TD Cowen sees little demand for tokenized stocks despite new SEC rules

Investment bank doubts tokenized stocks will take off despite SEC rule change

The U.S. Securities and Exchange Commission (SEC) last week introduced a new framework that allows tokenized stock trading outside traditional exchanges. Tokenized stocks are shares of companies that are represented as digital tokens on a blockchain, a digital ledger. But the investment bank TD Cowen says it expects only limited demand from both U.S. retail investors and institutions in the near term.

Key points from the report

• The SEC's Innovation Exemption provides a five-year framework for special trading venues to operate without registering as exchanges.
• Certain liquidity providers may also avoid dealer registration under conditions.
• TD Cowen's Reid Noch wrote that U.S. investors already have efficient access to the underlying shares, and tokenized venues must offer a compelling benefit to offset limited liquidity and extra operational complexity.
• The framework allows trading through automated market makers (AMMs), which are pools of assets that use preset rules to price trades, instead of a traditional order book.
• Tokens must represent NMS stocks, preserve the economic interest, dividends, voting rights and liquidation rights of the underlying shares, and trading volume is capped.

What the SEC framework does

The SEC's Innovation Exemption was released days after the CLARITY Act failed to advance in the U.S. Senate. The framework lets tokenized securities venues operate automated market maker pools without registering as exchanges, as long as they meet certain conditions.

Why demand may remain low

Reid Noch, vice president of U.S. equity market structure at TD Cowen, said in a paper on Friday that he expects limited near-term adoption. He noted that U.S. investors already have easy access to stocks, and tokenized venues must offer a clear benefit to overcome thin liquidity and added complexity.

Round-the-clock trading, which AMMs could allow, does not necessarily mean better prices if liquidity is thin, Noch added.

Issuer interest is minimal

TD Cowen said its conversations with dozens of issuers, including several highly retail-facing companies, found minimal interest in tokenizing their stocks, with the exception of crypto-adjacent companies such as Figure.

Figure offers an example of the challenge. Its Nasdaq-listed FIGR shares trade alongside blockchain-native FGRS shares with the same economic exposure and voting rights. But during a 24-hour period examined by TD, 99.9% of Figure's notional trading volume came through its traditional listed shares.

What is confirmed

The SEC created a five-year Innovation Exemption for tokenized securities venues. TD Cowen published a report on Friday stating that it sees limited near-term interest from U.S. investors and issuers in tokenized stocks, citing existing access to shares and low issuer interest.

What is still unclear

TD Cowen's views are its analysis, not a confirmed outcome. It is uncertain how many venues will apply under the new SEC framework or whether demand will grow over time.

Why it matters for crypto and stocks

The SEC's move was seen as a step toward allowing tokenized stocks to trade in the U.S. But if issuers and investors show little appetite, the new pathway may struggle to gain traction beyond niche crypto-adjacent companies.

Sources

• CoinDesk