Expectations For Tokenization

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Jaret Seiberg:
Welcome to Two Cents, the financials podcast at TD Cowen. I am Jaret Seiberg, managing director and financial services policy analyst at TD Cowen Washington Research. I'm bringing back two of the most popular speakers from the year to kick off our final podcast of 2025. Scott Smith is TD Cowen's specialty salesperson for financials. He's going to give us an update on where the market stands. Then we're going to shift to perhaps the biggest issue in financials this year, which is the tokenization of equity and debt securities. Returning is friend of the show, Reid Noch, to catch us up on the latest from SEC chair, Paul Atkins, on this big topic. Reid is the US market structure guru at TD Cowen. But first, let's catch up on the news out of Washington for financials.
The bank regulators testified before the House recently, this was testimony that was delayed during the government shutdown. A few highlights for the bank folks out there. The overhaul of bank capital rules will not necessarily be capital-neutral. If this was the Biden administration, we would read that as meeting capital levels will go up. But this is the Trump administration, and the takeaway has to be that reform will result in lower capital requirements for the bigger banks, certainly something the banks have been seeking. There is also a strong desire to encourage the banks to reenter the mortgage origination market. This would be done by reversing capital changes adopted after the financial crisis, including for mortgage servicing rights. That would certainly change the makeup of mortgage originations today, which are dominated by non-banks. And lastly, we heard a lot of support for better tiering regulation based on the size and complexity of banks. This already happens, though the thresholds do not get adjusted for economic growth. We expect to hear a lot more on this next year, and it should also be broadly positive for the big banks.
On the housing front, the disappointment is that objections from House Financial Services chair, French Hill, meant the ROAD to Housing Act was dropped from the latest bipartisan bill. That bill would have boosted manufactured housing and instructed HUD to craft model zoning provisions to help communities improve their zoning. That could have led to more construction. We expect a renewed push for the bill next year, though the challenge will be to keep the bipartisan coalition together in an election year.
And then, lastly, on the markets front, SEC chair, Paul Atkins, offered some good news. He gave a major speech at the NYSE calling for reforms that would make it easier for small companies to go public. We expect more details on this next year, though it should be positive for the market, positive for investment banks and positive for active managers.
All right. With the news out of the way, let's turn to our first guest. Scott Smith is TD Cowen's specialty salesperson for financials. As I mentioned in each episode, no one has a better handle on how the broader financials team at TD Cowen is thinking about the sector than Scott. So Scott, what's the word as we head into the end of the year?
Scott Smith:
Well, Jaret, what a time it's been since we last spoke. It does seem like the concern around credit that was plaguing the banks and some of the alternative asset managers a couple of months ago has basically been put entirely to bed. Over the last month or so, BKX, KRE, have been some of the best performers of all sectors as people have gotten over that.
The large cap banks continue to be on a very strong path for the year, some of which, if not a lot of which, has got to do with what you highlighted in terms of large cap bank expectations continue to be based around a lot of what you talked about earlier, which is the capital requirements should go lower, and that overall, the regulatory environment remains incredibly friendly for the sector. BKX, i.e. large cap banks, still up over 25% on the year. And in general, investors are pretty constructive. It does seem like people are starting to believe that 2026 will be a year where cost saves will also come in from some of the AI initiatives. Whereas in 2025, a lot of firms are running both AI and real life people side by side, that may start to change in 2026, which should help costs, and therefore help multiples for the large cap banks. So that sector has been incredibly positive.
Where we've seen a little bit more negativity has been on insurance. We just got back from a trip to Bermuda where we met with a number of insurance companies, and on reinsurance, particularly around property, given the amount of excess capital that's in the space, because there were no real storms during hurricane season, pricing looks like it's going to be quite challenging. So insurance is down about a percent over the last month or so, as people have started to digest the fact that pricing isn't going to be particularly healthy.
FinTech does continue to be somewhat more negative, that's in the public space. Although, we are starting to hear some commentary that in particular on the wealth side on private tech and FinTech, there is an opportunity set that's starting to build. There has been a company that has filed to go public in the WealthTech arena, so we do look for that to potentially bail out some of FinTech on a going forward basis.
