Major U.S. exchanges are expressing concerns as the Securities and Exchange Commission (SEC) contemplates exemptions that could accelerate the introduction of tokenized stocks into mainstream markets.
The debate has intensified following a letter submitted by the World Federation of Exchanges (WFE) to the SEC’s Crypto Task Force, cautioning that broad exemptive relief could disrupt market structure and provide lightly regulated crypto firms with a competitive advantage.
The letter, dated November 21, highlights the growing “alarm” over platforms offering tokenized versions of U.S. equities without the safeguards that traditional securities enjoy. Many of these instruments are marketed as equivalents of listed shares but lack essential features such as legal ownership rights, voting power, and clear avenues for investor recourse.
SEC Chairman Paul Atkins has been working on an “innovation exemption” framework that would allow crypto firms to launch blockchain-based products under conditional relief while the agency finalizes long-term regulations for digital assets. Atkins believes that tokenization is inevitable and crucial to positioning the U.S. as a global digital finance hub.
The SEC is currently reviewing proposals for tokenized stocks, bonds, and partnership interests, with major financial institutions already seeking approval. Tokenized stocks aim to represent traditional shares on a blockchain ledger, offering benefits such as round-the-clock global trading, faster settlement, and fractional access.
However, concerns have been raised about the lack of investor protections and regulatory oversight for these tokenized assets. Exchanges argue that granting exemptions too broadly could lead unregulated crypto platforms to divert trading activity away from traditional markets, potentially weakening price discovery and causing discrepancies between tokenized and underlying share prices.
The WFE has pointed to instances in overseas markets where synthetic stock tokens traded at significantly different valuations, raising concerns about accuracy and investor protection. The group also warned that tokenized equities could disrupt clearinghouse systems that are designed to reduce systemic risk.
Atkins continues to advocate for a more permissive regulatory approach, emphasizing the need to adapt regulatory models to accommodate on-chain finance. His broader plan, known as “Project Crypto,” calls for modernizing securities rules, bringing crypto asset issuance back onshore, and providing clarity for tokenized instruments.
Regulators are exploring ways to modernize market infrastructure without destabilizing existing systems. One option under consideration is requiring platforms offering tokenized equities to register as exchanges or alternative trading systems, subjecting them to the same standards as traditional venues.
The shift towards tokenized shares could reshape how investors access financial markets, offering benefits such as low-cost fractional ownership and faster settlement. However, it also introduces new risks, including smart-contract vulnerabilities and uncertainty around regulatory treatment.
The WFE has urged the SEC to keep exemptions narrow, temporary, and subject to strong oversight, including anti-money laundering controls, governance standards, and asset-segregation requirements. The group recommends transparent rulemaking or controlled sandbox programs over sweeping exemptions that could shift risk onto the public.
In conclusion, the debate surrounding tokenized stocks underscores the need for careful consideration and robust regulatory oversight to ensure the integrity and stability of the financial markets as they evolve in the digital age.
