From Verizon to UnitedHealth, Corporate America Is Balking at 'Tokenized' Stocks — WSJ

By Vicky Ge HuangThe country's top securities regulator made a push last month to bring tokenized stock trading to the U.S. Now, corporate America is pushing back.AI chip maker Broadcom, telecom stalwart Verizon Communications and UnitedHealth are among the companies objecting to the Securities and Exchange Commission's plan for tokenizing their stocks, according to a regulatory filing.Many exchanges and trading venues are eager to offer digital tokens that represent traditional shares and can trade 24/7. The goal is to appeal to a class of new-age investors who have grown up on crypto and want to trade round-the-clock. But some companies worry the SEC's plan for tokenization might create a shadow stock market, distort trading and confuse investors.And even Nasdaq, which is developing its own tokenization platform, has said it would opt out of having its own shares tokenized under the framework proposed by the SEC. In an FAQ on its website, the exchange operator cited concerns that the plan could create a parallel market outside the National Market System, a series of rules that bind U.S. stock exchanges and help ensure investors get the best available prices on trades on any platform."We have determined that our shares should not trade on a venue that does not display best prices in real time, report to the consolidated tape, or provide the transparency investors expect," said a Nasdaq spokesperson, adding that the exchange remains committed to tokenization.Some Wall Street players warn that the new framework creates hidden risks for public companies. Notices sent by tokenized trading platforms to corporate emails or postal addresses are potentially not actively monitored, and failing to respond within 30 days is treated as tacit consent. Moreover, the framework offers no blanket opt-out, meaning companies will have to monitor and object to every trading venue individually.The SEC's order last month temporarily exempts authorized trading venues and market makers from certain rules that previously prevented trading in digital tokens that represent shares of listed companies.But it comes with some safeguards: The tokens permitted by the SEC exemptions will carry the same shareholder rights granted to investors in traditional stocks, including dividend payouts and proxy votes. And before a tokenized securities venue can begin trading any stock, it must give the issuing company 30 days notice. If the company objects, the venue can't proceed with the offering.The 30-day decision window is rapidly closing for many corporate issuers. OKXICE, a 50-50 joint venture between New York Stock Exchange owner Intercontinental Exchange and crypto exchange OKX, triggered the clock last week when it became one of the first entities to notify regulators of their plans to launch a tokenized stock-trading platform under the SEC's framework.Nine companies needed little time to make up their mind. In addition to Broadcom, Verizon and UnitedHealth, Cerebras Systems, AppLovin, Applied Digital, Rocket Lab, CoreWeave and Applied Optoelectronics have each opted out.A spokeswoman for Applied Optoelectronics said the fiber-optic manufacturer objected because it wasn't sure how tokenization would affect its stock price, liquidity and volatility."We are also mindful of the risk of investor confusion about AOI's involvement in the offering, which we did not sponsor or endorse," she said. "At this stage, we don't see a clear benefit to AOI or our shareholders that justifies these uncertainties."OKXICE said it still plans to launch trading for dozens of U.S.-listed companies on X Layer, a blockchain developed by OKX, including Nvidia, Apple, Microsoft, Amazon, Alphabet, Tesla, JPMorgan Chase and Walmart.Andrew Cuomo, the co-chair of OKXICE, has said that he expects some companies to be skeptical and exercise caution about tokenizing their stocks and that is to be expected for any major change. "It is the first step toward tokenizing securities," Cuomo, the former governor of New York, said in a recent interview with The Journal.Market maker Citadel Securities said in a letter to the SEC last year that the exemptions could facilitate the "emergence of a 'shadow' U.S. equity market" and "allow tokenized U.S. equities to trade completely outside of the national market system." The firm argued that bypassing traditional exchange rules could fragment liquidity, or scatter trading activity across different platforms, and undermine investor protections.Nasdaq echoed this point, arguing this shadow market "can become disconnected from the broader market in both pricing and price transparency."Their worries aren't unfounded. Overseas, synthetic tokens, which track stock prices without conferring ownership rights, sometimes deviated significantly from real stock values during off hours and periods of low trading volume. Critics warn that similar risks could emerge under the SEC's framework, including price tracking errors, confusion around proxy voting and dividend distributions as well as legal liabilities for corporate issuers if individual investors suffer big losses in tokens that trade wildly different from the underlying stocks.Earlier this year, the SEC approved Nasdaq's proposal to allow the trading of some stocks and exchange-traded products in tokenized forms. The exchange took part in a trial run to tokenize securities that Wall Street firms keep at Depository Trust & Clearing, a leading trade processor. It is also working with crypto exchange Kraken and issuing companies in developing its plan to offer tokenized stocks on its exchange.Brett Redfearn, president of tokenization firm Securitize, said some corporate issuers could object to being listed on one tokenized trading venue without rejecting tokenization altogether. Securitize recently rolled out tokenized stock trading for U.S. investors and the stocks it tokenizes are expected to trade on OKXICE's platform.Some lawyers note that the SEC's innovation exemptions are a limited experiment to gather information, not a commitment to using this framework permanently. Rodrigo Seira, a partner at law firm Cooley, said the firm has spoken with the agency a couple of times and expects revisions to the current innovation exemptions."Part of what they're doing with this exemptive order is trying to get as much information as they can so that they can inform their ultimate rules and make them better, and also make them more defensible from a potential administrative challenge," Seira said.Write to Vicky Ge Huang at [email protected]