SEC innovation exemption for tokenized stocks raises concerns over liquidity and revenue fragmentation

A recent regulatory move by the U.S. Securities and Exchange Commission to allow third-party listings of tokenized stocks has sparked a debate over the potential fragmentation of financial markets. The SEC's innovation exemption, announced last week, would permit exchanges to list digital representations of existing equities without requiring approval from the issuing companies. Analysts warn this shift could disperse trading activity away from traditional venues, posing risks to market efficiency and domestic revenue.

The primary concern, according to a report from Tiger Research, is liquidity fragmentation. Ryan Yoon, the firm's director and head of research, explained that as the same stock is tokenized and traded across multiple blockchain networks and decentralized platforms, the order flow that typically concentrates on centralized exchanges like the NYSE or Nasdaq would become scattered. This dispersion could lead to price discrepancies for the same asset on different platforms, increase slippage costs for large trades, and ultimately degrade overall market efficiency. Yoon characterized the potential breakup of consolidated liquidity as a serious structural threat to...