The U.S. Securities and Exchange Commission’s recent innovation exemption for tokenized securities has opened a five-year framework for automated market maker pools, but investment bank TD Cowen anticipates limited adoption in the near term. The SEC’s move followed the failure of the CLARITY Act, which stalled broader crypto market structure legislation, leaving tokenized stocks as a niche experiment with regulatory hurdles and issuer resistance. "We expect limited near-term adoption among both retail and institutional investors," said Reid Noch, TD Cowen’s vice president of U.S. equity market structure, in a report. "U.S. investors already have efficient access to underlying shares, and tokenized venues must offer compelling benefits to justify liquidity constraints and operational complexity."
The SEC’s exemption allows tokenized stocks to trade via automated market makers (AMMs) rather than traditional order books, enabling 24/7 trading if liquidity pools remain sufficient. However, Noch cautioned that thin liquidity could still result in poor execution. Key restrictions include:
- Token requirements: Tokens must represent National Market System (NMS) stocks, preserve economic interests (dividends, voting rights, liquidation rights), and require issuer approval before trading.
- Liquidity caps: Trading volumes are capped, and third-party tokenizers must notify issuers 30 days prior to trading, giving companies time to object.
- Limited issuer interest: TD Cowen’s surveys of dozens of issuers—including retail-focused firms—revealed minimal enthusiasm for tokenization outside crypto-adjacent companies like Figure Holdings (FIGR). During a 24-hour period, 99.9% of FIGR’s trading volume remained in traditional shares, not blockchain-native tokens.
Meanwhile, perpetual futures have emerged as a stronger alternative for crypto traders seeking stock exposure. TD Cowen found that 96% of Nvidia-related notional volume on Binance in recent data came from perpetual futures, compared with just 4% from spot products. The bank expects platforms to expand these products globally, driven by retail investors’ demand for leverage. "Perpetual futures remain the bigger draw for crypto-based stock exposure," Noch noted, "as they offer liquidity and flexibility that tokenized spot products lack."
The SEC’s framework, while innovative, risks replicating the challenges of overseas tokenized stock markets, where liquidity and issuer participation remain fragmented. Without broader issuer buy-in or a clear competitive edge over traditional markets, tokenized stocks may struggle to gain traction beyond niche crypto-adjacent sectors.
