SEC Delay Raises Bigger Questions for Tokenized Stocks

Tokenized stocks are blockchain-based versions of traditional shares that are designed to track the value of publicly traded companies. They allow investors to gain stock exposure through crypto platforms rather than traditional brokerages.

SEC staff had been preparing to release a proposed "innovation exemption" for tokenized stocks as early as this week. However, the timing was pushed back after agency staff held discussions with stock-exchange officials and other market participants in recent days, the report said.

Questions remain

The delay highlights some of the challenges facing efforts to bring traditional financial products onto blockchain networks, particularly around how existing rules and investor protections would work.

Bloomberg said that one of the main concerns for the SEC was "third-party tokens," or digital versions of stocks that could be issued without approval from the companies involved. The report also said the SEC has not decided whether to make changes to its drafted proposal.

"If third parties can tokenize Apple (AAPL) or Amazon (AMZN) without the issuer at the table, there's no theoretical limit on how many wrappers of the same company exist at once," Brett Redfearn, president of tokenization firm Securitize and former director of the SEC's trading and markets division, told Bloomberg on 18 May. 

Delays are normal

The alleged delay could simply reflect the normal process of building new financial infrastructure.

Dave Liebowitz, head of growth at Cap, a yield-bearing stablecoin protocol, told Sandmark the SEC's move does not materially change the long-term outlook for tokenized stocks and described the delay as part of the agency's typical review process.

"The real substance behind the delay is around corporate actions like dividends and shareholder votes," Liebowitz said, adding that some of those challenges could potentially be addressed through different layers of permissions and identity verification.

He added that tokenization doesn't have to be "all-or-nothing," and once industry participants realise that, a lot of the regulatory difficulty "gets smaller."

Kyle Reidhead, head of research at Milk Road and co-founder of Impact3, also told Sandmark he does not believe the delay changes the broader direction of tokenized stocks.

"Of course, it would be great if we had something more specific from the SEC, but I think we’ll still get that," Reidhead said. "I think we just need to get clarity and access... Ultimately, it’s very clear that the SEC and many others want to get this through."

He also emphasized that the delay does not amount to a ban on tokenized stocks, noting that there are already "billions of dollars" in tokenized stocks onchain.

Liquidity and other challenges

Liebowitz said the larger issue for tokenized equities may be liquidity rather than regulation.

"Tokenizing the asset is the easy part; the hard part is making sure there's enough depth onchain to trade against," he explained to Sandmark. "And it's worth being precise about why this is harder for equities than it was for stablecoins." 

Unlike stablecoins, where liquidity can naturally gather into a few pools, equities are spread across thousands of individual stocks and already compete with large trading venues such as the NYSE and Nasdaq, Liebowitz said.

Reidhead also pointed to open questions around how tokenized stocks will eventually be integrated into existing financial systems, including whether public companies, exchanges or outside firms will play the biggest role.

"The biggest challenge is probably just regulation and understanding the exact mechanism of how this should exist," he said. "There are many different ways to do this that you can see today, and the question is, 'What’s the best way?' We don’t know, and even if we get regulation, I don’t think we’re going to know that anyway."

The rise of tokenization

The SEC's proposal comes as crypto firms increasingly look for ways to merge blockchain technology with traditional financial products, with tokenization emerging as one of the main approaches.

Supporters say that tokenized stocks could make markets more efficient and expand access to trading, while critics argue that questions around ownership rights and oversight still need to be resolved. 

Currently, the tokenized real-world asset (RWA) sector as a whole boasts a distributed asset value of around $34bn, up from $11bn this time last year, according to RWA.xyz data.