SEC Approves Nasdaq Framework for Tokenized Securities Trading

The SEC approved a proposed rule change by The Nasdaq Stock Market LLC ("Nasdaq") to enable the trading of securities in tokenized form during the pendency of a tokenization pilot program operated by the Depository Trust Company ("DTC").

Key features of the framework include:

• Fungibility and Unified Trading: Tokenized securities must be fungible with their traditional counterparts, sharing the same CUSIP number, trading symbol, and shareholder rights. Tokenized and traditional shares will "trade on the same order book and with the same execution priority."
• DTC Pilot Integration: Participation is limited to "DTC Eligible Participants," and eligible securities, which are initially limited to securities in the Russell 1000 Index and ETFs tracking major indices (e.g., the S&P 500 and the Nasdaq-100).
• Tokenization Instructions: DTC Eligible Participants may indicate a preference to clear and settle trades in tokenized form by selecting a designated flag at order entry. Nasdaq, acting as the agent, communicates these instructions to DTC on a post-trade basis. The DTC will effectuate the tokenization preference in accordance with its rules, policies, and procedures, or otherwise settle the trade in traditional form if the instruction cannot be executed.
• Regulatory Consistency: Nasdaq stated that its trading systems and procedures will operate the same regardless of whether securities are "tokenized or traditional." All existing order types, routing strategies, and fee schedules remain unchanged, market data feeds will not distinguish between tokenized and traditional shares, and trades will continue to settle on a T+1 basis.

In approving the proposal, the SEC noted that concerns raised by commenters—including potential price divergence, shareholder rights, and market surveillance—are addressed by the requirement that tokenized securities be fully fungible with their traditional counterparts and "trade within the confines of existing securities laws."

The SEC stated that Nasdaq will issue an Equity Trader Alert at least 30 days before trading in tokenized securities begins on the Exchange.