The World Federation of Exchanges (WFE) has issued a demand that regulators must crack down on digital assets that “mimic equities.” This references the concept of tokenization or digital securities. These digital assets will eventually replace their analog relative, but it appears legacy exchanges are fearful of their ability to compete and are not going down without a fight.
Based in London, the WFE is a global industry association for exchanges and clearing houses.
The statement addresses the US Securities and Exchange Commission (SEC) Crypto Task Force and the European Securities and Markets Authority (ESMA). The WFE claims that tokenization will introduce additional risk, citing “unregulated brokers and crypto-asset trading platforms.”
Today, platforms like Robinhood, Kraken, and Republic are tokenizing or plan on tokenizing securities. By tokenizing an asset, you can reduce intrinsic friction, enhance security, and automate processes like back-office needs. You may also be able to expand investor access.
The WFE believes otherwise, claiming that tokenized equities “may mimic equities without necessarily providing the same rights or trading safeguards and may be marketed to overseas and retail investors without the same protections as for domestic ones. As such, the WFE outlines serious concerns about regulatory arbitrage, lack of transparency, and the erosion of fundamental investor rights.”
Nandini Sukumar, CEO of the WFE, issued a statement claiming his group supports innovation, particularly with exchange-traded products, but these tokenized assets do not meet the high standards that investors expect.
“What we are seeing is a blatant attempt to circumvent regulation, with some firms seeking “no action” relief from regulators or deliberately operating through legal grey areas. Most concerning is the risk to retail investors, who may be misled into believing they hold the same rights and protections as traditional shareholders. In many cases, they do not. Investor protection must remain paramount, and regulation must evolve to ensure that new technologies are not used as a mask for risk and opacity.”
The WFE bullets out their concerns.
- 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.
Digital assets legal expert Kris Swiatek, a partner in the Investment Management and Digital Assets groups at law firm Seward & Kissel, shared his opinion on the WFE warning, stating that he is not surprised that incumbent exchanges are critical of platforms that tokenize securities.
“It is not surprising that there is a lot of legacy industry pushback to tokenized stock offerings. Placing stocks on blockchain rails promises significant advantages, including greater access, faster settlement, and 24/7 trading, among others,” said Swiatek. “Couple that with the fact that some of the biggest players trying to offer tokenized stock offerings are not traditional financial institutions but newer entrants that are either crypto-native or have significant expertise with the crypto ecosystem, and it is not hard to imagine the significant disruptive potential that tokenized stock offerings can have on the traditional stock exchange model and the legacy players within it.”
Swiatek noted that SEC crypto czar Commissioner Hester Peirce has already stated that a security remains a security regardless of its status on the blockchain.
“As Commissioner Peirce stated, tokenized securities are still securities, and therefore federal securities laws apply when transacting in these instruments.”
Swiatek said that tokenized securities still have disclosure requirements, outlining certain questions which will be answered by these digital assets.
- Although each tokenized stock offering needs to be reviewed independently, a threshold question for a common contemplated offering (e.g., a tokenized public stock) is what exactly the investor is entitled to when they transact in such an instrument?
- Is it merely economic exposure (i.e., no direct ownership or voting rights)? Is it even complete economic exposure (e.g., the right to dividends, if any)?
- Is the tokenized stock backed 1:1 with collateral comprised of the underlying shares, or is it a synthetic/derivative token?
- Does it represent a full underlying share or just a fraction?
- Can that tokenized public stock be redeemed for the underlying shares of the company or only for cash value?
- How big is the market on which such tokenized public stock is traded, and is it subject to a greater risk of price manipulation (e.g., volatile pricing and/or wider bid-ask spreads, particularly during times when the traditional stock market is closed)?
If tokenized equities are regulated just like traditional equities, it seems that the WFE’s concerns are much ado about nothing. Perhaps the WFE should entertain supporting tokenization, instead of engaging in battle, a fight they will inevitably lose.