WFE Warns Tokenized Stocks Could Undermine Market Integrity, Spur Regulatory Fragmentation

Nasdaq Inc. (NDAQ.O) is intensifying its campaign for the U.S. Securities and Exchange Commission (SEC) to approve the issuance of tokenized stocks, a move that could redefine capital markets but has drawn sharp resistance from traditional exchanges. The World Federation of Exchanges (WFE), which includes Nasdaq and Germany's Deutsche Boerse (DB1Gn.DE), warned in a November 21 letter that granting regulatory exemptions to crypto platforms could erode market integrity and investor protections. The WFE's CEO, Nandini Sukumar, emphasized that the SEC should avoid letting firms bypass decades-old regulatory frameworks, which have safeguarded markets for years.

The debate centers on tokenized equities, where blockchain-based tokens are pegged to traditional stocks. Proponents argue this technology could streamline trading efficiency and expand access, but critics like James Auliffe, head of the WFE's technology working group, contend that existing equity markets are already highly efficient, making the costs of blockchain adoption outweigh potential benefits. The WFE's stance reflects a broader tension between innovation and regulation, as crypto firms seek to leverage blockchain's perceived advantages while traditional exchanges push for a "level playing field" to prevent unregulated platforms from undercutting compliance standards.

Nasdaq's efforts align with a broader strategy to position itself as a leader in financial infrastructure. The exchange recently expanded its partnership with fintech Revolut, leveraging its AxiomSL platform to unify regulatory reporting across Europe. Murray Laister, Revolut's head of group regulatory reporting, highlighted that the integration creates a scalable framework for compliance without stifling growth. This collaboration underscores Nasdaq's dual focus on innovation and adherence to regulatory expectations, a balancing act crucial as it seeks SEC approval for tokenized assets.

The SEC's approach under President Donald Trump has shifted toward a crypto-friendly stance, offering a potential opening for tokenization. However, the agency faces a delicate task: fostering innovation while preserving investor protections. The WFE's letter, though not naming specific crypto firms, signals growing unease among mainstream financial institutions as crypto platforms encroach on traditional markets. Auliffe noted that equity markets' existing efficiency means there are few scenarios where blockchain's benefits justify the costs.

Meanwhile, Nasdaq's stock performance reflects mixed investor sentiment. While the company's P/E ratio of 31.84 exceeds the 24.4 average for the Capital Markets industry, its share price has lagged in the short term. This volatility highlights the challenges of balancing regulatory uncertainty with market expectations, particularly as tokenization gains traction.

Global regulators remain divided. The International Organization of Securities Commissions has cautioned that tokenized assets introduce risks unaddressed by existing rules, including unclear ownership rights and counterparty exposure. These concerns echo the WFE's warnings and suggest a fragmented regulatory landscape, with the Financial Stability Board (FSB) urging harmonized standards to mitigate systemic risks.

As the SEC weighs its next steps, the outcome could reshape capital markets. If approved, tokenized stocks may offer faster settlement and 24/7 trading but could also fragment regulatory oversight and deepen ties between traditional and crypto markets. For now, the debate remains a test of whether innovation can coexist with the foundational principles of market integrity.