Markets TD Cowen anticipates minimal interest in tokenized stocks, despite recent SEC regulations that pave the way for trading outside conventional markets.
TD Cowen forecasts modest demand for tokenized stocks despite SEC's new trading regulations.
By Helene Braun, AI Boost | Edited by Cheyenne Ligon 51 minutes ago 2 min read Make preferred on
Recently, the Securities and Exchange Commission (SEC) introduced a new pathway for trading tokenized stocks in the U.S., adding momentum to a technology that has gained traction in financial markets over the past year. However, TD Cowen does not foresee a rush of investors into this market.
The SEC's Innovation Exemption establishes a five-year framework allowing qualifying tokenized securities venues to manage automated market maker pools without the need to register as exchanges.
Liquidity providers may also be exempt from dealer registration, contingent on certain conditions. This announcement came shortly after the Clarity Act failed to progress, leaving the broader legislative framework for the crypto market in limbo.
Reid Noch, TD Cowen's vice president of U.S. equity market structure, predicts that this new market will remain relatively small for the time being.
“We expect limited near-term adoption among both domestic retail investors and institutions,” Noch stated in a report released on Friday. “U.S. investors already have efficient access to the underlying shares, and tokenized venues will need to provide a compelling advantage to counteract limited liquidity and added operational complexities.”
This highlights a fundamental challenge for tokenized stocks: they must address a gap that the current U.S. stock market does not.
The SEC's framework permits trading via automated market makers (AMMs) rather than through a traditional order book. An AMM manages pools of assets and employs predefined rules to price trades, potentially enabling continuous trading as long as there are sufficient assets in the pool.
However, continuous trading does not guarantee improved trading quality, as thin liquidity can lead to unfavorable pricing, according to Noch.
The SEC has also imposed stringent limits on this initiative. Tokens must represent NMS stocks and must maintain the economic interests, dividends, voting rights, and liquidation rights associated with the underlying shares. Additionally, third-party tokenizers must inform a company before trading its stock, giving the issuer a 30-day window to raise objections. Trading volume is also restricted.
These stipulations may complicate the U.S. model's adoption compared to tokenized stock offerings already available in international markets.
Interest from issuers is also a concern. Noch noted, “Our discussions with numerous issuers, including several that cater to retail investors, have shown little interest in tokenizing their stocks, apart from crypto-related companies like Figure.”
Figure provides insight into this challenge. Its Nasdaq-listed FIGR shares trade alongside blockchain-based FGRS shares that offer identical economic exposure and voting rights. Nevertheless, 99.9% of Figure’s trading volume was conducted through its traditional listed shares during the 24-hour analysis by TD.
For crypto traders seeking stock exposure, the more significant threat to traditional markets may arise from perpetual futures.
TD discovered that 96% of the notional volume related to Nvidia in a Binance snapshot was derived from perpetual futures, with only 4% from spot products.
“As we continue to emphasize, we view perpetual futures as the more compelling demand narrative,” Noch added. “We anticipate platforms will keep expanding these products both domestically and internationally, reflecting retail investors’ appetite for leverage.”
Tokenization AI Disclaimer: Portions of this article were generated with the assistance of AI tools and reviewed by our editorial team to ensure accuracy and compliance with our standards. For more information, see CoinDesk's full AI Policy.Latest Crypto News- 1Crypto political group plans to spend $30 million against Sherrod Brown's Senate bid 3 hours ago
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