Key Takeaways
- SEC is contemplating permitting blockchain-based stock tokens to be traded on accepted cryptocurrency exchanges, which would be a positive sign of regulatory leniency towards tokenization.
- Exchanges such as Robinhood, Kraken and Coinbase are actively soliciting or listing tokenized equities and Nasdaq is seeking SEC authorization to list them.
- Recently, tokenized stocks have grown rapidly with market value almost doubling over 100 days and predictions estimate a potential of a $1.3 trillion market if adoption grows.
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The U.S. Securities and Exchange Commission (SEC) is reportedly considering a model to allow blockchain derivatives of standard stocks to be traded on crypto exchanges. If implemented, it would mark the beginning of a change in the way standard financial instruments interact with digital markets.
SEC Seeks to Offer Stock Trading on Crypto Exchanges
The plan, which is still in preliminary stages, would enable investors to buy and sell stock tokens, which are digital representations of shares in publicly listed companies, on crypto exchanges that are approved by SEC, according to sources familiar with the matter. The progress occurs against a wider background of tokenization, the process of transforming traditional assets into tokenized versions in the blockchain.
Bloomberg Intelligence senior ETF analyst Eric Balchunas Eric Balchunas remarked that the move isn’t a radical disruption but rather a convenience for crypto-savvy investors. He noted, “This makes [sense] but it’s not some kind of big takeover like it seems. This is simply allowing crypto natives to buy regular person investments in a format they prefer. It’s the same as ETFs allowing regular people to buy crypto in [the] format they prefer.”
Balchunas added that, given the scale of traditional ETFs, tokenized stocks are unlikely to significantly threaten the existing market. He wrote, “Only this side of [the] equation has [way] which is why tokens likely won’t dent [the] ETF market share much IMO!”
The SEC has been positive of tokenization. SEC Chair Paul Atkins termed blockchain-based assets as an “innovation,” which regulators ought not to restrict. . “Regulators should be focused on how do we advance innovation in the marketplace,” Atkins said. He said that tokenized financial products have the potential to improve market access and reduce transaction costs.
There has been increased interest in tokenized equities, and platforms such as Robinhood and Kraken already have these products available. Nasdaq has also petitioned the SEC and seeks to be able to list tokenized securities, and Coinbase is reportedly seeking approval to list blockchain-based shares on its platform.
Traditional Firms Raise Concerns Over SEC’s Decision
However, the old-fashioned financial institutions have sounded an alarm. In a July letter to a Crypto Task Force of the SEC, Citadel Securities called on regulators to ensure that tokenization creates real market benefits and not a way to skate around regulatory barriers. “Tokenized securities must achieve success by delivering real innovation and efficiency to market participants, rather than through self-serving regulatory arbitrage,” the note added.
The tokenized stocks become an increasingly popular part of the entire tokenization. Although past initiatives mostly focused on creditors of privates and the U.S. Treasury bonds, equity tokenization is starting to take off. According to industry data, tokenized equities, which represent only approximately 2% of the total amount of tokenized assets, have increased in value by almost two times in the last 100 days, which is the signal of the increase in their adoption.
For further context, a Binance Research report released recently compared the rise in tokenized stocks to the initial DeFi boom of 2020-2021. The report noted that this sector “may be nearing a major inflection point in the broader transition to hybrid finance.” The paper also estimated that the market would outpace the $1.3 trillion in case only 1% of global equities were tokenized.
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