Tokenized Stocks Face SEC Scrutiny: Balancing Progress and Compliance

Nasdaq Seeks SEC Approval for Tokenized Stock Listings

Nasdaq is actively pursuing authorization from the Securities and Exchange Commission (SEC) to list tokenized versions of stocks, aiming to play a pivotal role in the evolving landscape of U.S. equity markets. In September, the exchange formally requested a rule change that would permit tokenized shares to be traded alongside conventional stocks, granting them identical regulatory status, including CUSIP numbers and shareholder privileges. This initiative is part of a broader industry movement to incorporate blockchain technology into financial markets, but it has also intensified debates between established exchanges and crypto-focused platforms regarding regulatory oversight.

Industry Response and Regulatory Concerns

The World Federation of Exchanges (WFE)—whose membership includes Nasdaq and Germany’s Deutsche Boerse—has strongly advocated for upholding current regulatory standards. In a letter sent to the SEC on November 21, the WFE cautioned against granting exemptions that would allow unregistered crypto exchanges to sidestep long-standing investor protections. The organization argued that such exemptions could expose investors to products that appear to be equities but lack proper oversight. WFE CEO Nandini Sukumar highlighted the dangers of letting tokenized assets bypass the safeguards associated with traditional stock ownership, echoing recent regulatory warnings from authorities in the U.S., Europe, and Asia about the risks posed by unlicensed platforms offering tokenized securities.

Upcoming SEC Deliberations

The SEC’s review of this matter has gained urgency as it prepares for a crucial Investor Advisory Committee meeting on December 4. During this session, the committee will explore how tokenized stocks might operate within the existing regulatory framework, using Nasdaq’s proposal as a primary example. Nasdaq’s plan envisions tokenized shares being traded on the same platforms as traditional equities, with blockchain technology replacing legacy settlement systems but maintaining current compliance protocols. This strategy, which Nasdaq describes as an incremental improvement rather than a radical shift, is designed to keep tokenized stocks within the National Market System (Reg NMS) and preserve features such as the national best bid and offer (NBBO).

Ongoing Challenges and Market Risks

Despite these efforts, several obstacles remain. Some industry participants, including Ondo Finance, have urged a pause until Nasdaq provides more details on how tokenized transactions would interact with the Depository Trust Company’s settlement processes, according to various reports. Additionally, regulators are scrutinizing the differences between native tokenized shares—issued directly on the blockchain by companies—and so-called wrapper tokens, which are offshore instruments that simulate equity exposure but do not grant voting rights. Nasdaq has pointed to European markets as cautionary tales, where tokens tracking companies like Apple and Amazon have traded at inconsistent prices and lacked adequate investor protections.

Potential Impact of the SEC’s Decision

The SEC’s forthcoming decision is expected to have far-reaching consequences. If tokenized stocks are approved under current regulations, it could pave the way for blockchain-based settlement while upholding market safeguards. However, such approval might also allow unregulated platforms to challenge traditional exchanges. On the other hand, rejecting the proposal could hinder technological progress or push trading activity to overseas markets. With the SEC’s Innovation Exemption proposal under consideration and the Responsible Financial Innovation Act awaiting action in Congress, the outcome of the December 4 meeting will likely determine whether tokenized stocks become a mainstream part of the U.S. financial system or remain confined to a niche, less regulated sector.