Tokenised Stock Trading

Stock trading may soon enter the blockchain era and Nasdaq is leading the charge. Earlier this week, the Nasdaq stock exchange announced it was working with the US Securities and Exchange Commission to introduce tokenised securities to its exchanges. If successful, this would mark the first major US exchange to do so and bring blockchain technology to one of the world’s largest exchanges. So, what is tokenised stock trading, will it change how we trade, and are there any risks to tokenisation?

Tokenisation, Blockchains, and How It Applies to Securities

Tokenisation is a technology based on blockchains. A blockchain is a digital ledger or database that is distributed across many nodes (i.e., computers). A blockchain consists of a series of blocks: cryptographically protected and unalterable data records. As each block is unchangeable, a chain of these blocks forms a permanent record or history of the data and any changes to that data. Because the blockchain is distributed, no single person owns or controls the records, making the blockchain’s change history transparent and verifiable. Blockchain is the central technology behind Bitcoin and other cryptocurrencies, which utilise the technology to verify the validity of coins and their ownership.

In the general sense, tokenisation is the process of replacing sensitive data with non-sensitive data, referred to as a ‘token’. In the web context, this means creating a digital token which represents ownership of something else, either physical or non-physical. This token is usually stored on a blockchain, so the history and ownership of the token can be verified. This is the theory on which stablecoins are based, with a token representing an underlying currency or commodity (e.g., US dollars or gold), thus making a theoretical 1-to-1 conversion with this asset. The biggest benefit of this technology is that a token, if stolen, is fundamentally useless without the private key necessary to gain access to the token’s vault or wallet.

Tokenisation of stock trading, then, is the application of this technology onto securities such as shares. Instead of buying and owning a share directly, an investor would own the token representing the ownership of that share. The token could then be traded between investors without the asset itself actually changing hands. As the token represents one-to-one ownership of a share (or basket of shares), the value of that token can be said to have the same as the value of the underlying asset.

So, why use tokenised stocks instead regular stock? To quote Nasdaq directly, “Blockchain technology can provide a number of potential efficiencies, including faster settlements, improved audit trails, and a more streamlined flow from order to trade to settlement. Additionally, once an equity asset is on a blockchain, it has the potential to be used in new ways.”

Are There Any Risks to Tokenised Stock Trading?

Not all aspects of tokenised securities have been met enthusiastically by everyone; particularly concerning third-party tokens being issued by brokers off exchanges. In August, the World Federation of Exchanges published a letter urging a “crackdown on tokens that mimic equities”. WFE highlighted the following key concerns regarding third-party tokenization (quoted directly here):

Liquidity fragmentation: Mimicked third-party tokenised equities traded off regulated venues could drain liquidity from traditional exchanges, harming price discovery and market integrity.
Investor protection: holders of these tokens may not enjoy shareholder rights such as voting or dividends, often without clear disclosure.
Custody and enforceability risks: in the event of platform failure, it’s unclear whether token holders retain legal claims to the underlying assets.
Regulatory arbitrage: firms are bypassing traditional rules by exploiting jurisdictional gaps and marketing to retail audiences under minimal oversight.
Issuer reputational and legal exposure: issuers of the underlying equities are exposed due to a lack of control and connection with token holders.

To be clear, this letter refers to tokens issued by third parties and not exchanges themselves. Low-cost broker Robinhood has already launched third-party tokenized securities, and Coinbase is seeking regulatory approval to do so.
Nasdaq’s proposal put forward to the SEC suggests that their tokenised securities would have “the same material rights and privileges as do traditional securities of an equivalent class.”

Meanwhile, the SEC has described the tokenisation of securities as “enchanting, but not magical”, while noting some of the drawbacks noted by the WFE above, particularly the issue of third-party tokens. The SEC also remarks that although blockchain tokenisation is a new concept, the trading of instruments that represent securities is not new.

Will Tokenisation Change How We Trade?

If approved by the SEC, tokenisation will represent one of the biggest technology overhauls that financial exchanges have seen in decades. Nasdaq suggests that tokenised securities would be clearly labelled and trade alongside traditional securities under the same rules of execution and documentation. At present, it is not clear what this situation will look like from a practical point of view for retail investors. It is also unclear how the existence of tokenised securities would interact with traditional stocks when traded on the same exchanges. Immediately the question of how these tokens would affect the volatility and liquidity of the markets comes to mind. If approved, Nasdaq foresees the first tokenised shares listed on the exchange in late 2026.

Tokenisation of stocks represents a major change in the technology exchanges are built on and could mark a significant transformation in the dynamics and day-to-day processes of trading. At present, stock tokens are on the unregulated fringe of investment and should be treated with scepticism. However, their regulation and introduction onto major exchanges such as the Nasdaq could see their legitimisation and adoption onto further exchanges in the US and abroad.

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