SEC Balances Innovation and Integrity as Tokenized Stocks Debate Heats Up

Nasdaq Inc. is advancing its proposal to tokenize stocks under a regulated framework as the U.S. Securities and Exchange Commission (SEC) faces mounting pressure to define the regulatory boundaries for blockchain-based equity instruments. The exchange operator, a member of the World Federation of Exchanges (WFE), submitted a formal rule-change in September to list tokenized versions of equities with the same CUSIP identifiers and investor protections as traditional shares. This move aligns with broader industry efforts to modernize capital markets but has sparked intense debate over whether innovation should occur within existing regulatory guardrails or through exemptions for unregistered crypto platforms according to industry analysis.

The WFE, representing exchanges including Deutsche Boerse and Cboe, has consistently opposed the SEC's consideration of an "innovation exemption" that would allow unregistered crypto firms to offer tokenized stocks without meeting standard broker-dealer requirements. In a November 21 letter to the SEC, the group warned that such exemptions risk creating a "shadow equity market" where investors could be exposed to synthetic tokens lacking voting rights, dividend claims, or legal ownership protections. WFE CEO Nandini Sukumar emphasized that bypassing established rules could erode investor confidence and market integrity, particularly as unlicensed platforms already offer tokenized versions of U.S. equities trading at divergent valuations overseas.

Nasdaq's proposal, however, seeks to integrate tokenization within the existing national market system (Regulation NMS), ensuring tokenized equities contribute to the national best bid and offer (NBBO) and remain subject to surveillance for market manipulation. The exchange argues that blockchain should function as a settlement technology rather than a vehicle for regulatory arbitrage according to Nasdaq's proposal.

Yet critics, including Ondo Finance, have called for delays until Nasdaq clarifies how tokenized trades would interface with the Depository Trust Company (DTC), the backbone of U.S. securities settlement. Meanwhile, the WFE's technology working group head noted that equity markets are already highly efficient and cautioned that shifting trading onto blockchains must demonstrate clear benefits over current systems.

The SEC's upcoming Investor Advisory Committee meeting on December 4 will scrutinize these competing visions. The panel, featuring representatives from Nasdaq, BlackRock, and Coinbase, aims to evaluate how tokenized equities could operate under existing rules while addressing technical challenges such as 24/7 trading and cross-chain interoperability. SEC Chair Paul Atkins, a vocal proponent of blockchain innovation, has framed the debate as a strategic imperative for U.S. competitiveness in digital finance under the Trump administration. However, regulators face a delicate balancing act: fast-tracking exemptions could spur innovation but may also enable unregistered platforms to siphon liquidity from traditional markets, fragment price discovery, and expose retail investors to opaque products according to industry experts.

The outcome will have far-reaching implications. If tokenized stocks gain regulatory approval, they could democratize access to fractional ownership and enable faster settlement, but risks include smart-contract vulnerabilities and the proliferation of "wrapped" tokens that mimic equities without conferring actual rights. The WFE has urged the SEC to adopt narrow, time-limited exemptions with strict oversight, while industry groups stress that legal ownership must remain intact to preserve investor protections. As the debate intensifies, the SEC's final decision will likely shape whether the U.S. becomes a global leader in tokenized finance-or a cautionary tale of regulatory fragmentation.