Alex Thorn, head of research at Galaxy Digital, has signaled that proposed changes to U.S. Securities and Exchange Commission (SEC) market regulations could remove a key barrier to the growth of stock token trading on decentralized finance (DeFi) platforms. In a post on X, Thorn identified two specific rules that currently hinder the use of automated market makers (AMMs) for trading tokenized equities.
Which SEC rules are at the center of the debate?
Thorn pointed to Rule 611, known as the Order Protection Rule, and Rule 610(e), which restricts locked and crossed markets. These regulations were designed for traditional, order-book-based stock exchanges and were not written with decentralized or automated trading mechanisms in mind. According to Thorn, these rules effectively prevent DeFi protocols from efficiently facilitating trades in tokenized stocks, as AMMs rely on continuous liquidity pools rather than matched order books.
The SEC has proposed repealing both Rule 611 and Rule 610(e) as part of a broader effort to modernize market structure. If adopted, the changes would remove the requirement that trades must occur at the best available price across all exchanges, a concept that is difficult to enforce in a DeFi environment. Thorn argues that this repeal would create a regulatory environment where AMMs could legally and efficiently handle stock tokens.
Why this matters for the crypto and finance industries
The tokenization of traditional assets, including stocks, has been a long-standing goal for many in the blockchain space. Proponents argue that stock tokens could offer faster settlement, 24/7 trading, and broader global access. However, regulatory uncertainty has kept most institutional players on the sidelines. The SEC’s current proposal, while still in its early stages, represents one of the most concrete signals that U.S. regulators may be willing to adapt existing rules to accommodate blockchain-based financial infrastructure.
Galaxy Digital, a crypto-focused financial services firm with significant institutional exposure, has been actively involved in the tokenization space. Thorn’s comments suggest that the firm views regulatory reform as a catalyst for bringing traditional equities onto blockchain rails, potentially unlocking a new asset class for DeFi users.
Potential impact on market structure
If the SEC moves forward with the repeal, it could reshape how tokenized equities are traded. AMMs, which are already widely used for crypto tokens, could become the primary mechanism for stock token trading, reducing reliance on traditional broker-dealers and centralized exchanges. This would likely increase competition in the equity trading space and could lead to lower fees and faster execution times for end users. However, critics caution that removing the Order Protection Rule could fragment liquidity and create pricing inefficiencies, particularly for less liquid stocks.
The proposal is still subject to a public comment period and final SEC approval. Industry participants are watching closely, as the outcome could set a precedent for how other securities regulations are applied to decentralized systems.
Conclusion
Galaxy Digital’s Alex Thorn has highlighted a potentially pivotal moment for the intersection of DeFi and traditional finance. The SEC’s proposed repeal of Rule 611 and Rule 610(e) could remove a significant legal hurdle for stock token trading via AMMs. While the regulatory process is ongoing, the discussion marks a notable shift in the conversation around how existing securities laws may need to evolve to accommodate blockchain-based trading systems. For now, the industry awaits the SEC’s final decision.
FAQs
Q1: What is Rule 611 and why does it affect stock token trading?
Rule 611, also known as the Order Protection Rule, requires that trades be executed at the best available price across all registered exchanges. This rule is difficult to implement in DeFi environments where automated market makers (AMMs) use liquidity pools rather than order books. Repealing it would allow AMMs to trade stock tokens without needing to comply with this price-matching requirement.
Q2: How would repealing Rule 610(e) help DeFi platforms?
Rule 610(e) restricts locked and crossed markets, which occur when bid and ask prices overlap or cross. AMMs naturally create these conditions as they adjust prices based on pool balances. Repealing this rule would remove a technical compliance barrier for DeFi protocols handling tokenized equities.
Q3: Is the SEC definitely going to repeal these rules?
No. The SEC has proposed the repeal, but it is still in the rulemaking process. The proposal must go through a public comment period and final vote by the commissioners. There is no guarantee the repeal will be adopted as proposed, or at all.
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