SEC Tokenized Stock Plan Risks Fragmenting Markets, Experts Warn

The SEC‘s recently announced ‘Innovation Exemption’ for tokenized stocks is drawing fire from market analysts, who warn it could destabilize financial markets through liquidity and revenue fragmentation. Tiger Research flagged these risks just days after the SEC confirmed the exemption on May 19, enabling third parties to tokenize publicly traded stocks without issuer consent.

Ryan Yoon, head of research at Tiger Research, cautioned that liquidity fragmentation could result as capital disperses from centralized exchanges like the NYSE and Nasdaq to multiple blockchain platforms. “Traditional finance views the breakup of its previously consolidated, centralized liquidity as a serious structural threat,” Yoon stated. He explained that spreading trading volume across decentralized venues could lead to price discrepancies, increased slippage, and reduced market efficiency.

Revenue fragmentation poses a second major risk. As tokenized stocks trade on decentralized platforms, revenues that typically flow to domestic exchanges could shift offshore. This would undercut the competitiveness of U.S. financial markets and exacerbate capital flight. Yoon pointed to Hyperliquid, a decentralized exchange, which recently hit an all-time high of $2.6 billion in real-world asset open interest, as evidence of growing fragmentation trends.

Strategic Implications for Regulators and Markets

The SEC’s exemption comes at a time when the broader tokenized securities market is surging. According to RWA.xyz, tokenized stocks currently represent just 4.4% of total on-chain real-world asset (RWA) value, but the space has seen explosive growth—up 420% since 2025. The exemption is structured as a 12-to-36-month regulatory sandbox with caps on trading volumes and platform eligibility requirements, aiming to provide guardrails while regulators refine longer-term rules.

Critics argue that the SEC’s move, while fostering innovation, could create “disconnected pools” of trading, leading to price tracking errors and vulnerabilities like shadow-shorting. Maja Vujinovic, CEO of digital assets firm FG Nexus, warned this fragmentation could destabilize tokenized stock prices in the absence of sufficient localized liquidity.

SEC Commissioner Hester Peirce acknowledged these concerns, emphasizing on May 21 that the exemption would be “limited in scope,” allowing only digital representations of existing publicly traded securities. However, the final rules governing the exemption, including whether such tokens must replicate traditional shareholder rights like voting or dividends, remain under debate.

Potential Benefits of Tokenization

Despite the risks, proponents argue that tokenized stocks could deliver significant benefits. These include faster settlement times, fractional ownership, reduced transaction costs, and the possibility of 24/7 trading. Brian Vieten, senior research analyst at Siebert Financial, said the exemption could “accelerate the transition of the U.S. financial system from legacy rails to blockchain-based systems.” He added that high-quality blockchains like Bitcoin and Hyperliquid stand to capture portions of this shift.

For global investors, tokenized stocks offer a new avenue to access U.S. equities without being constrained by local brokerage limitations. This could drive additional demand for tokenized offerings, further integrating traditional securities with decentralized finance.

The SEC’s phased strategy reflects its broader effort to integrate blockchain technology into regulated securities markets. Earlier this year, the agency approved instant settlement for a registered tokenized money market fund, signaling its willingness to experiment with distributed ledger technologies. Still, whether the rewards of tokenized stock trading outweigh the fragmentation risks remains a contentious issue.

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