Tokenization: The next evolution of the stock market
The U.S. equity market has repeatedly changed its underlying mechanics while the asset itself — a share of stock — has remained largely the same. Trading moved from floors and phone calls to electronic venues. Settlement cycles compressed. Commissions fell to zero. Fractional shares and online brokerages expanded retail participation. The next major change may already be underway. Tokenization — or the process of issuing digital representations of financial assets such as stocks or bonds that can be transferred using blockchain technology — could make markets more global and more continuous, while making tokenized versions of those assets increasingly programmable. That means the digital representation of a stock or bond can interact with smart contracts and other blockchain-based financial applications, potentially allowing it to be transferred, pledged as collateral or used in other transactions more easily. The result could change not only how and when a security trades, but who can access it and what investors can do with it once they own it. U.S. public equities are already liquid and relatively easy to trade. The more consequential use cases may therefore emerge where the existing system is more constrained: distributing U.S. assets globally, broadening access to private investments and allowing securities to move more efficiently through collateral and financing markets. That evolution is also unlikely to come from replacing the entire existing financial system. Tokenization is increasingly being built on top of the infrastructure already in place, creating a hybrid market in which traditional and tokenized systems could operate alongside one another for years. A hybrid market The regulatory framework for tokenized stocks is still taking shape, but the Securities and Exchange Commission cleared a path forward in September by allowing certain platforms to trade tokenized stocks under specific conditions. The pathway is temporary while the agency considers additional action and more durable rules. Many tokenized equities today still depend on the traditional financial system underneath them. For example, Ondo Finance , a decentralized platform set up by former Goldman Sachs executives, issues tokenized notes backed by shares held through traditional market infrastructure. Investors can hold and transfer those instruments on-chain, but the underlying shares remain inside the existing financial system. Tokenization may therefore initially complement incumbents rather than replace them. Depository Trust & Clearing Corporation , or DTCC, is approaching the same transition from the other direction. Its tokenization service launched in October with 34 securities available to tokenize, including select large-cap stocks, exchange-traded funds and U.S. Treasurys. Rather than creating a parallel securities market entirely separate from the existing one, the service allows securities held at DTCC to be represented in tokenized form while remaining connected to the existing custody and recordkeeping system. That suggests the transition may be additive rather than substitutive. Running both systems could add complexity before it removes it. Global stock access One of the more immediate use cases for tokenized stocks may be global distribution rather than trading efficiency. For U.S. investors, buying shares of Nvidia or Apple is already cheap and simple, so tokenization offers relatively little additional access. For investors with more limited access to U.S. markets, however, the value proposition is considerably clearer. The best comparison is stablecoins: just as stablecoins made it easier for investors around the world to access U.S. dollars, tokenized stocks could make it easier to access U.S. capital markets. Robinhood is already seeing that dynamic. Its tokenized-equity offering is available across more than 120 countries outside the United States, and the company said much of the demand has come from investors who previously needed more complicated structures to gain exposure to U.S. securities. Broadridge separately said the largest source of demand it currently sees for tokenized equities is global investors seeking access to U.S. shares, including during their own local market hours. Private market access The democratization argument becomes more significant when applied to private markets. Public investing has already gone through several rounds of expanded access. Online brokerages made it easier to open an account. Zero commissions reduced transaction costs. Fractional shares lowered minimum investment sizes. Private markets remain much harder to access. Individual investors often do not gain exposure to fast-growing companies until an initial public offering. Private investments can require large minimum commitments, complex legal structures and accredited-investor status, while secondary liquidity remains limited. Private markets may be one of the more underappreciated opportunities created by tokenization. A large private-market position could theoretically be divided into smaller units and distributed through digital platforms, reducing minimum investment sizes and making access easier for a broader set of investors. That doesn’t mean tokenization solves every problem in private markets. Accreditation requirements still exist. Disclosure and due diligence remain necessary. And putting an illiquid asset on a blockchain does not automatically create liquidity. But tokenization could reduce some of the distribution and minimum-size barriers that have historically limited participation. If online brokerages helped democratize public equities, tokenization could potentially extend part of that evolution into private investing. Programmable stock ownership The most significant change may ultimately have less to do with buying and selling securities than with what happens after an investor owns one. Today, the basic experience of owning a stock is relatively static: buy it, hold it and eventually sell it. Tokenized assets could become much more functional. Once represented on blockchain infrastructure, a security can interact with smart contracts and other financial applications. It could potentially be transferred more easily, pledged as collateral, incorporated into lending transactions or moved across different financial systems. Ondo described programmability and collateral use as fundamental reasons to tokenize an asset. Broadridge’s distributed-ledger repo platform offers an early institutional example. Banks already use the system to move tokenized representations of collateral between entities within the same institution, allowing the underlying securities to remain immobilized while the digital representation moves. That begins to change the role of the asset itself. A Treasury is not simply something that pays interest. It can also become collateral that moves quickly between financial applications. A stock may not simply sit in a brokerage account until it is sold. In tokenized form, it could potentially be transferred across networks, pledged against a loan or incorporated into another financial transaction. The potential economic benefit is greater capital efficiency. An asset that can move more readily into collateral, lending or financing transactions can potentially be put to work more easily across the financial system. The transition still comes with meaningful obstacles. Liquidity could fragment across traditional and tokenized venues. The SEC’s September decision provides a temporary pathway rather than a permanent set of rules, and some companies have objected to third parties tokenizing their shares. The early development of the market suggests, however, that the biggest opportunity may not be making already-liquid public equities easier to trade. It may be bringing the same technology to parts of the financial system where access, distribution and the movement of capital remain constrained. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. 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