FILE PHOTO: A smartphone with displayed Coinbase logo and representation of cryptocurrencies are placed on a keyboard in this illustration taken, June 8, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
(Reuters) -Coinbase is seeking a green light from the U.S. Securities and Exchange Commission to offer "tokenized equities" to its customers, the crypto exchange's chief legal officer told Reuters.
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 Coinbase.
The concept is a "huge priority," said Paul Grewal, Coinbase's chief legal officer.
Tokenizing equities is a process in which shares of a company are converted 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.
Critics have said there are plenty of gaps that need to be addressed before tokenized equities can be commonly traded. The World Economic Forum, in a report last month, pointed to a lack of sufficient secondary-market liquidity as well as the lack of a clear global standard as two major challenges for adoption.
An SEC representative did not immediately respond to a request for comment.
Currently, tokenized equities are not available for trading in the United States, but several firms are experimenting with the concept. Rival crypto exchange Kraken said last month 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, in which the securities regulator would pledge not to pursue an enforcement action if Coinbase moved forward.
Typically, companies that offer trading in securities have to be registered as broker-dealers. The SEC sued the company in 2023 during former President Joe Biden's administration, alleging that it was operating as one without registering with the agency. The SEC under President Donald Trump's administration dropped that case this year.
Coinbase acquired a broker-dealer in 2018, providing it with a license to offer similar services, but 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.
Grewal did not say if Coinbase had already submitted an official request to the SEC or when a potential product launch might happen.
"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, some comfort, that the SEC has adopted its view of why this product is compliant," Grewal said.
"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,Grewal added.
The move from Coinbase comes as 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 has 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.
(Reporting by Hannah Lang in New York; editing by Pete Schroeder, Will Dunham and Rod Nickel)
