The Age of Tokenized Trading Is Dawning. How Companies and Customers Could Win. — Barrons.com

By Joe LightIn Washington, the cryptocurrency industry just suffered a crushing legislative defeat. On Wall Street, the crypto-powered tokenization of financial markets is proceeding at a rapid pace. Despite the contradiction, the future is already here. Crypto technology is moving from the fringes toward the center of finance, whether or not legislators approve.With the support of President Donald Trump, who made more than $1 billion from crypto ventures last year, Wall Street is embedding the blockchain technology powering Bitcoin into almost every corner of the financial system. Crypto and traditional finance firms are "tokenizing" or creating programmable versions of stocks, bonds, and other real-world assets and moving them onto blockchain networks that could one day replace the traditional venues that match trades, custody stocks, and settle transactions.For investors, tokenized stocks could herald the beginning of round-the-clock trading, with instant purchases and access to the proceeds of sales. That would be particularly beneficial for overseas investors, who currently must confine their transactions to U.S. trading hours. Switching brokerages — a cumbersome process that takes days to weeks — also could happen almost instantly, while violations for using unsettled proceeds to trade stocks would largely disappear.For the firms that power trades, the change potentially is even more profound. Much of Wall Street's capital essentially is sitting today in the wrong place at the wrong time. Banks, brokerages, and asset managers position excess collateral at different institutions, wait for transactions to settle, and sometimes must borrow money because of asset-transfer delays. Modernizing the market's plumbing could free up billions of dollars now idled as traditional systems process trades."This is a watershed moment," says former New York Gov. Andrew Cuomo, who co-chairs OKXICE, a joint venture between New York Stock Exchange owner Intercontinental Exchange and crypto platform OKX.The JV announced on Oct. 4 that it plans to launch a tokenized market. Cuomo compares the move to tokenized trading to the birth of automated mortgage underwriting or the digitization of the stock market in the early 2000s. "I would hope that Wall Street as Wall Street still exists, but it will have to do business differently," he says.The emerging tokenization trend has little to do with Bitcoin, but relies on the blockchain technology that powers crypto trading. A blockchain is typically a decentralized digital database shared across a network of computers that is difficult to hack. Bitcoin traded on the first widely used blockchain, but companies are now applying the innovation to trade stocks and other assets. Even as the value of the crypto market has grown to nearly $3 trillion, the golden goose for some crypto firms has been winning the right to tokenize hundreds of trillions of dollars worth of traditional assets, including stocks.Moving stock trades "onchain" could fundamentally change how a trade is processed. Transactions now move through a broker, an exchange, a clearinghouse, and other intermediaries, all of which carry separate ledgers that must be matched up before trades settle hours to days later. A blockchain-based system could remove these inefficiencies, creating instant settlement.The benefits gained from blockchains could be enticing enough to eventually tokenize the entire trading system. In their base-case estimate, Citigroup researchers in June projected that the tokenized asset market will reach $5.5 trillion by 2030, up from $17 billion today. In addition to stocks, firms plan to bring bonds, funds, and even illiquid assets such as private equity and real estate onchain.Several factors have coalesced to create this "liftoff" moment, including the rise of stablecoins, a type of token pegged to the dollar. Stablecoins have been used until now to trade cryptocurrencies and would be essential to executing tokenized asset trading in many models. Circle Internet Group has issued one of the largest stablecoins, with a market capitalization of more than $73 billion, and various consortia of banks and retailers have announced in the past year that they are creating their own.Some investors also see tokenized systems paving the way for artificial-intelligence "agents" to execute financial transactions. Agents work autonomously and can transact through traditional financial systems, but are much more valuable in a world where markets never stop trading.The value of always-open markets became clear earlier this year when Trump launched major offensives against Iran outside normal market hours. With traditional futures markets closed, trading volume exploded on the crypto platform Hyperliquid in oil-related "perpetual" futures. By the time traditional markets opened, the crypto market had effectively priced in the news.A major step forward in the tokenization of markets is slated to occur later this month, when the Depository Trust & Clearing Corp., or