Nasdaq’s Move Toward Tokens Challenges the SEC’s Regulatory Stance

Nasdaq Advances Efforts to Tokenize U.S. Stocks

Nasdaq Inc. is ramping up its campaign to secure approval from the U.S. Securities and Exchange Commission (SEC) for the tokenization of stocks, aiming to lead a significant transformation in the equity market landscape. On September 8, the exchange submitted a formal request to permit the trading of digital tokens that represent shares of publicly traded companies. This initiative is designed to accelerate settlement processes and broaden participation in the market, all while navigating a challenging regulatory environment. Matt Savarese, who heads Nasdaq's digital assets strategy, highlighted in a CNBC interview that the company is committed to "responsible innovation" and is working closely with regulators to address public input and move the proposal forward.

Regulatory Hurdles and Industry Concerns

The SEC's stance is crucial, as the agency faces increasing calls to update its policies in response to developments in the crypto sector. The World Federation of Exchanges (WFE), a prominent global industry group that counts Deutsche Boerse among its members, sent a letter to the SEC on November 21 urging the agency not to grant exemptions that would allow crypto platforms to circumvent established market protections. The WFE cautioned that tokenized stocks could pose new risks to market integrity and weaken investor safeguards if they are not held to the same standards as conventional securities trading. This reflects a broader debate between traditional financial institutions and crypto-native companies, with established players pushing for consistent regulation across the board.

Modernizing Market Infrastructure

Nasdaq's latest proposal is part of its ongoing mission to update and enhance market infrastructure. The exchange has recently strengthened its collaboration with fintech company Revolut, expanding the use of Nasdaq AxiomSL—a regulatory reporting solution—to streamline compliance operations throughout Europe. Murray Laister, who leads group regulatory reporting at Revolut, emphasized that this technology supports scalable growth without sacrificing flexibility, which is increasingly important as the digital asset sector evolves. These investments highlight Nasdaq's commitment to bridging the gap between traditional finance and blockchain technology, building on its legacy of innovation from the transition to electronic trading systems.

Mixed Industry Reactions

The response from the financial community has been divided. Supporters believe that tokenized stocks could make investing more accessible and improve liquidity. For example, Galaxy Digital became the first Nasdaq-listed company to tokenize its shares on the Solana blockchain in September. On the other hand, critics such as Rob Hadick from Dragonfly Capital warn that tokenizing assets on layer-2 networks could shift value away from primary crypto platforms, potentially limiting the broader benefits of adoption. In response, Savarese reiterated that Nasdaq's objective is to integrate tokenization into mainstream finance without disrupting existing systems, drawing parallels to the exchange's previous technological advancements.

Looking Ahead: Regulatory Decisions and Market Impact

The SEC's forthcoming decision will be pivotal in determining the future of tokenized equities. While Savarese remains hopeful for regulatory approval by 2025, the agency continues to scrutinize the proposal carefully. The WFE's correspondence and the SEC's internal reviews underscore ongoing concerns about market stability, especially as tokenized assets begin to compete with traditional exchanges. According to Deloitte, tokenization could reduce operational expenses in equity markets by as much as 50%. However, challenges such as cybersecurity risks and the potential for insider trading in decentralized systems must be addressed to ensure safe adoption.

As Nasdaq navigates this transformative period, its strategy of balancing innovation with regulatory compliance may serve as a model for markets worldwide. The ultimate direction will depend on whether regulators see tokenization as a natural progression for financial markets or as a disruptive force that necessitates new oversight measures.