The Securities and Exchange Commission opened a new path for tokenized stock trading in the U.S. by creating an Innovation Exemption framework that allows qualifying tokenized securities venues to operate automated market maker pools without registering as exchanges. However, TD Cowen expects the new market to remain small in the near term.
The SEC's framework came days after the Clarity Act failed to advance, leaving broader crypto market structure legislation stalled. Under the new rules, certain liquidity providers can avoid dealer registration subject to conditions, and tokens must represent NMS stocks while preserving economic interest, dividends, voting rights, and liquidation rights of underlying shares.
Reid Noch, vice president of U.S. equity market structure at TD Cowen, outlined the central challenge: tokenized stock venues must offer compelling benefits to offset limited liquidity and operational complexity. "U.S. investors already have efficient access to the underlying shares," Noch wrote, citing expectations of limited near-term adoption among both domestic retail investors and institutions.
The SEC framework allows trading through automated market makers rather than traditional order books, potentially enabling round-the-clock trading. However, thin liquidity in such markets can produce poor pricing. The SEC has also imposed tight limits on the experiment, including a 30-day notice requirement for issuers to object before their stock can be tokenized and caps on trading volume.
Issuer interest represents another significant hurdle. TD Cowen's conversations with dozens of companies revealed minimal interest in tokenizing their stocks outside crypto-adjacent firms. Figure, which offers both Nasdaq-listed FIGR shares and blockchain-native FGRS shares with identical economic exposure and voting rights, demonstrates the scale of adoption challenges—99.9% of Figure's notional trading occurred through its traditional listed shares during the period examined by TD.
For crypto traders seeking stock exposure, perpetual futures appear to present a greater competitive threat to traditional markets. TD Cowen found that 96% of Nvidia-related notional volume on Binance came from perpetual futures compared with 4% from spot products, suggesting retail investors' preference for leverage continues to drive demand toward futures products.
