Tokenized Equities Deep Dive

Overview:

• Investor interest in tokenized equities is rising; SEC rules may arrive soon.
• Tokenization could disrupt price discovery and market transparency.
• Instant settlement can bring efficiency but also new risks.
• Fractionalization and 24/7 trading are benefits; direct registration may increase.
• SEC’s regulatory approach could shape adoption and innovation.

Interest in tokenized stocks has surged among investors in recent months. Earlier this year, the Securities and Exchange Commission (SEC) hosted a roundtable on tokenization, returning to the topic again at a joint SEC–CFTC (Commodity Futures Trading Commission) roundtable. In that period, large crypto exchanges and retail brokers began offering tokenized equities to investors outside the U.S., with one company seeking SEC approval to offer tokenized equities domestically. All of this aligns with SEC Chair Atkins stating he hopes to issue rules by the end of this year (or by early next year). Given these developments and growing interest from the buyside community, our note is meant to serve as a comprehensive guide to what is happening in the tokenized equities space.

What Are Tokenized Stocks?

Tokenization in stocks today splits into two fundamental categories: wrapped securities and natively issued securities. As for which version gains adoption, SEC Commissioner Peirce has stated that the market, not regulators, should determine which tokenization models succeed. It is therefore likely that when the SEC issues rules, we will see both types of models, along with several structures within each.

Wrapped Securities

Wrapped structures take existing equity exposure and represent it with a token. In practice, wrapped securities are treated as new securities, not necessarily one-for-one with the underlying share. Voting, dividends and other entitlements are not guaranteed. Because the instrument is separate from the listed share, trades may not print to the consolidated tape, and prices can diverge from the underlier—especially because many current wrappers have poor liquidity and weak arbitrage mechanisms to keep the wrapper aligned with the underlying security. The absence of uniform post-trade reporting invites shadow liquidity that sits outside the public price-discovery loop, a theme further discussed below.

American Depositary Receipts (ADR) Model

In the ADR-style model, the most common approach, where a custodian vaults the underlying equity and issues a token that confers economic exposure.

ADR Model

Special Purpose Vehicle (SPV) Model

An SPV acquires or holds stock, and issued tokens represent interests in that vehicle. This structure is used to give offshore retail investors exposure to large private companies with tokens mapping to SPV claims rather than the issuer’s registered equity. The model works reasonably well if the company remains private. However, complexity rises if the company later goes public since private deals often include warrants or covenants. Once public, token holders may find they do not have a full-share equivalent of exposure.

SPV Model

Short-Sale / Synthetic Model

In the synthetic model, a token references a public company’s stock without any underlying exposure. In some overseas markets, there are no clear rules for companies and organizations to sell tokens short. This can be especially impactful for short-sale–exempt securities and in markets that do not allow redemptions into the underlying shares. Since this model can occur via a naked short, greater counterparty risk can arise.

Short Seller Model

Natively Issued Securities

Natively issued tokens make the token the security. The issuer and/or transfer agent maintain uncertificated records of ownership and effects transfers on a digital ledger.

Issuer Model

Two concrete examples have already begun to take shape:

• Transfer-Agent–Led Fungibility
  As an example, two issuers today have worked with transfer agents to allow their shares to be tokenized. Investors can hold the same security in traditional book-entry within their brokerage app or withdraw and reissue it as a token maintained by a transfer agent. Crucially, these token positions are designed to be fungible with traditional shares and to carry the same rights—dividends, voting, and ownership.
  
  Investors can move between a personal wallet and a brokerage account, with the transfer agent preserving books and records, canceling and reissuing lost tokens if needed and maintaining know-your-customer controls. While you can currently transfer tokens wallet-to-wallet, you must convert back into traditional stock to trade them right now. Crypto firms envision that changing soon—allowing trading directly on decentralized exchanges and protocols.
• Nasdaq and DTCC: Exchange-Embedded Tokenization
  Nasdaq’s recent proposal embeds tokenization inside today’s market. Tokenized securities would remain fully fungible with their traditional counterparts, sharing the same CUSIP number and material rights (voting, dividends, liquidation). All trades would clear and settle through DTCC, which would mint the tokens and deliver them into DTCC registered digital wallets. Crucially, these tokens would trade with the same rules, priority, and protections as listed equities—effectively embedding tokenization into existing infrastructure rather than creating new rails. This is essentially just a fixed tag that effectively passes the baton to DTCC.
  
