Why This Investment Bank Predicts Minimal Demand for Tokenized Equities Despite SEC New Trading Regulations

Summary

• The SEC established a five-year regulatory framework for tokenized stock trading shortly after the CLARITY Act failed to progress.
• TD Cowen anticipates restrained short-term adoption because American investors already enjoy seamless stock access and corporate issuers display minimal enthusiasm for tokenization.
• Perpetual futures represent a significantly stronger driver for crypto-linked equity exposure, with TD noting substantially larger trading volumes compared to tokenized spot alternatives.

Last week, the Securities and Exchange Commission (SEC) unveiled a new path for tokenized stock trading in the United States, providing fresh impetus to a financial trend that has expanded across markets over the past year. Nevertheless, TD Cowen does not foresee market participants rushing to adopt it.

The regulatory body’s newly introduced Innovation Exemption establishes a five-year operational structure allowing eligible tokenized security platforms to manage automated market maker pools without registering as conventional exchanges.

Under specific conditions, designated liquidity providers can also bypass dealer registration requirements. This development arrived merely days following the stagnation of the Clarity Act, which failed to advance in the U.S. Senate, leaving wider cryptocurrency market structure legislation stalled.

Despite this, Reid Noch, vice president of U.S. equity market structure at TD Cowen, forecasts that this emerging sector will remain modest, at least initially.

“We expect limited near-term adoption among both domestic retail investors and institutions,” Noch stated in a Friday research note. “U.S. investors already possess efficient channels to access the underlying equities, and tokenized platforms must deliver a compelling advantage to outweigh sparse liquidity alongside increased operational complexity.”

This highlights the fundamental challenge facing tokenized shares: they must resolve a problem that current American equity markets do not already address.

The SEC framework permits transactions through automated market makers, known as AMMs, rather than utilizing a standard order book model. An AMM maintains asset reserves and applies predetermined formulas to determine trade pricing. Potentially, this design enables share tokens to circulate around the clock provided that the reserve pool holds adequate capital.

However, continuous trading does not automatically equate to superior execution quality, according to Noch, since shallow liquidity can lead to unfavorable pricing.

Furthermore, the SEC has instituted strict boundaries for this regulatory sandbox. Tokens must mirror NMS equities while retaining the economic benefits, dividend allocations, voting privileges, and liquidation entitlements tied to the primary shares. Third-party tokenization entities are required to notify a corporation ahead of trading its equity, granting the issuer a 30-day window to raise objections. Additionally, trading volume is subject to strict caps.

Such conditions might make the American framework more challenging to implement than tokenized stock instruments currently available in international jurisdictions.

Issuer enthusiasm remains another open question.

“Our discussions with numerous issuers, including several consumer-oriented brands, have uncovered negligible appetite for tokenizing their equities outside of crypto-native firms like Figure,” Noch remarked.

Figure illustrates the magnitude of this obstacle. Its Nasdaq-traded FIGR shares trade concurrently with blockchain-native FGRS shares, which offer identical economic exposure and voting rights. Even so, 99.9% of Figure’s notional trading volume occurred via its traditional listed equities during the 24-hour observation period analyzed by TD.

For digital asset traders seeking stock exposure, the primary disruption to legacy financial markets could originate elsewhere: through perpetual futures.

TD discovered that 96% of Nvidia-related notional volume within a Binance data sample derived from perpetual futures, in contrast to a mere 4% stemming from spot offerings.

“As we continue to emphasize, we view perpetual futures as the more robust demand narrative,” Noch wrote. “We anticipate that trading platforms will continue expanding these instruments globally and domestically, mirroring retail investors’ appetite for leverage.”