Following the wave of retail interest in digital assets, but seeking to address industry concerns about weak regulation, Nasdaq has issued a proposal for tokenised securities to be traded with tight regulatory safeguards.
The document, submitted to the SEC yesterday, calls for Nasdaq’s member firms and investors to be allowed to tokenise and trade equity securities and exchange-traded products (ETPs) on Nasdaq’s markets.
Chuck Mack, senior president of North American markets, stated, “Our goal is to integrate digital assets into Nasdaq’s current infrastructure and systems, which will advance financial innovation while maintaining stability, fairness, and investor protection.”
Tokenised securities are a growing market presence, and one that has shaky regulatory oversight. Last month, the World Federation of Exchanges called for the SEC to crack down on third-party tokenised US equities, which it calls “mimicked” products.
“Even though they’re marketed as stock tokens and may seem like stocks, they are not stocks,” the group explained. These tokens are closer to derivatives, it added.
Among the group’s concerns with such products are the risk of liquidity fragmentation, with third-party tokenised equities pulling liquidity from traditional exchanges, and exploitation of gaps in regulation that haven’t caught up to the blockchain frenzy. The WFE also noted that retail investors may not have the same shareholder rights with tokensied equities that they would with their traditional counterparts, highlighting a lack of clarity around ownership.
Nandini Sukumar, WFE CEO, commented, “What we are seeing is a blatant attempt to circumvent regulation, with some firms seeking “no action” relief from regulators or deliberately operating through legal grey areas. Investor protection must remain paramount, and regulation must evolve to ensure that new technologies are not used as a mask for risk and opacity.”
In its SEC filing, Nasdaq recognised this issue. “In Europe, trading of tokenised stocks is occurring in a manner that raises numerous concerns,” it said.
“For example, we understand that some digital asset trading platforms are offering shares of US equities to European investors without the prior knowledge or consent of the issuers of those securities.”
If Nasdaq’s plans are approved, once an order is entered on the exchange, participants will be given the choice between clearing in a regular or tokenised form. In both formats, securities will be subject to the same order entry and execution rules and will share a market identification number when sent to the Depository Trust Corporation (DTC) for clearing and settlement.
Nasdaq’s Mack stressed that the exchange’s trading of tokenised securities is in line with federal SEC regulations ensuring fair and orderly trading.
“That’s a key point we make in our filing: the U.S. has existing rules that don’t preclude different types of representation of a security. If you’re trading a stock and we’re having DTC tokenise it after the trade, then nothing is different from the perspective of how the market functions, how you trade, how you get your best execution, or how you buy or sell on your trading platform,” he said.
“Past market failures teach us that it is imperative to ensure governance, resilience, and investor protection are embedded from the outset.”