Away from that, on the consumer finance side, things are actually okay, the data continues to be pretty good. There's a couple of conferences coming up in the next few days where managements will be presenting what we think will still be overall a fairly constructive view on consumer credit, with particularly the high-end doing well. A little bit of a wildcard recently with the crypto sell-off, starting to raise some questions about whether some of the higher end spenders, who are in a younger cohort, who are tied up in that crypto investing community, may have to pull back, so that's definitely a watch point. As I said at the outset, people are much more constructive on credit than they were, not consumer credit, but corporate credit, than they were just a month or two ago, and that has helped the alternative asset managers start to come off low points, and traditional asset managers continue to act very well as the overall market acts well.
Jaret Seiberg:
So Scott, is there anything we should be paying attention to as we head into 2026, any future catalysts that you're looking for?
Scott Smith:
For sure, investors are waiting to see what happens with the Fed picture in terms of not only who's going to be there, but what the rate cut trajectory looks like. We took a look at this this morning, and where the forward curve is now versus where it was right after the large cap banks reported earnings, it's clearly for not as many cuts at the moment as there had been just a month and a half or so ago. So we're clearly very focused on that, our investors are very focused on that. Consumer credit quality will always be a focus for folks who will be looking to make sure that some of the crypto stuff in particular doesn't dent that world. And we'll be looking for the return of government data on payrolls as a strong indicator of where all that stuff will go.
Jaret Seiberg:
All right. One last question for you, Scott. It seems like everyone is fixated on whom Donald Trump will pick as the next Federal Reserve chair. Kevin Hassett has emerged as the clear front-runner, he's been on television and talks as if he is the pick, we'll see if that holds over time. But Scott, how do you think the market would react if it is Kevin Hassett?
Scott Smith:
To the extent that people think that that is a mouthpiece for rates going lower, I think it will generally be viewed at least initially as constructive. Not entirely clear, as time goes on and we see what the implications of that might be on inflation, whether people will actually think that was a good choice longer term or not.
And actually, Jaret, when you mentioned the Trump administration, you brought up one other thing that I do think people will be focused on. Obviously, the off-cycle elections certainly have raised some questions about where the administration is going to be focused in terms of affordability. I know you've written about it a bunch around issues like credit card, interest rate caps, et cetera. So with a more progressive win in some of the off-cycle elections, most notably here in New York, there's a lot of people waiting on Washington to see whether the administration takes on something bigger in that construct that may have a negative impact across the space.
Jaret Seiberg:
Yeah, I think that's a great point, Scott. Certainly, I think it's easy to forget that a big part of the MAGA coalition is very populous, and we haven't really seen that wing of the coalition get a lot of airtime during the first year. But based on the off-cycle election results, that certainly could change over the next couple of months, and that will definitely impact the sector. Certainly something for us to talk about in 2026. With that, Scott, thank you, as always, super informative.
So without any further ado, let's go to the big topic of the week, which is the tokenization of securities. We had Reid Noch with us earlier this year when the issue first started to get attention, and now he's back, after SEC chair, Paul Atkins, recently offered up a strong endorsement of tokenization in a recent speech. The SEC Chair said the existing regulatory regime for equity issuance is not built for tokenization. He promised not to allow that to get in the way of there being liquid markets for tokenized equities. He promised that there would be exemptive relief to encourage tokenization even before the agency could rewrite the rules that govern equity markets. And he said he's not wed to a particular form of tokenization, discussing how the market's experimenting with direct issuance, as well as an ADR-like model and a synthetic tokenization. There's a lot there to unpack, and thankfully, Reid is here to help us really make sense of all of this. So Reid, maybe we can just start, where do we actually stand with tokenization? And maybe you can just update everybody, what exactly is a tokenized equity?
Reid Noch:
Thanks, Jaret. A tokenized stock or equity is really just a blockchain-based representation of a traditional stock or share. And currently, there's a lot of tokenized versions out launching in Europe and Asia available for retail traders there. And there's smaller tokens exposure here in the US currently, but it's very limited. And Chair Atkins is very adamant that he wants to expand that, and he thinks America is losing its lead in innovation by having tokenized shares launch overseas, and really wants to bring it onshore.
