Last Friday, Nasdaq submitted another rulemaking proposal to the SEC. This one is a bit different. This proposal seeks to integrate digital assets into the exchange’s current infrastructure and systems and, to that end, proposes to amend Nasdaq rules to allow member firms and investors to tokenize equity securities and ETPs they trade on Nasdaq.

Here’s more from this Q&A with Chuck Mack, Senior Vice President of North American Markets for Nasdaq:

[T]he filing provides a simple and clear approach to enable trading of tokenized securities under the existing regulatory frameworks, utilizing the Depository Trust Corporation (DTC) to clear and settle trades in token form.

Here’s how it would work: A security may be traded on Nasdaq in either traditional form or tokenized form.

• The traditional form is a digital representation of ownership and rights, but without utilizing distributed ledger or blockchain technology
• The tokenized form is a digital representation of ownership and rights, utilizing distributed ledger or blockchain technology

Upon entry of the order, a participant can select to clear and settle in regular or tokenized form, and the exchange will communicate the participant’s instruction to the DTC. All shares will be traded on Nasdaq with the same order entry and execution rules, has the same identification number (CUSIP) as, and gives its holder the same rights and benefits as a traditional share.

Nasdaq says “this is about responding to demand,” citing “potential efficiencies, including faster settlements, improved audit trails, and a more streamlined flow from order to trade to settlement.” The Q&A stresses that “tokenization is just a different method of digitally representing an asset” and “trading would still take place under the SEC’s existing federal regulations.”

That’s a key point we make in our filing: the U.S. has existing rules that don’t preclude different types of representation of a security. If you’re trading a stock and we’re having DTC tokenize it after the trade, then nothing is different from the perspective of how the market functions, how you trade, how you get your best execution, or how you buy or sell on your trading platform. Importantly, both the traditional and tokenized types of shares would have the same value, the same rights and benefits, and the same market identification number.

The Q&A also addresses some recent reports that Nasdaq has required some crypto treasury companies to obtain shareholder approval before issuing stock to buy crypto. It clarifies that these reports do not reflect any changes or new rules, but that Nasdaq, similar to any market development, is providing guidance to listed companies on the applicability of the existing shareholder approval requirements to securities issuances. These reports, together with other proposed rule changes, are separate from each other and unrelated — but for the “common thread” of “optimizing capital formation while protecting investors and ensuring market integrity.”

– Meredith Ervine