  DTCC is in the process of being able to tokenize all securities under its control on the Ethereum blockchain. This is tokenization without decentralization—incremental modernization that keeps established guardrails intact, while details remain vague on how and when the chain record becomes operationally different.

Market Quality in a Tokenized Framework

U.S. equities have been built on rigid infrastructure around continuous price discovery, best execution and centralized risk reduction. Tokenized environments—especially those that drift toward decentralized rails—may stress each pillar.

Price discovery and Post Order Protection Rule World

Price discovery is at risk of distortion as the U.S. drifts away from a protected, consolidated tape, raising questions about post-trade transparency. A 100-share quote says little about fair value when you need to move a million shares; for institutions, a 200,000-share block printed is by far the more meaningful signal. As was emphasized at the CFTC–SEC roundtable, post-trade transparency is the cornerstone of U.S. markets. Yet across multiple blockchains and private verticals, it’s unclear what reporting obligations and latencies would apply—or whether some activity would be reported at all—particularly for wrapper model tokens. And following last month’s Order Protection Rule roundtable, it appears the SEC is seeking to terminate the entire rule, permitting trades outside the National Best Bid and Offer (NBBO) (to the extent an NBBO even exists). That would materially widen where—and at what prices—stocks can trade.

The risks of opacity are not theoretical. In one case reviewed internally by my colleague Peter Haynes, an illiquid, sole-listed Canadian stock saw significant movement was happening despite no news and no local trades occurring. Peter discovered someone had created an over-the-counter ADR of the security, and trading was occurring in the U.S. with significantly wider spreads than those shown in Canada. While the details in the name are not important, what matters is that substantial trading was happening in a derivative format—impacting pricing without clear transparency. If the administration isn’t careful, we could see multiple versions of that in every single name in token format.

Settlement

Tokenization holds out the promise of instant settlement and near-immediate clearing. The U.S. already moved from T+2 to T+1, which cut margin needs and improved efficiency. But when firms were asked about going to T+0, the prevailing view was “More Risk, Fewer Benefits”. As the Securities Industry and Financial Markets Association (SIFMA) warned, a same-day cycle would dislocate settlement between portfolio securities and fund shares, forcing overnight financing or temporary funding—costs that can ultimately hit shareholders. That version of T+0 still assumes end-of-day processing; tokenization goes further, aiming for atomic, trade-by-trade settlement. While that could trim a meaningful slice of middle- and back-office work, it also strips away protections like netting. As Commissioner Crenshaw put it, “the settlement cycle… is a design feature, not a bug… Netting eliminates about 98% of trade obligations. Without it, capital gets tied up… Instant bilateral settlement over a blockchain removes that benefit.”

Atomic settlement also implies prefunding—posting cash or securities before execution—which can telegraph trading intent and leak market-moving information. And because tokenized shares can be recalled at any time, established short-selling workflows become less stable, increasing the likelihood of higher volatility and sharper short squeezes. Many prime brokers are working on models on how borrowing would even function in an instant settlement world.

Front Running

Execution mechanics differ in a decentralized world. Traditional markets mostly match orders in price–time priority. However, current large blockchains confirm transactions in discrete batches, and pending transactions are publicly visible before finality. Trades are "printed" to the chain by gas-fee order, those that are willing to pay more for their trade to print will go first. That visibility enables maximal extractable value (MEV): searchers who can front-run transactions they see by paying higher gas fees. A lot of MEV searchers' actions depend on gaming others' activities. For this reason, many prices you trade against cannot be confirmed in real time.

To mitigate this, many large crypto exchanges and platforms net transactions or maintain internal token records before posting anything to the blockchain. This is also because it costs money to perform any on-chain action, whereas actions on traditional ledgers are free. There are ongoing investments to design more obscure and trading-friendly protocols as firms have invested hundreds of millions of dollars exploring related infrastructure. Traditional ledgers reintroduce counter party risk as record keeping must be maintained by the exchange itself. Ownership questions also arise under this model.

Peer to Peer

Peer-to-peer equity trading does not meaningfully exist in today’s regulated ecosystem. Intermediaries act as facilitators and gatekeepers, enforcing policies, communications controls and surveillance that protect investors and market integrity. Peer-to-peer trading is often imagined as retail-to-retail, but if rules are not addressed carefully, large, decentralized trading systems could be dominated by sophisticated players—and further complicated by firm-to-firm organizational arrangements.