Jaret Seiberg:
And what does that mean if we bring it onshore? If I'm an average retailer, an institutional investor out there, can you talk about how this would impact me?
Reid Noch:
For the average retailer or institutional trader, for the retail side, the benefits for retail traders currently are very limited in the US compared to normal stock trading, just given how easy it is to open up a brokerage account. It definitely helps overseas retail, as it's much more easier to deal with KYC and AML rules to launch and start trading equities. For institutions, the concern is you're having this whole section of equity trading now happen outside of the current system, and so you won't have any transparency potentially into what's trading there, and then also the prices that are being traded as well.
Jaret Seiberg:
So Reid, we hear often the SEC Chair and industry talk about exemptive relief to permit this to happen, and I assume that if we need exemptive relief, that means something could be standing in the way. So what is standing in the way of this being a working product in the United States, and what kind of changes should we expect?
Reid Noch:
So I'd say the largest rule that's standing in the way is currently the Order Protection Rule, or 611, which is something Chair Atkins has been against since the inception 20 years ago when he was a SEC commissioner when the rule was first adopted. And Atkins simultaneously is setting up the removal of OPR in the US currently, with a second round table that'll be held next week on the topic.
But one of the big exceptions with Rule 611 is that non-standard trades are a legal pathway outside of trading through the NBBO, and so non-regular settlement, so instant settlement, which is how a lot of the tokenized equities perform, could serve as a very easy legal path forward to trade outside of the NBBO and serve as a catalyst for exemptive relief. The other areas that need to be addressed and are being heavily debated currently are investor protections based around intermediaries with broker dealers and venues, like exchanges, and if the current crypto framework applies to those older rules and definitions.
Jaret Seiberg:
So Reid, you threw out a couple of terms there, and so for the help of the audience, let's try to define them a little bit. What is the Order Protection Rule? More broadly, you were talking about Chairman Atkins and some of his prior positions, I believe that you were referring to the National Market Structure Rule. And so, what is the National Market Structure Rule as well?
Reid Noch:
The Order Protection Rule is the cornerstone of the US equity markets, and ensures that investors or traders get the best price based on protected quotes served on the different exchanges in the US. And so, you can never really trade outside of the best price of that framework. And currently, crypto platforms generally don't have access into routing into traditional venues, and so can't perform or operate under that rule set. And then, Reg NMS, or the National Marketplace Rules, are the other frameworks surrounding US equity markets and service protections for US investors, with definitions on responsibilities for exchanges, ATSs or broker dealers.
Jaret Seiberg:
Okay. So if I'm an investor and I am buying or selling stock, what would be the incentive for me to want a tokenized equity if it doesn't have to trade at the best price? That seems like it could be pretty important.
Reid Noch:
That is pretty large. There's some arguments on having the ability to control it in your own wallet and have self-custody, the ability to send it to peers as a gift to your friends. I'd say the best argument I've heard is a way that you can do special consumer obligations or corporate actions can assume on blockchain. There's ideas that companies could start doing daily dividends instead of quarterly, new novel ways for how retail can vote, or just new ways that issuers can engage directly with their shareholders or retail investors. However, most tokenized shares are not the issuer model, but are wrappers or synthetic versions, which the issuer has no say in the matter whatsoever.
Jaret Seiberg:
Once we get exemptive relief, how quickly are we going to start seeing US equities be tokenized, is this days, weeks, years?
Reid Noch:
Days. I think the moment the SEC goes about it, a lot of the platforms that are available overseas will launch or be available to US investors now.
Jaret Seiberg:
So Scott, I know you've been staying on the call here, what do you make of this, and do you have any questions for Reid?
Scott Smith:
Yeah. It's funny, as we were wrapping up our other conversation about the administration becoming more populous, I was just curious whether a more populous view is constructive for tokenization and crypto, or whether that's going to be viewed more as playground for the wealthy, and therefore not part of the progressive mantra.
