On-Chain Equity Trading: A Potential Transformation or a Risky Gamble? | Opinion

The potential of on-chain equity trading is enormous, but only if the custodial, liquidity, and legal protections are carried forward from tested public markets

Summary:
As we approach 2026, there is a growing momentum toward integrating equity markets into blockchain technology. Supporters herald the benefits of 24/7 trading and quick settlements. However, moving equities to the blockchain does not eliminate existing issues such as regulation and risk. It is crucial that the protections of traditional markets are adapted to this new landscape for on-chain equity trading to succeed.

Key Takeaways:

The transition to on-chain equity trading offers the potential for instant settlements and improved market access.
Moving to blockchain does not negate the need for regulatory compliance and consumer protection.
There are risks associated with liquidity and market stability that must be addressed.
Tokenized equities must provide the same rights and protections as traditional stocks to be viable.

The Promise of Instant Trading

With the year 2026 approaching, the initiative to transition equity markets into the blockchain realm is accelerating due to its promise of 24/7 trading and nearly instant global settlement. Previously confined to broker-dealer infrastructures, this shift is being celebrated as progress. However, that perception overlooks some critical considerations.

Despite its apparent efficiency, the migration of equities to blockchain doesn't remove regulation, inherent inequalities, or risk. If the industry forges ahead without adequate safeguards, the shift to on-chain equity trading could undermine the protections crucial for the reliability of public markets.

Tokenizing equities represents both a new approach to market structure and a significant experiment, especially as demand for these tokenized options surges. Companies like Nasdaq are already collaborating with regulators to facilitate the listing and trading of these innovative stocks.

It's essential for the necessary protections that investors find in regulated equity markets to be effectively translated into their tokenized forms. This transition needs to be grounded in smart contracts while also maintaining the custody, disclosure, and governance necessary to support established markets.

Speed Advantages

On-chain equity trading can facilitate almost instantaneous trade settlements, reducing the cumbersome traditional processes and allowing for quicker capital deployment. This speed appeals particularly to cross-border investors, making fractional ownership more accessible and lowering jurisdictional barriers compared to non-tokenized options.

According to analysts from the World Economic Forum, on-chain equity trading promises predictable settlements, reduced reconciliation costs, and programmable corporate actions, marking significant progress toward tokenization. Retail investors can now access fractionalized blue-chip stocks without intermediaries acting as custodians.

With blockchain technology enhancing trading speed, equity markets could become more globally accessible, rather than being limited by geography. While these advantages are significant, the failure to maintain appropriate governance alongside these changes could expose participants to unnecessary risks.

As the excitement around tokenized equities accelerates, regulatory bodies like the U.S. Securities and Exchange Commission (SEC) are taking notice. The SEC is exploring limited exemptions to allow blockchain-based trading, but only under stringent conditions.

Risks of Liquidity and Regulation

Despite the advancements and excitement surrounding tokenized equities, many fail to recognize the associated risks, particularly regarding liquidity. While on-chain assets may trade quickly, that doesn't ensure they trade in substantial volumes.

Research suggests that tokenized assets, even those with real-world backing, could face severe liquidity issues, especially during periods of market volatility. Synthetic equities, lacking robust order books, may lack the liquidity necessary to absorb sell-offs, leading to potential flash crashes.

If companies or exchanges try to sidestep securities law by asserting that being on-chain means they're "outside of jurisdiction," it could lead to severe repercussions, rendering the entire system prone to collapse and labeling it as a shadow market.

The SEC has reiterated that tokenized stocks will still be classified as securities, necessitating full regulatory compliance. A token that mimics the characteristics of a stock, in trading and function, must adhere to the same standards. Without these regulatory frameworks, such tokens are essentially ghost assets.

The Need for Higher Standards

The crypto industry now faces a crucial crossroads: to embrace tokenized equities as a legitimate improvement for investor safety or to misuse blockchain technology to undermine the valuable protections inherent in public markets.

Tokenized equities should afford genuine shareholder rights, enforceable claims on dividends, and follow the same disclosure and reporting standards as traditional markets. Regulators have made their positions clear; therefore, it is vital that safeguards and compliance take precedence during this transitional phase.

The potential benefits of on-chain equity trading are immense, but only if the critical elements of custody, liquidity, and legal protections are carried over from established public markets. Tokenization must serve to enhance equity markets rather than undermine them, ensuring that tokenized equities can uphold the accountability required in modern trading.

Industry standards need to elevate to meet the economic requirements for investor safety. If not, tokenized equities risk being sidelined. Over time, the choices made during this period will become evident.