Stock tokenization: Wealth opportunities and compliance points

"Stock tokenization" is rising from a niche topic in the crypto space to the focus of global fintech - just days ago, the U.S. SEC launched "Project Crypto" under the leadership of its new chairman, in conjunction with the Trump administration's proactive policies and stablecoin strategy, aimed at facilitating global capital flows into high-quality assets like U.S. stocks and solidifying the long-term leadership position of the U.S. Capital Market. Meanwhile, the concept of on-chain capital markets is rapidly spreading globally, attracting not only the attention of the crypto-native community but also gradually gaining the interest of Financial Institutions. Against this backdrop, we have outlined the multifaceted significance of stock tokenization for TradFi and the crypto industry, exploring whether it can become a new narrative to drive new prosperity in the industry, and analyzing the compliance and uncertainty issues it faces.

1. What is the significance of stock tokenization for TradFi and the encryption industry?

1.1 Changes in Liquidity and Settlement Efficiency

Stock tokenization breaks the characteristic of delayed settlement in the traditional financial market. For a long time, whether in the US stock market or other mainstream markets, most have adopted a delayed trading system, where the "T+1" and "T+2" settlement cycles not only affect market liquidity but also limit the efficiency of fund usage. Stock tokenization is expected to achieve "Atomic Settlement," where payment and delivery can be completed almost instantaneously, and the exchange of assets and funds occurs as an indivisible whole simultaneously. This not only shortens the settlement cycle but also releases funds that were originally locked in the settlement process, significantly reducing counterparty risk. Combined with the automatic execution capability of on-chain smart contracts, trading matching and settlement can operate almost anywhere in the world, 24/7, making 7×24-hour global trading a reality. This efficiency upgrade is not only significant for high-frequency trading and cross-border arbitrage but also greatly improves the fund utilization rate for ordinary investors.

1.2 Reconstruction of the Cross-Border Securities Investment System

Traditional cross-border securities investment is limited by a complex network of custodians, agents, and compliance review processes, resulting in low efficiency and high costs. However, stock tokenization, based on distributed ledgers and smart contracts, can embed compliance rules such as KYC, AML, and geographic restrictions directly into the assets themselves. On one hand, it reduces investors' dependence on multiple intermediaries, as anyone can create their own wallet and directly hold and trade assets in the on-chain capital market; on the other hand, programming compliance logic into token smart contracts can automate compliance checks, lowering the execution costs of cross-border investments. Although it is difficult for national laws and regulatory frameworks to fully integrate in the short term, technological changes have laid a solid foundation for the reconstruction of the cross-border securities investment system.

1.3 A bridge connecting traditional funds with the on-chain world

In countries that are currently embracing stock tokenization, stock tokenization is not only a technological innovation but is also positioned as an important component of the national financial strategy. It enables the digitization of high-quality traditional assets, allowing global funds to more easily enter the domestic capital market. For traditional funds, this model retains familiar investment targets and regulatory frameworks while gaining advantages such as settlement efficiency, liquidity, and global trading hours brought by blockchain; for the crypto ecosystem, it introduces high-value, low-volatility quality assets as collateral and trading varieties, enriching the on-chain asset structure and financial instruments, and bringing unprecedented incremental capital and new users to the crypto industry. Although it will still take time to build a complete decentralized on-chain market in the future, the parallel structure of traditional and on-chain capital markets will coexist and complement each other for a considerable period, and stock tokenization will become one of the bridges connecting TradFi and DeFi.

2. Can Stock Tokenization Become a New Encryption Narrative?

From the perspective of community culture, native crypto users prefer high-risk, high-volatility, and ultra-high-yield speculative varieties—they are willing to heavily invest while Bitcoin is only a few hundred dollars, or chase returns of several times or even dozens of times in projects like Meme coins and DeFi. In contrast, the stable returns of traditional assets such as government bonds and gold have limited appeal to them, which raises a question: will this investment habit make it difficult for traditional assets to generate good liquidity on-chain?

