Nasdaq's Tokenized Stocks Push Faces Regulatory Backlash from WFE

Nasdaq Inc. has pledged to accelerate its efforts to bring tokenized stocks to market, with its head of digital assets strategy, Matt Savarese, emphasizing a commitment to collaborate closely with regulators to secure approval. The exchange submitted a proposal to the U.S. Securities and Exchange Commission (SEC) on September 8, seeking to enable investors to trade digital representations of publicly listed shares while adhering to existing regulatory frameworks. This initiative aligns with broader industry trends as financial institutions explore blockchain technology to modernize equity trading. However, the push faces scrutiny from traditional market operators, including the World Federation of Exchanges (WFE), which has warned that broad exemptions for tokenized assets could undermine investor protections and create an uneven regulatory landscape.

The WFE, in a November 21 letter to the SEC's Crypto Task Force, cautioned against granting exemptions that might allow crypto platforms to bypass rules governing exchanges, clearing, and investor safeguards. The group, which includes major U.S. exchanges like Nasdaq and Deutsche Boerse, argued that tokenized stocks-crypto tokens pegged to existing equities-could distort market structure by offering competing platforms a regulatory advantage. For instance, synthetic stock tokens traded in overseas markets have shown valuation discrepancies, raising concerns about price accuracy and investor redress.

The WFE's stance reflects a growing divide within the finance sector: while some view tokenization as a natural evolution of capital markets, others fear it could erode the efficiency and stability of traditional systems.

Nasdaq's approach, however, emphasizes collaboration and compliance. The exchange has deepened its partnership with fintech firm Revolut to enhance regulatory technology (regtech) capabilities, leveraging Nasdaq AxiomSL to consolidate reporting infrastructure across Europe. This move underscores Nasdaq's strategy to balance innovation with robust compliance frameworks, a priority as it navigates SEC review of its tokenized stock proposal. Savarese, the exchange's crypto chief, stated that the goal is not to "upend the system" but to integrate tokenization responsibly, ensuring alignment with SEC rules. The SEC, under Chairman Paul Atkins, has signaled openness to innovation through its "Innovation Exemption" framework, which aims to fast-track blockchain-based products while finalizing long-term digital-asset regulations.

Despite these efforts, the debate remains contentious. Critics argue that tokenized stocks could introduce risks such as smart-contract vulnerabilities and cyber threats, while proponents highlight benefits like 24/7 trading and fractional ownership according to industry analysis. The SEC's final decision will likely hinge on balancing these factors, with potential outcomes ranging from narrow, temporary exemptions to broader regulatory reforms. For now, Nasdaq and its peers continue to advocate for a level playing field, emphasizing that tokenized and traditional markets must compete under the same rules. As the agency reviews proposals, the outcome could reshape how investors access financial markets, with implications for market structure, investor protection, and the future of capital formation.