In the interests of investor protection and market integrity, there needs to be further, careful consideration of plans before any hasty decision to permit crypto platforms to offer tokenised equities by ‘exempting’ them from normal practices. An essential part of this should include formal consultation with issuers of listed shares. 

So-called tokenised stocks are actually options (or ‘mimics’ of shares) that are offered by third parties, without any collaboration with the issuers. Such tokens should be subject to the same standards of disclosure, trading, and post-trade arrangements as traditional securities. Not only does this promote free and fair competition, it also protects the integrity of the markets and the welfare of investors.

Issuers will derive no benefit from third-party tokenisation but could face real reputational risks. These tokens can be mistaken for official shares, causing confusion and blame toward issuers. Should issuers wish to clarify who the owners of these third-party tokens are, they will find it difficult and costly.

When trading fragments into unregulated corners, price discovery and liquidity is harmed which raises the cost of capital for issuers. Regulated exchanges, the public markets that are the bedrock of the economy, provide robust, authoritative price formation, through the powerful combination of network effects and a well-structured environment, with transparent rules of the road.

Allowing unregistered and unregulated markets to trade equities brings the entire system into disrepute, with few discernable benefits other than for those who seek to avoid regulation for commercial reasons.  Providing exemptive relief for trading platforms, based purely on the manner in which they happen to deliver that trading, adds nothing to the objective of good secondary markets, which are essential for successful primary markets. It effectively provides regulatory encouragement to trade outside the well established and highly competitive environment that already exists for US equity listing and trading. 

We urge regulators to ensure that any experimentation they engage in does not result in worse outcomes for issuers, investors and markets. Although exchanges certainly quibble with regulators about the extent of regulation, make no mistake that we believe that the success of the capital markets globally has occurred because of robust and thoughtful regulation, not despite it.  We should not unlearn the often painful lessons of the past 100 years simply to fulfill the ambitions of so-called innovators, particularly when so much innovation can be seen in regulated financial markets.  There is no need to risk breaking the system to move forward.

The WFE previously set out our concerns here. The following WFE papers are also relevant to this topic.

• The Innovation Advantage in Well-Regulated Markets 
• Key Attributes of Exchanges: Harnessing Network Effects 

Nandini Sukumar, Chief Executive Officer, WFE.

Source: WFE