Tokenized Stocks and the Regulatory Tightrope: How Transparency and Governance Risks Shape the Future of Digital Securities

The tokenization of stocks has emerged as a disruptive force in capital markets, promising 24/7 trading, fractional ownership, and faster settlements. Yet, as the industry races to tokenize equities, regulatory scrutiny has intensified, exposing critical vulnerabilities in transparency and governance. These challenges threaten to undermine investor trust and slow adoption, even as institutional players and crypto-native platforms push for broader acceptance.

Transparency: A Double-Edged Sword

Blockchain's inherent transparency-immutable ledgers and real-time settlement-positions tokenized stocks as a potential upgrade to traditional markets. However, this promise is often undermined by structural limitations. For instance, many tokenized assets rely on private blockchains with restricted access, limiting visibility for investors and regulators, according to a Reuters report. A 2025 Federal Reserve study noted that while public blockchains offer full transparency, hybrid models (e.g., tokenized real-world assets like real estate or private equity) often obscure critical details about underlying holdings, creating "opacity traps" for retail investors; a Skadden client alert highlighted similar concerns.

Compounding this issue is the lack of standardized settlement mechanisms. Tokenized stocks frequently depend on stablecoins or central bank digital currencies (CBDCs) for liquidity, yet interoperability remains uneven across jurisdictions, according to a McKinsey report. For example, the absence of a universal framework for on-chain cash payments has led to fragmented secondary markets, where tokens trade at discounts to their real-world counterparts due to unclear redemption processes, as discussed in a Morgan Lewis roundup.

Governance Gaps and Investor Protection

Tokenized stocks often lack the foundational rights of traditional equities, such as voting power, dividend access, and direct ownership. Critics argue this creates a "derivatives-like" structure that exposes investors to counterparty risks without the safeguards of public markets, as reported by Reuters. Citadel Securities, a major market maker, has warned that tokenization could siphon liquidity away from traditional exchanges, fragmenting markets and eroding price discovery - a risk also noted in the Reuters coverage.

Regulators are equally concerned. The U.S. Securities and Exchange Commission (SEC) has emphasized that tokenized securities must comply with existing securities laws, including disclosure requirements and anti-fraud provisions, a point covered in the Skadden client alert. Yet enforcement remains inconsistent. The SEC's ongoing cases against Ripple Labs and Coinbase-challenging whether tokens qualify as securities-highlight the legal ambiguity surrounding tokenized assets, as summarized in the Morgan Lewis roundup. Meanwhile, platforms like Robinhood and Gemini have launched tokenized stocks in Europe under MiFID derivatives rules, but legal experts argue these frameworks are ill-suited for blockchain-based instruments, according to an EdgarIndex article.

Case Studies: Lessons from the Frontlines

Several high-profile incidents underscore the risks of inadequate governance. In 2024, the "OpenAI Token" project drew backlash after investors were misled about the nature of their tokens, which lacked voting rights or equity stakes in the company, a situation analyzed in the Skadden client alert. Similarly, FTX and Binance's short-lived tokenized equity offerings collapsed under regulatory pressure, revealing the fragility of custodial-backed models where tokens are collateralized by real-world assets but lack clear redemption mechanisms, as reported by Reuters.

Nasdaq's recent proposal to align tokenized securities with traditional shares offers a potential solution. By ensuring tokenized stocks grant identical rights to their real-world counterparts, the exchange aims to bridge the gap between innovation and compliance, a development discussed in the Morgan Lewis roundup. However, such efforts face headwinds from legacy infrastructure and fragmented regulations.

The Path Forward: Balancing Innovation and Oversight

To unlock tokenization's potential, stakeholders must address three key priorities:
1. Regulatory Clarity: The SEC's "Spring Sprint Toward Crypto Clarity" initiative seeks to modernize securities laws for blockchain, but statutory updates (e.g., revising the Investment Company Act) remain out of its control, as noted in the Skadden client alert.
2. Standardization: Industry-wide protocols for settlement, custody, and cross-chain interoperability are needed to reduce fragmentation, a recommendation highlighted in the McKinsey report.
3. Investor Education: Retail investors must understand the risks of tokenized assets, which often resemble derivatives rather than traditional equities, a concern raised in the EdgarIndex article.

Conclusion

Tokenized stocks represent a paradigm shift in capital markets, but their success hinges on resolving transparency and governance risks. While blockchain offers tools for greater efficiency, the absence of robust frameworks leaves investors exposed to mispricing, fraud, and regulatory arbitrage. As the SEC and global regulators grapple with these challenges, the industry must prioritize collaboration-balancing innovation with the safeguards that underpin market integrity.