Institutions Balk at Tokenized Stocks Over Liquidity Fears

Exchanges Push Tokenized Stocks for 2027 Launch

Major financial exchanges are actively pursuing the tokenization of equities, setting the stage for a potential market structure overhaul. Nasdaq announced a partnership with Payward, the parent company of crypto exchange Kraken, to develop a platform for tokenized stocks, with a target launch in the first half of 2027. Similarly, Intercontinental Exchange (ICE), the owner of the New York Stock Exchange, has invested in the crypto exchange OKX to bring tokenized NYSE-listed stocks to its platform. These initiatives aim to modernize market infrastructure by representing traditional shares on blockchain networks, theoretically enabling 24/7 trading and instant settlement.

This issuer-sponsored approach is designed to give public companies more control while enhancing global access to U.S. equity markets. Proponents argue that tokenization can streamline processes like corporate actions and shareholder engagement. However, the core proposal of moving from the current one-day settlement cycle to real-time settlement is creating significant friction with the market's largest participants.

Institutions Reject T+0 Model, Citing Liquidity Risk

The move to instant settlement is meeting strong resistance from institutional investors who warn it could destabilize daily market operations. Unlike the current T+1 system, which gives firms one business day to net positions and manage funding, instant settlement would require every transaction to be fully pre-funded. This change introduces major operational hurdles for large trading firms that execute high volumes of trades throughout the day.

Institutional investors generally do not like instant settlement.

— Reid Noch, Vice President of U.S. Equity Market Structure at TD Securities.

The requirement to pre-fund trades would dramatically increase financing costs and strain firms' balance sheets, according to market experts. This could reduce market liquidity, particularly during periods of high activity like the market close when trade volumes peak. The new constraints could make trading more expensive and spread liquidity unevenly across the trading day, undermining the efficiency of the current system.

Retail Adoption May Fragment Market and Force Institutional Hand

The initial adoption of tokenized stocks is likely to be driven by retail investors, who already account for roughly 20% of U.S. equity trading volume. The benefits of 24/7 trading and direct ownership of assets in a digital wallet are more appealing to individual traders, especially international investors seeking access to U.S. stocks outside of traditional hours. For these users, crypto platforms often provide an easier onboarding process than traditional brokerages.

This potential shift in user behavior could lead to a fragmented market. If a significant portion of retail liquidity migrates to new tokenized venues, institutional firms may have no choice but to participate to access that volume. This scenario introduces new risks, including confusion over asset ownership if multiple tokenized versions of a single stock trade on different platforms, potentially weakening the price discovery and transparency that define U.S. equity markets.