Tokenizing Traditional Stocks: Navigating Investor Protection Risks and Market Infrastructure Readiness

The tokenization of traditional stocks represents a seismic shift in global finance, blending blockchain innovation with established capital markets. While this convergence promises efficiency, accessibility, and programmable compliance, it also introduces complex investor protection risks and infrastructure challenges. As regulators and market participants navigate this uncharted territory, the balance between fostering innovation and safeguarding market integrity will define the trajectory of tokenized equities.

Investor Protection Risks: A Regulatory Tightrope

The U.S. Securities and Exchange Commission (SEC) has acknowledged the need to adapt to tokenized securities, launching Project Crypto to streamline rules for digital assets, according to Andrew Busch. However, tokenized stocks remain subject to a labyrinth of existing regulations, including the Investment Company Act, broker-dealer rules, and anti-money laundering (AML)/know-your-customer (KYC) requirements, as Busch also outlines. For instance, tokenized assets linked to special purpose vehicles rather than direct equity stakes raise legal enforceability concerns, complicating ownership rights and liquidity - a point highlighted in the same analysis.

Decentralized finance (DeFi) models further muddy the waters. While they offer novel functionalities, they challenge foundational investor protections. Policymakers are wary of allowing unregistered DeFi platforms to operate without addressing risks like AML compliance and market fragmentation, a concern documented in the Tokenized Stock Market Map report. The absence of clear definitions for "decentralization" exacerbates regulatory uncertainty, as seen in the SEC's cautious approach to decentralized trading models.

Cybersecurity risks also loom large. The borderless nature of tokenized assets introduces vulnerabilities such as private key theft and fraud, particularly for retail investors accessing private markets through fractional ownership, as noted in OECD insights. Institutional players are mitigating these risks via multi-party computation (MPC) solutions and qualified custodians, but systemic gaps persist, a point detailed in Busch's analysis.

Market Infrastructure Readiness: Progress and Pitfalls

Market infrastructure is adapting to tokenization's demands, driven by blockchain and AI advancements. According to a report by Andrew Busch, tokenized securities enable instant settlement, lower operational costs, and programmable compliance. The integration of AI into market infrastructure is particularly transformative. J.P. Morgan's 2025 report highlights AI's role in optimizing global trade execution and stabilizing liquidity, while AI-driven risk management systems reduce counterparty exposure by 30–40%.

Institutional adoption is accelerating. BlackRock's BUIDL and Franklin Templeton's BENJI tokenized funds surpassed $1 billion in assets under management in 2025, signaling growing confidence in the model. Regulatory flexibility, such as the SEC's July 2025 statement supporting controlled pilots, has further encouraged experimentation. Meanwhile, the European Union's Markets in Crypto-Assets (MiCA) framework has enabled platforms like Robinhood to expand into Europe, fostering cross-border liquidity, as described in the Tokenized Stock Market Map.

Despite this momentum, challenges remain. The OECD emphasizes the need for cross-border regulatory alignment to address fragmentation and legal gaps, an issue echoed in the OECD discussion. Projects like Backed Finance and Ondo Finance demonstrate compliance-driven on-chain equity issuance, but systemic risks-such as interoperability issues and unclear custody protocols-require resolution, as noted by Keyrock.

The Road Ahead: Balancing Innovation and Stability

The tokenized stock market, currently valued at $500 million, is projected to reach $1.34 trillion by 2030 if 1% of global stocks become tokenized, according to the Tokenized Stock Market Map. Achieving this potential will depend on harmonizing regulatory frameworks, enhancing cybersecurity protocols, and standardizing ownership rights. The Bank for International Settlements (BIS) and International Monetary Fund (IMF) caution that while tokenization and AI can enhance market efficiency, governance and data privacy standards must evolve in tandem, a concern reflected in Busch's work.

For investors, the key lies in discerning between compliant, well-structured tokenized offerings and speculative projects lacking robust safeguards. As the SEC and global regulators continue refining their approaches, the next 18–24 months will be critical in determining whether tokenized stocks become a mainstream asset class or remain a niche experiment.