SEC Balances Blockchain Innovation with Regulatory Caution in Stock Tokenization Debate

Nasdaq Inc. is accelerating its bid to tokenize publicly traded stocks, seeking swift approval from the U.S. Securities and Exchange Commission (SEC) to integrate blockchain-based settlement into its existing market infrastructure. The exchange's proposal, unveiled in a formal filing, aims to enable tokenized versions of listed equities to trade alongside traditional shares on the same order book, arguing that the technology requires no exemptions from the national market system. This move aligns with a Dec. 4 advisory panel convened by the SEC's Investor Advisory Committee, where Nasdaq, BlackRock, Coinbase, and other market participants will outline the practical framework for tokenized equity issuance, trading, and settlement.

The proposal hinges on maintaining regulatory continuity. Tokenized equities would share the same CUSIP identifiers, execution priorities, and economic rights as traditional shares, with blockchain serving as a settlement layer rather than a structural overhaul. The Depository Trust Company (DTC) would continue to guarantee delivery, while transfer agents would manage tokenized registers under existing custody standards according to Nasdaq's proposal. Nasdaq emphasizes that this approach preserves compliance with Regulation NMS, ensuring trades contribute to the national best bid and offer (NBBO) and subjecting market activity to surveillance for wash trades and spoofing.

The SEC, however, remains cautious. Commissioner Hester Peirce has stressed that tokenization does not alter the fundamental nature of securities, reiterating that tokenized assets remain subject to the full federal regulatory regime. The advisory panel's focus will include reconciling technical challenges, such as key management for blockchain custody, the mechanics of short selling, and the feasibility of 24/7 trading without disrupting the NBBO.

Nasdaq's blueprint explicitly rejects "wrapper tokens" that mimic equity exposure without granting voting rights or legal ownership-a practice seen in offshore platforms where tokenized Apple and Amazon shares traded at divergent prices from their underlying assets according to market analysis.

The debate extends beyond technicalities to broader market implications. Tokenization promises faster settlement times (potentially reducing counterparty risk) and enhanced liquidity through fractional ownership, but critics warn of fragmentation if unregistered platforms bypass traditional exchanges. The Securities Industry and Financial Markets Association (SIFMA) has underscored that tokenized securities must retain the same legal and beneficial ownership as their physical counterparts; otherwise, they risk morphing into unregulated derivatives. Meanwhile, the Responsible Financial Innovation Act, currently under Senate review, signals legislative support for treating tokenized stocks as securities, reinforcing the SEC's oversight role.

The Dec. 4 meeting is a stress test for industry consensus. If Nasdaq and its peers can harmonize custody models, interoperability standards, and short-sale mechanics, the SEC may gain a reference architecture for evaluating tokenization proposals. Failure to align could delay approvals as the agency identifies technical or incentive mismatches. While the panel won't directly approve Nasdaq's filing, its outcomes could shape the regulatory roadmap for integrating blockchain into capital markets.

The path forward remains uncertain. Nasdaq projects live trading of tokenized equities as early as Q3 2026 if DTC's blockchain infrastructure is finalized on schedule. Yet, the SEC's reluctance to redefine "security" or grant exemptions suggests tokenization will remain within existing regulatory bounds, at least initially. For now, the advisory panel's deliberations will determine whether the SEC views blockchain as an evolutionary upgrade or a disruptive force requiring new guardrails.