DTCC, which ensures that trades are processed and settled correctly, flips the switch on a platform allowing its customers to tokenize many stocks, exchange-traded funds, and other securities. DTCC's platform will let participants convert tokenized assets to traditional assets, and vice versa, in part to avoid reducing liquidity. Tokenized stocks will transfer between holders almost instantly on a 24/7 basis."Honestly, for the past 10 years we've had innovation by press release," says Nadine Chakar, global head of DTCC Digital Assets, alluding to small, pilot tokenization programs that never involved a critical mass of participants.Not anymore. When DTCC ran a one-day trial of the new system this past summer, dozens of major financial institutions participated, including JPMorgan Chase, Goldman Sachs, BlackRock, and the New York Stock Exchange. The goal of tokenized equity is to "move the markets to an always-on economy," Chakar says.Proponents of tokenizing stocks point to myriad advantages. The benefits of the DTCC platform mostly accrue to institutional investors, chiefly by speeding market plumbing. Under the platform that DTCC is launching this fall, investors' trades will execute and settle through conventional methods, but DTCC participants can opt to receive a tokenized version of their shares. Institutions can then move tokenized shares onchain.Speeding up such transfers could free up billions of dollars now held by institutions as excess collateral to deal with unexpected margin calls. Margin calls wouldn't disappear, but institutions likely wouldn't have to park extra collateral at multiple institutions simply because they don't know where one might occur. Nasdaq estimates that the largest financial institutions collectively could earn up to $340 million a year in additional interest by reducing excess collateral and investing the money elsewhere.Tokenization could also allow companies to pay dividends and execute stock splits programmatically, reducing the usual manual reconciliation work, which can take days. Nasdaq executives have said the shift could give international investors more access to U.S. stocks. The company plans to launch Nasdaq Equity Tokens, representing shares of publicly traded companies, next year."There have now been some use cases that have really unlocked the imagination of what tokenization can bring," says Tal Cohen, Nasdaq's president. "It's no longer in the background."The Trump administration is trying to bring the benefits of tokenized stocks directly to retail investors. Trump was a vocal supporter of the Clarity Act, a sweeping crypto bill that, among other things, would have clarified that tokenized securities should be treated the same as traditional securities under the law. Senate Democrats blocked the bill for unrelated reasons, saying it didn't do enough to rein in Trump's personal crypto investments.Yet, two days after the bill stalled, the Securities and Exchange Commission moved forward on its own, issuing an exemption that will allow crypto and traditional finance firms to proceed with trading venues that don't need to comply with all the requirements governing exchanges. Traditional exchanges generally must execute trades at the best available price. They also can't price shares in increments smaller than a penny, a rule designed to protect market liquidity. The new venues don't have these requirements.The goal "is allowing the market to evolve, monitoring its development, and using that insight to inform a nimbler and future-ready regulatory framework," SEC Chairman Paul Atkins said in a statement.One advantage of tokenization for retail investors would be the ability to switch brokerages readily. That would increase competition among firms, and potentially lower customers' costs. An investor who wants to change brokerages now must typically initiate a transfer using the automated customer account transfer service, or ACATS, a process that can take several business days. A transfer would take minutes under a tokenized system, says Johann Kerbrat, a senior vice president at Robinhood Markets who helps manage the company's crypto projects.Not everyone is on board with the move toward tokenization. Tokenizing shares could make markets more prone to crashes by accelerating the pace at which investors can sell stocks, says Mark Hays, an associate director at Americans for Financial Reform, an advocacy group.High-frequency trading, which accelerated in the late 1990s, contributed significantly to the frequency of so-called flash crashes, or sudden, steep selloffs, Hays says. Although 24/7 tokenized markets might bring convenience, there would also be a risk of overnight market crashes when liquidity is low. "If the blockchain is automatic and everything is happening in the wee hours of the morning, you need circuit breakers to keep things from crashing," Hays says.Until now, there has been little agreement about the structure a tokenized stock should have. Last year, before the SEC's exemption, Robinhood launched tokenized versions of 200 U.S. stocks and funds for European traders. A more recent