Tokenized Securities’ Fate Depends on Investors, Not Regulators

Intercontinental Exchange, parent of the New York Stock Exchange, announced in January that it was developing a platform for trading and on-chain settlement of tokenized securities. Last month, Nasdaq unveiled its plan to bring tokenized shares into existing market infrastructure while preserving shareholder rights.

These moves follow the growth of tokenized stocks abroad, where investors were already trading blockchain-based instruments tied to US equities. Regulation will shape the path of tokenized securities in the US, but their success will ultimately depend on whether they deliver value to investors beyond what existing markets already offer.

Cryptocurrency and Securities

The Securities and Exchange Commission offers a clear framework for understanding tokenized securities. It defines them as securities represented by crypto assets, with ownership recorded on blockchains, and distinguishes between issuer-sponsored and third-party-sponsored models.

Crypto has experimented with securities before. The first wave, during the 2017 initial coin offering boom, was largely issuer-sponsored and tied to crypto ventures. These offerings sat between crowdfunding and initial public offerings, often without the rights or disclosures of public shares.

The central debate was whether many of these tokens were securities at all. That uncertainty, combined with weak transparency and investor protection, led the market to collapse before regulation could catch up.

Later models moved closer to comply with securities law. Initial exchange offerings added exchange intermediation, and security token offerings explicitly granted regulated financial claims. But these efforts still focused on funding crypto ventures.

The latest phase shifts toward tokenizing traditional securities rather than securitizing crypto ventures. If a token references a security, directly or synthetically, the question is no longer whether securities law applies, but what rights it confers. As the SEC notes, third-party models may involve custodial claims, linked securities, or security-based swaps—each with different rights and degrees of intermediary risk.

Considerations for Investors

For investors already operating on crypto rails, tokenized securities expand investment opportunities without requiring conversion back into fiat. They also offer fractional ownership, longer trading hours, faster settlement, and easier integration with crypto-based trading and custody.

Still, these features shouldn’t be confused with economic equivalence to the underlying security. For the average investor, however, two questions matter most.

First, what returns do tokenized securities actually offer? For less accessible assets, such as private equity and private credit, tokenization may provide meaningful access where few alternatives exist. But for widely traded securities, investors should ask:

• Does a token confer voting rights, dividends, and other distribution rights?
• Does it track the underlying security’s price closely?

Second, what fees and risks come with them? Sponsors may charge issuance or platform fees. Thin trading and fragmented venues can lead to wide bid-ask spreads, poor execution, and price deviations from the underlying security. Missing distribution rights can also quietly erode returns. Investors may also face risks from the intermediary that issued or holds the asset.

For experienced crypto traders, these costs may be worth bearing to avoid fiat-crypto frictions. But for retail investors primarily seeking small-dollar exposure or extended trading hours, US equity markets already offer many of the same features through fractional shares and expanding 23/5 trading. Tokenized securities may offer limited additional economic value, apart from on-chain ownership itself.

Challenges for Regulators

For regulators, the challenge is to make tokenized securities legible to investors. Disclosure can’t stop at the label “tokenized security.” Investors need to know whether the token represents direct ownership or a synthetic claim, what rights come with it, how corporate actions and distributions are handled, and what fees and intermediary risks are involved.

Execution quality is another salient issue, especially because faster on-chain settlement can spur more frequent trading by relaxing the one-day settlement cycle for conventional equities. Investors shouldn’t have to guess whether tokenized securities traded at a fair price, what spreads they paid, how much slippage they absorbed, or whether the token diverged materially from the underlying security.

Tokenized securities should therefore be integrated into existing best-execution and price-discovery rules, as SIFMA has argued, rather than broadly exempted from them. Nasdaq’s proposal to trade tokenized shares alongside traditional shares on the same order book points in that direction. Otherwise, investors could end up with a product that looks modern but delivers worse execution.

Implications for Companies

Legally, rights matter more than technology. Recent federal banking guidance suggests tokenized securities receive the same capital treatment as their traditional counterparts only when they confer identical rights.

In market terms, broader access cuts both ways. While it may expand the retail investor base and support valuation, it may also lead to more dispersed ownership and volatility. Berkshire Hathaway Inc., for example, long kept its Class A share price high to deter short-term speculators. Research on fractional trading suggests that lowering barriers to high-priced stocks attracts small retail investors but also amplifies volatility and fuels price bubbles.

Tokenized securities may be even more attractive than fractional trading to crypto and day traders, who are comfortable with leverage and drawn to rapid turnover made possible by fast settlement, potentially increasing trading volume and amplifying volatility.

The future of tokenized securities in the US depends on whether they deliver real value beyond what existing markets already provide. If initial coin offerings offer any lesson, it is that markets, not regulators, ultimately decide which innovations endure.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Vivian Fang is the Sznewajs Family Chair in Finance at the Kelley School of Business, Indiana University. She has been teaching and researching cryptocurrencies since 2018.

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