Leverage

Decentralized finance (DeFi) lending protocols can allow borrow levels that exceed traditional margin constraints, which are already relaxing in the U.S. market. There is already more trading in perpetual futures (PERPs) than in spot markets for many overseas crypto markets. PERPs are futures contracts with no expiration date. Exchanges that support these products use real-time margining and automated liquidations. This raises concerns about the 24-hour nature of these products and around-the-clock margin calls, with liquidity stress during off-peak hours. As leverage expands and traditional markets become more connected, there are real concerns about spillover effects. A real-time example of the risks associated with PERPs was recently experienced as tariff news caused some of the largest automatic liquidations seen in crypto.

Benefits

Fractionalization and 24/7 trading are the most discussed benefits of tokenization. While originally presented as revolutionary, both have largely been incorporated into U.S. markets. Fractional / notional share trading has been offered to U.S. retail investors since 2019, and several ATSs now operate extended trading sessions, allowing for 24/5 equities trading. U.S. exchanges are also moving toward 24/5 trading, aiming for Q2 2026. Institutional appetite for outside-regular-hours trading remains limited to a handful of hedge funds, with few institutions asking for weekend trading. However, after the SEC–CFTC roundtable, U.S. equities may be moving toward 24/7 trading sooner than expected, as crypto firms argued they were ready today.

A large potential benefit of a tokenized world is more companies going public as tokenization enables direct registration. The Direct Registration System (DRS) allows shareholders to hold shares directly in their own name, rather than in street name through a broker and central depository. This self-custody model draws a direct line from the issuer to the investor, giving issuers more insight into who owns their shares and enabling more novel corporate actions and dividend distribution. Even though it is not widely adopted in the U.S., companies often support this. Some French companies actively incentivize direct registration by offering a preferential or bonus dividend to long-term registered shareholders. For example, one French multinational offers a 10% loyalty bonus to registered shareholders who have held shares in the DRS for at least two years.

While this issuer-level transparency is attractive to companies, wallet-level visibility also allows the street to see when large token holders are amassing or selling positions—potentially leaking sensitive information. Even so, this could further incentivize companies to go public. The CEO of an electronic trading platform stated that once any private company stock is tokenized, he believes it can be sold directly to retail. While the SEC is exploring easier access of private companies to retail, we do not expect them to fully dismantle the accredited investor rule.

A New Kind of Equity: Utility Tokens

While we focus on tokenized shares, it’s important we discuss developments in utility tokens. Recently, the SEC’s Division of Corporation Finance issued a no-action letter for token distributions on a decentralized physical infrastructure network (DePIN)—an inflection point in how the Commission may treat these assets. The letter appears to permit tokens tied to DePINs to operate outside the securities regime for now, and the practical scope of that approach could realistically expand beyond DePIN over time. As Bloomberg columnist Matt Levine has noted, utility tokens often behave like equities—their value rises or falls with network success—blurring the line between a true consumption token, an equity-like stake, and, at the extremes, Ponzi-style dynamics where value depends on a constant influx of new participants. For years, prior SEC administrations broadly applied Howey to token distributions (especially pre-launch sales), sweeping many into securities classifications. By contrast, the DePIN request argues the fourth prong of Howey—profits from the entrepreneurial or managerial efforts of others—is not met because “the actions of the Providers themselves determine the success of the Network.”

Regulators also emphasized that forcing utility tokens into securities frameworks could stifle innovation and slow infrastructure buildout. While the no-action letter nominally focuses on DePIN, the implications are broader: if this approach is adopted widely, attention could shift away from tokenized equities, with utility tokens emerging as a leading model for capital formation.

Path Forward and Regulatory Timeline

Ultimately, the breadth and adoption of tokenization will hinge on what the SEC is willing to waive. As we mentioned above, the SEC has signaled that new rules could arrive by year-end or early 2026, though the government shutdown could push timelines back—and legal challenges may follow. Crucially, while full rulemaking can take years, the SEC can move much faster via exemptive relief. That path still carries litigation risk, but robust economic analysis can help fortify an exemption. Unlike the Gensler era, when many initiatives took years and stalled, a well-supported exemption could bring tokenized equities to market relatively quickly once the analysis is complete. The momentum is also political: the White House has signaled an ambition to make the U.S. the crypto capital of the world, adding urgency to the SEC’s timetable.