tokenized stock product launched by the company took the form of debt securities issued by Robinhood whose value adjusts based on the performance of the underlying equity. The tokens don't give investors ownership or governance rights, or traditional dividends, although their prices are adjusted to account for dividend payments.The potential confusion brought strong objections from Adam Aron, CEO of AMC Entertainment Holdings, whose shares were among those tokenized this way. Aron called the tokenization method "abhorrent" last month in a post on X and said that "it defeats the very ethos of share ownership." An AMC spokesman said Aron declined to comment further. A Robinhood spokesperson referred Barron's to an article posted on X by CEO Vlad Tenev, in which he said that "a company should control the rights attached to its shares — not every lawful use of those shares once they're in investors' hands."The SEC exemption only allows the new trading venues to transact in tokenized shares that have the same rights as those issued conventionally. It also requires companies to give issuers such as AMC 30 calendar days to opt out of having their stock tokenized.That requirement could become an important governor of how quickly some tokenized markets grow. On Oct. 4, the OKX and ICE joint venture became among the first to file notice that it is launching a tokenized market using the new SEC exemption. It said it initially plans to list 63 public companies, including Nvidia, Apple, Coca-Cola, and dozens of other recognizable names. The filing also disclosed that one company, Cerebras Systems, had already objected. Cerebras didn't respond to requests for comment.The other companies have at least several more weeks to opt out, depending on when they receive the notice. Cuomo says more objections are probably coming. "I'm sure many will opt out because it is very new and revolutionary," he says.Another potential hurdle to adoption is the future of the SEC's exemption, particularly if the next president is a Democrat who appoints an SEC chair more skeptical of crypto technology. The current exemption lasts five years, after which the agency can sunset or extend it, or replace it with new rules. Many industry players expect the SEC to undertake a formal rule-making process in the coming months. It would be harder to undo, but a Democratic-controlled commission could still effectively kill many tokenization projects.Meanwhile, shares of some companies involved in the tokenization process could benefit directly if the tokenization trend continues. Companies with crypto trading platforms, such as Coinbase Global and Robinhood, have said for years that they are positioned to profit as their investors gain the ability to trade tokenized stocks in addition to cryptocurrencies.Like Robinhood, Coinbase operates a tokenized equity program for investors outside the U.S., although its offshore tokens don't have the same governance and dividend rights as traditional shares. Coinbase executives say they are still studying the SEC's exemption but are eager to expand their tokenization efforts to U.S. investors. "Tokenization will represent the biggest upgrade to our financial system since we moved from paper to electronic trading," says Coinbase Vice Chair Ryan VanGrack.Bullish, a fintech company that operates a crypto exchange, said, days after the SEC announcement, that it is partnering with other companies to create standards for tokenized stocks, with an eye toward forming a coalition big enough to support a liquid tokenized stock market. The company announced in May that it was buying transfer agent Equiniti. Bullish CEO Tom Farley said on a recent earnings call that the SEC exemption "provides a mandate for us to go and talk to every one of our issuer customers about tokenizing their shares."Compass Point Research & Trading analyst Ed Engel upgraded Bullish to Buy in September, saying the company "is among the few public companies that can monetize this trend."Securitize, which went public through a special purpose acquisition company, or SPAC, merger in July, is another company focused on tokenization. Securitize launched a program on Oct. 8 that will allow the trading of tokenized shares of a dozen major companies, including Apple, Microsoft, and Nvidia. "The opportunity to bring securities onchain is significant," said Securitize CEO Carlos Domingo, in a statement to Barron's.One of Securitize's advantages is the SEC's decision to require tokenized shares to carry the same rights as traditional ones, says StoneX Group analyst Mark Palmer.The SEC order's "fine print reads like a blueprint of the model for tokenized equities that [Securitize] has spent years building," Palmer wrote in a research note.Right now, the stock market's chief regulator is paving the way for a tokenized future — one that establishes blockchain technology's commercial purpose. If current tokenization initiatives succeed without harm to companies or investors, calls to overhaul Wall Street's plumbing are bound to grow.Write to Joe Light at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.