Big Tech Opposes Stock Tokenization: What’s Next for Institutional Entry?

1. SEC Eases Regulations, Stock Tokenization Market Gains Momentum

The U.S. Securities and Exchange Commission (SEC) is easing regulations on stock tokenization, marking the beginning of a merger between traditional financial markets and blockchain. There is growing optimism that stocks can be traded 24/7 and utilized in on-chain financial services, moving beyond the operating hours of existing exchanges and complex settlement procedures.

On September 17, the SEC introduced the 'Innovation Exemption' program. Platforms that meet certain criteria are exempt from some of the registration obligations of existing exchanges, allowing them to trade tokenized stocks using automated market makers (AMMs) and liquidity pools.

This move is significant as it lays the regulatory groundwork for establishing a blockchain-based stock trading market separate from existing exchanges. Consequently, the global digital asset exchange OKX and the parent company of the New York Stock Exchange (NYSE), Intercontinental Exchange (ICE), are pushing to build a new tokenized stock trading market through their joint platform, OKXICE.

Existing financial institutions are also actively participating. Nasdaq received SEC approval in March to allow trading of traditional stocks and tokenized stocks on the same order book. The U.S. Depository Trust & Clearing Corporation (DTCC) also secured a no-action letter from the SEC last December and is developing services to tokenize existing custodial assets.

2. Big Tech Begins to Oppose Stock Tokenization

However, recently some major publicly traded companies have opposed stock tokenization. According to the Wall Street Journal (WSJ) on October 20, major companies such as Microsoft, Alphabet, Goldman Sachs, and McDonald's expressed their opposition to the tokenization of their stocks being traded on OKXICE. Following earlier objections from Broadcom, Verizon, and UnitedHealth, the total number of companies raising concerns has now reached 16.

This is due to the objection procedure included in the Innovation Exemption program introduced by the SEC. Under this program, if a third party unrelated to the issuer wants to tokenize and trade stocks, they must notify the company in advance. The company can raise objections within 30 days, and if they oppose within the deadline, the platform cannot offer the tokenized stocks of that company for trading.

The concerns of these companies can be summarized into three main points.

First is the issue of price and liquidity. If a separate on-chain market is formed apart from the existing stock market, the same stock could be traded at different prices, or liquidity could become fragmented. This could potentially affect the price formation and volatility of the stocks.

Second is the issue of shareholder rights and investor protection. It is crucial to determine whether tokenized stocks provide the same voting and dividend rights as actual stocks, and who manages and guarantees those rights. Additionally, there is a possibility that investors may confuse tokenized stocks with derivative products that simply track stock prices.

Third is the uncertainty regarding the unproven new market structure. The existing stock market has a long-established trading, clearing, settlement, and oversight system. In contrast, the new on-chain trading market has not sufficiently verified price stability and investor protection during actual operations.

In fact, one of the opposing companies, Applied Optoelectronics, expressed uncertainty about how tokenization might impact the price, liquidity, and volatility of its stocks, raising concerns about potential investor confusion.

3. Why Tokenization Combined with Existing Financial Infrastructure is Relatively Favorable

In this situation, it seems that introducing blockchain into existing financial infrastructure, like Nasdaq and DTCC, may be in a relatively favorable position during the early development of the stock tokenization market. For stock tokenization to take root in the actual market, it is essential to ensure not only technological infrastructure but also the acceptance by issuing companies, compatibility with existing securities market systems, and regulatory stability.

Nasdaq has established rules that allow tokenized stocks to maintain the same ticker symbols, CUSIP numbers, and shareholder rights as existing stocks, enabling them to trade on the same order book with the same execution priority. Qualified market participants can specify whether to settle using tokenization when placing orders. Unlike building a separate on-chain trading market, utilizing the existing market's price formation system reduces the risks of liquidity fragmentation and price discrepancies. However, the actual service implementation is being pursued in conjunction with the establishment of DTC's tokenization settlement infrastructure.

The process of tokenization and asset management after trading will be handled by DTC, a subsidiary of DTCC. DTC is already working on services that will allow the tokenization of Russell 1000 stocks, major index ETFs, and U.S. Treasury bonds to be transferred on approved blockchains. The focus is on enhancing the flexibility of asset transfers and collateral utilization while maintaining the rights and custodial management systems of existing securities.

While the roles of the two institutions differ, they share a common goal of leveraging the advantages of blockchain while maintaining the rights and management systems of the existing financial market.

However, the opposition from these companies does not necessarily mean a final rejection of third-party tokenization trading. The concerns raised are more focused on the impact of the new trading structure on the existing stock market and the operational uncertainties rather than the tokenization technology itself.

Therefore, if future tokenization services operate stably in the actual market and precedents are established showing no issues with price formation, liquidity, and shareholder rights management, the stance of companies may change.

Ultimately, the next challenge for the stock tokenization market is to prove stability and trust in the actual financial market beyond technical possibilities. It will be crucial to observe what results and issues emerge during the commercialization processes of Nasdaq and DTCC, and whether third-party tokenization platforms can also secure stability and trust.

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