Tokenized Stocks at SEC Crossroads: Innovation vs. Regulation

Nasdaq is pushing for Securities and Exchange Commission (SEC) approval to list tokenized stocks, positioning itself at the center of a regulatory and technological debate that could reshape U.S. equity markets. The exchange submitted a formal rule-change proposal in September, seeking to allow tokenized shares to trade alongside traditional equities with the same regulatory treatment, including CUSIP identification and shareholder rights. This move follows a broader industry push to integrate blockchain technology into capital markets, though it has sparked tensions between traditional exchanges and crypto-native platforms over regulatory boundaries.

The World Federation of Exchanges (WFE), which includes Nasdaq and Germany's Deutsche Boerse among its members, has been a vocal advocate for maintaining existing regulatory frameworks. In a November 21 letter to the SEC, the WFE warned against exemptions that would let unregistered crypto platforms bypass decades-old market safeguards, arguing that such measures could expose investors to unregulated products masquerading as equities. WFE CEO Nandini Sukumar emphasized the risks of allowing tokenized assets to circumvent protections tied to real stock ownership, a stance aligned with recent calls from regulators in the U.S., Europe, and Asia to clamp down on unlicensed platforms offering tokenized securities.

The SEC's deliberation on this issue takes on heightened urgency as the agency prepares to host a pivotal December 4 meeting of its Investor Advisory Committee. The session will examine how tokenized equities could function under current regulations, with Nasdaq's proposal serving as a key reference point. The exchange's blueprint envisions tokenized shares trading on the same order books as traditional stocks, with blockchain replacing back-end settlement systems while retaining existing compliance structures. This approach, which Nasdaq frames as an evolution rather than a disruption, aims to ensure tokenized equities remain subject to the National Market System (Reg NMS) and retain features like the national best bid and offer (NBBO).

However, challenges persist. Critics, including Ondo Finance, have called for delays until Nasdaq clarifies how tokenized trades would integrate with the Depository Trust Company's settlement infrastructure according to reports. Meanwhile, the distinction between native tokenized shares-issued directly by companies on-chain-and wrapper structures-offshore tokens that mimic equity exposure without granting voting rights-has become a regulatory flashpoint. Nasdaq has cited European venues as cautionary examples, where tokens tracking Apple and Amazon traded at divergent prices and lacked investor protections.

The SEC's decision will carry significant implications. Approving tokenized equities under existing rules could enable blockchain-based settlement while preserving market integrity, but it may also open the door for unregulated platforms to compete with traditional exchanges. Conversely, rejecting the proposal could stifle innovation or drive activity to offshore markets. With the SEC's Innovation Exemption proposal under review and the Responsible Financial Innovation Act pending in Congress, the outcome of the December 4 meeting will likely influence whether tokenized stocks are integrated into the U.S. financial system-or remain a niche, unregulated segment.