquidity and a clear global standard.
Currently, tokenized equities are not available for trading in the United States, but several firms are experimenting with the concept. Rival crypto exchange Kraken recently announced that it is launching tokens of U.S. equities, called xStocks, which will be available in select markets outside the United States.
To offer tokenized equities in the United States, Coinbase would either need to be granted a "no action letter" or exemptive relief from the SEC. Typically, companies that offer trading in securities have to be registered as broker-dealers, but Coinbase acquired a broker-dealer in 2018, providing it with a license to offer similar services. However, that affiliate has not been active.
A no-action letter would be issued by SEC staff in response to a request from a company like Coinbase, saying that the SEC would not object to a certain offering and would not recommend an enforcement action if a firm were to move forward with that offering. The move from Coinbase comes as former U.S. President Donald Trump has sought to overhaul U.S. cryptocurrency policy after courting cash from the industry on the campaign trail. Trump has appointed industry-friendly regulators and hosted industry leaders at the White House. Cryptocurrencies have reacted favorably, with bitcoin reaching all-time highs this year. The SEC under Trump has dropped lawsuits against a litany of crypto companies, including Coinbase, Binance, and Kraken, and has instituted a crypto task force charged with devising new rules for digital assets.
"With a no-action letter, an issuer of a tokenized equity or a platform that wishes to offer secondary trading in those equities can have some confidence and comfort that the SEC has adopted its view of why this product is compliant," said Coinbase's chief legal officer. "It's that confidence that has been lacking so far, and I think really held back a lot of the institutional adoption" of crypto and blockchain technology.
