Nasdaq's SEC filing opens the door to security tokenization

Author: Zhao Hao, Cailian Press

Nasdaq Inc. is applying to regulators to allow investors to buy and sell tokenized versions of stocks on its exchange.

According to a document filed on Monday (September 8), Nasdaq is seeking approval from the U.S. Securities and Exchange Commission (SEC) to amend some rules, including the definition of "security," to enable stocks to be tokenized and traded on regulated venues such as Nasdaq. This move could be a major test for blockchain technology's first entry into the core U.S. stock market system. However, it's important to note that any rule changes must be approved by the SEC and undergo a comment period before implementation. In documents reviewed by the public, Nasdaq detailed how tokenized securities could be traded. The company proposes that if tokenized securities are deemed equivalent to underlying securities and carry the same shareholder rights, their trading should be subject to the same execution and recordkeeping rules as the original securities. Nasdaq also proposed that tokenized assets must be clearly identified so that trade clearing and settlement parties, including the American Depository Trust Corporation, can correctly execute related orders. The company said that tokenized assets would be given the same priority in order execution as traditional assets. The request is not just a technical rule change; it raises fundamental questions about the definition, issuance, and settlement of stocks—issues that could determine whether tokenization remains on the fringe of cryptocurrency or becomes integrated into the core infrastructure of Wall Street. “The solution is detailed in the proposal, it’s simple, and it leverages existing infrastructure and market structures,” Nasdaq Chief Financial Officer Sarah Youngwood said at a conference. If approved, U.S.-regulated exchanges would be able to integrate tokenized stocks into their systems, giving the blockchain technology that underpins cryptocurrencies direct access to some of the world’s most traded stocks. Nasdaq's move comes as traditional financial institutions are increasing their investment in digital assets and blockchain, and is also tied to Washington's increasingly open regulatory stance. New SEC Chairman Paul Atkins is pushing for clear standards for digital asset securitization. Last month, SEC Commissioner Hester Peirce stated that regulators are willing to work with tokenization companies, but emphasized the need to ensure full disclosure of the nature of the tokenized assets. Tokenized securities are digitized versions of securities, rather than directly holding the underlying assets themselves. They can be traded on blockchain networks rather than through traditional brokerage accounts. Tokenization is seen as a way to increase market liquidity, support fragmented holdings, and expand access to the U.S. stock market for overseas investors. Supporters point out that tokenized securities on the blockchain can be traded 24/7, unlike traditional exchanges that are closed overnight and on holidays. In theory, tokenization can also enable near-instant clearing and settlement, reducing reliance on traditional intermediaries. Tokenization has long been touted as one of the most viable applications of blockchain. Institutions such as BlackRock, Franklin Templeton, and KKR have all announced plans to tokenize some of their fund assets, though these efforts are often intermediary, often through brokerages. Currently, most tokenized shares are issued by third parties, rather than by publicly listed companies on traditional exchanges like Nasdaq, raising questions. Previously, Robinhood offered trading in tokenized shares of OpenAI, but the AI ​​company quickly cautioned that it did not endorse the product and that the tokens did not represent equity in the company. In a filing with the SEC, Nasdaq expressed its concerns about issuers: "Nasdaq believes that the tokenization of securities should not deprive issuers of the right to determine where and how their shares are traded." The filing also noted that Nasdaq has limited ability to grant issuers this option.

JPMorgan Chase recently pointed out in a report to clients that the tokenization of traditional assets such as bonds has not yet become widespread, and most related activities are currently driven by crypto-native companies rather than traditional banks, securities firms and listed companies.

Other financial giants have also called for caution in tokenization. Market maker giant Citadel Securities warned that if the SEC does not set clear rules, there may be a risk of "regulatory arbitrage."

Nasdaq President Tal Cohen said the company hopes to "build a bridge between the world of digital assets and traditional assets." He wrote in a LinkedIn post: "The challenge and responsibility lies in ensuring that this transformation always prioritizes the interests of investors."