Reid Noch:
I'd definitely say much more popular, as especially with younger people, there's a growing fascination with crypto and a drive for decentralization, and you really see it in a lot of these platforms and the demand there. And it's been struggling to find, I'd say, more real life applicable uses. And so, there's a lot of benefits or arguments that people are saying to bring into a more established and liquid market, like US equities, than trying to continue to build new guardrails around less liquid offerings, like real estate or private markets.
Jaret Seiberg:
So Reid, I had a follow-up question to that. So you had talked a couple of minutes ago about instant settlement, and how one reason people might want to do this is because their trade could settle instantly. How do trades settle now, and who really benefits if we get an instant settlement?
Reid Noch:
Right now, trades in the US settle T+1, so it's one business day before you have to pay or you receive your stock. And with that, it's really beneficial for institutional investors and traders, as it doesn't allow for pre-funding and gives you time to source how you're going to fund the trade or find your equity. It also really helps institutions with short selling, as you don't have to immediately be redeemed for stock if you're lending it out or if you're borrowing it.
It has traditionally hurt retail in the past. So the famous example is GameStop when the US was under a T+2 regime, and retail was just trading so much that Robinhood got a call from DTCC saying they need to put up, I think, over a billion dollars for margin that they didn't have, and there was huge conspiracies around that, if there is market manipulation allegations. For the most part though, retail thinks that they're trading instant settlement, and generally don't realize that most of trading is just one-day IOUs back and forth to each other.
Jaret Seiberg:
All right. Reid, is there anything you're looking for over the next couple of months to tell us where this is headed?
Reid Noch:
I think the SEC, Atkins, have been very clear that in the upcoming months, we will expect exemptive relief on optimization. The devil will be in the details on what models will be allowed and how broad the exemptive relief will be on broker dealer and venue definitions and responsibilities. I think some other interesting areas that Atkins has alluded to is on the capital formation process and bringing back initial coin offerings, and so I'm interested on those guidelines as well.
Jaret Seiberg:
All right. Before we leave this topic, Scott, I want to turn to you one last time. Are there particular parts of the financial sector that could benefit or lose as we move towards tokenization? How does the market think about this?
Scott Smith:
Well, I think Reid hit on some of the issues, and for sure, people are trying to figure out what it's going to mean for exchanges. I do think also, there has been, and this is not new, I think we've been talking about this for, gosh, six or seven years, if not more, conversations about whether tokenization will mean that businesses within investment banks, like stock lending, could become a little bit more challenged from a profitability perspective. In other words, if you are able to locate every single share anywhere all the time and you could just build some sort of auction, you might not need to go through a prime services organization to get a locate. So we've heard that as a point of concern, and then obviously, elsewhere, it's overwhelmingly on the exchanges.
Jaret Seiberg:
All right. Well, gentlemen, thank you so much for that great conversation. I think we're going to leave our tokenization debate there. But it's certainly an issue that we're going to turn back to next year, as Reid and Scott both mentioned, with the SEC intending to act on this sooner rather than later, this should be certainly front burner for everybody as we head into 2026.
All right, so let's wrap up our final podcast of the year with our calendar preview so you know what to expect at the rest of December and into January. We will have one more round of voting in the House Financial Services Committee in the middle of the month. We're looking for housing legislation to be part of that. That could bring headlines for manufactured housing in particular. On the regulatory front, we're still looking for a final rule out of the Federal Reserve on how to average stress capital buffers to limit the volatility of the annual stress test. And then, on the bigger front, we're going to get the revised Basel III end game capital proposal at some point, either the end of this year or early in the first quarter of next year.
As we move into January, the focus will be on January 21st, when the Supreme Court hears arguments on the President's effort to fire Federal Reserve governor, Lisa Cook. This is going to put front and center issues of Fed independence and how much authority the White House has over monetary policy control. And then, of course, we can't go more than a couple of months without worrying about a government shutdown. The current funding deal expires on January 30th, and we will get a shutdown absent an agreement. I do expect that there will be a deal. I don't believe either party really wants a repeat of what we saw throughout November.
All right. So that's it for 2025. Thank you all for listening, and please come back to join me and the gang for our next episode in early January.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.