The Securities and Exchange Commission just opened a new path for tokenized stock trading in the U.S. — and one of the country’s leading market structure analysts thinks hardly anyone will use it.
TD Cowen’s Reid Noch, vice president of U.S. equity market structure, wrote in a Friday paper that he expects “limited near-term adoption among both domestic retail investors and institutions.” The reasoning is simple: U.S. investors already have easy access to the underlying shares, and tokenized venues must offer a compelling benefit to offset limited liquidity and additional operational complexity.
The SEC’s Innovation Exemption is a five-year framework that lets qualifying tokenized securities venues operate automated market maker pools without registering as exchanges. Certain liquidity providers can also avoid dealer registration, subject to conditions. The move came just days after the Clarity Act failed to advance, leaving broader crypto market structure legislation stalled.
The SEC’s Five-Year Framework
The SEC’s Innovation Exemption is designed to let tokenized securities operate within a defined regulatory boundary. Here is how it works:
- Qualifying tokenized securities venues can operate automated market maker pools without registering as exchanges.
- Certain liquidity providers can avoid dealer registration, subject to conditions.
- Tokens must represent NMS stocks and preserve the economic interest, dividends, voting rights and liquidation rights attached to the underlying shares.
- Third-party tokenizers must notify a company before trading its stock, giving the issuer 30 days to object.
- Trading volume is capped.
Noch is skeptical that the framework will overcome the practical barriers. “We expect limited near-term adoption among both domestic retail investors and institutions,” he wrote. “U.S. investors already have efficient access to the underlying shares, and tokenized venues must offer a compelling benefit to offset limited liquidity and additional operational complexity.”
Why Retail Investors Stick to Listed Shares
The problem for tokenized stocks is that they need to solve something the existing U.S. stock market does not. Noch’s paper notes that round-the-clock trading through automated market makers, or AMMs, does not necessarily mean better trading, as thin liquidity can produce poor prices.
The underlying issue is that the U.S. stock market already works, and tokenized shares have to prove they are worth the trouble.
The evidence from Figure is stark. Figure offers FIGR shares on Nasdaq alongside blockchain-native FGRS shares that carry the same economic exposure and voting rights. During the 24-hour period examined by TD, 99.9% of Figure’s notional trading took place through its traditional listed shares.
Reid Noch wrote that “our conversations with dozens of issuers, including several highly retail-facing, have revealed minimal interest in tokenizing their stocks outside crypto-adjacent companies such as Figure.” The Figure comparison is telling. Issuers have shown little appetite for the hassle, and retail investors have shown little appetite for the product.
Perpetual Futures Swallow the Demand
For crypto traders who want stock exposure, the bigger threat to traditional markets may come from somewhere else. TD found that 96% of Nvidia-related notional volume in a Binance snapshot came from perpetual futures, compared with 4% from spot products.
“As we continue to outline, we see perpetual futures as the stronger demand story,” Noch wrote. “We expect platforms to continue expanding these products internationally and domestically, reflecting retail investors’ interest in leverage.”
The numbers are not close. Nearly all the Nvidia trading on Binance’s snapshot was in perpetual futures, while spot products, which are the tokenized shares themselves, got barely a sliver of the action.
The CLARITY Act and the Stalled Path
The SEC’s move came days after the Clarity Act failed to advance. That legislation would have addressed broader crypto market structure, and its failure means the tokenized stock framework is now the only path forward — at least for now.
The Innovation Exemption is a five-year framework, which gives the industry time to see whether tokenized shares catch on. But five years is a long time to wait when the underlying demand is this thin.
The issuer question is another hurdle. Noch’s conversations with dozens of issuers showed minimal interest in tokenizing their stocks outside crypto-adjacent companies like Figure. The Figure example is the clearest data point: a company that actually tried both options chose the listed share path by a margin that is almost impossible to overstate.
The Numbers That Matter
The demand for tokenized stocks is thin. Here is the evidence in order of importance:
- Figure’s notional trading: 99.9% of its notional trading came through its listed shares, not its blockchain-native tokens.
- Nvidia-related volume on Binance: 96% perpetual futures, 4% spot products.
- Noch’s conversations with dozens of issuers: minimal interest in tokenization outside crypto-adjacent companies.
The listed shares won on both counts. The Figure shareholders went to the listed shares first. The Binance traders went to the perpetual futures first. The issuers did not show up at all.
What Happens Next
The SEC’s Innovation Exemption is on the books, and the industry will likely move forward with it. But the demand question is unanswered.
The retail investors who showed up to trade Nvidia on Binance were not buying the shares — they were buying leverage. The listed shares on Nasdaq saw the vast majority of the trading.
That is the shape of the market right now. The traditional listed shares work, and the tokenized shares have to prove they are worth the trouble. The evidence from Figure, from the NMS requirements, and from the Nvidia trading snapshot all point in the same direction: retail investors prefer the shares they already have.
The CLARITY Act’s failure means the tokenized stock framework is now the only path forward — at least for now. The SEC has opened the door, but TD Cowen’s research suggests no one is lining up to walk through it.
Source material: “Why this investment bank expects little demand for tokenized stocks despite SEC’s new trading rules,” CoinDesk.
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