SEC Opens Door to Tokenized Stocks, TD Cowen Remains Skeptical
The Innovation Exemption lets platforms test tokenized NMS stocks, but TD Cowen expects little demand as long as liquidity and benefits remain limited.
Key Takeaways
- The SEC introduced an Innovation Exemption for tokenized stock trading on qualified platforms for five years.
- TD Cowen expects limited adoption for now, because the existing U.S. stock market is already efficient and accessible.
- Companies show little interest in tokenizing shares; at Figure, 99.9% of trading took place in the traditional listing.
The U.S. regulator SEC opened a new path for tokenized stock trading last week, but according to TD Cowen, demand will remain limited for now. The bank sees an important policy moment, but does not expect investors to move en masse to tokenized venues as long as the existing stock market already works efficiently.
New SEC Rules
The so-called Innovation Exemption gives qualified platforms five years to run tokenized securities venues with automated market makers, without having to register as an exchange right away. Certain liquidity providers can also stay outside dealer registration under specific conditions. The rule applies only to tokenized NMS stocks and not to OTC shares, which keeps the scope intentionally narrow.
According to the SEC, the tokens must keep the same economic rights as the underlying shares, including dividends, voting rights, and liquidation rights. Third parties that want to tokenize shares must first notify a company before trading starts. That company then gets 30 days to object. Trading volumes are also capped.
Why TD Cowen Is Cautious
Reid Noch, vice president of U.S. equity market structure at TD Cowen, wrote Friday that the bank expects only limited adoption in the near term from both retail and institutional investors in the U.S. His reasoning is simple: U.S. investors already have good access to the underlying shares, while tokenized venues still need to show a clear advantage over limited liquidity and extra operational complexity.
Noch also pointed out that 24-hour trading does not automatically mean better trading. If liquidity is thin, prices can actually become less attractive. That makes it hard for tokenized stocks to carve out their own place alongside the existing market.
Limited Demand From Issuers
A second drag, according to TD Cowen, is interest from companies themselves. In conversations with dozens of issuers, including several with a large retail following, the bank saw little appetite to tokenize shares, except among crypto-related names such as Figure. That company does show how small current usage still is: during a period reviewed by TD, 99.9% of notional trading took place in the traditional stock listing, not in the blockchain-native version.
For European crypto and market watchers, this matters because the U.S. is experimenting with a model that brings blockchain and traditional stock trading closer together. At the same time, the limited scope of the rule shows that regulators are still treating tokenized markets mainly as a controlled test ground, not as a full replacement for existing exchanges.
The move also fits into a broader wave of experiments around tokenized securities. For example, the ECB is working on a settlement platform for tokenized assets, as central banks and market participants look for a safer way to settle these transactions.