In the short term, this cultural difference does exist, but stock tokenization is still one of the few categories of RWA that may break this barrier. The key lies in its "dual characteristics" - on one hand, it retains the value support and stability of the underlying quality assets; on the other hand, once tokenized, these stocks can be combined with derivatives such as leverage, futures, and options, creating sufficient volatility and strategic space to meet the speculative needs of crypto users. Traditional assets still have the opportunity to deliver significant investment returns, thereby possessing attractiveness in the eyes of crypto traders. Moreover, the changes in user investment structures brought about by the development of the crypto industry are equally important. As some early crypto participants complete their wealth accumulation, their risk appetite naturally declines, and they begin to actively seek diversified asset allocation and stable returns. At this point, tokenized traditional assets may gradually enter their investment portfolios. These users focus not only on price volatility itself but also on the characteristics of investment products being "on-chain available" and "tradable at any time."

More importantly, the target audience for stock tokenization goes far beyond native crypto users, also encompassing a large number of potential users and institutional investors. For institutions, tokenization can provide 24/7 liquidity and lower cross-border settlement costs while retaining traditional rights such as dividend distribution and voting rights, which holds potential appeal in areas like private equity funds, family offices, and sovereign wealth funds. For ordinary investors, familiar investment targets and compliance frameworks can lower psychological barriers, making them more willing to allocate assets through on-chain channels. Therefore, stock tokenization is expected to become the "first step" for traditional capital to enter the DeFi world. This is not just an expansion of funding channels, but also the construction of infrastructure for two-way capital flows—facilitating the smooth inflow of traditional capital into on-chain markets while also providing convenient pathways for on-chain funds to enter high-quality assets in the real economy. Thus, the imaginative space for stock tokenization extends far beyond the circulation of funds within the crypto circle, but rather reshapes the value of the entire financial ecosystem.

3. What compliance risks does stock tokenization bring?

3.1 Unavoidable Risks

The tokenization of stocks and on-chain Capital Market not only brings improvements in efficiency and liquidity but also introduces new systemic risks and compliance challenges. Here, we select some for analysis:

(1) Lack of Regulations and Investor Protection Issues: Currently, there are no clear and complete regulations and trading rules in the relevant fields, and the market may degenerate into a disordered "open amusement park," breeding uncontrollable risk events. In this case, allowing investors to enter without thresholds may trigger a series of market fluctuations. Although such fluctuations have limited impact on AI or institutional investors, they may be very unfriendly to retail investors. For the government, it is essential to ensure that risk management and compliance mechanisms keep pace with promoting innovation to avoid regulatory gaps becoming market hidden dangers.

(2) Regulatory and Compliance Issues: The decentralized nature of the on-chain market makes it difficult to fully track the sources and flows of transactions, involving not only domestic users but also participants from different regions around the world, which increases regulatory complexity. However, these risks are not unique to stock tokenization; many issues already exist in the current encryption market. For example, money laundering and illegal trading activities have already occurred on-chain and will not significantly worsen due to stock tokenization. From a corporate perspective, for the stock tokenization of listed companies, traditional brokers and large financial institutions will continue to play the role of "gatekeepers," responsible for key aspects such as KYC and tax declarations, thereby mitigating regulatory pressure to some extent; as for the tokenization of private company equity, its limited scale has a minimal impact on the overall market.

(3) Tax Collection Issues: On one hand, decentralized on-chain transactions increase the difficulty of tracking trades. Due to the lack of a unified intermediary, it is challenging to collect transaction data and execute withholding taxes through brokers as in traditional markets. On the other hand, cross-border tax collection enforcement is complex, with investors distributed across different jurisdictions, involving various tax laws and information exchange mechanisms, leading to high coordination costs. This raises higher demands on tax authorities and industry participants in various countries. However, these challenges are similar to current cryptocurrency tax issues and are not unique to stock tokenization. In the short term, the government may continue the existing strategy of tax management through centralized participants, while in the long term, it could form a dual-track market where traditional and on-chain coexist, seeking a balance between efficiency and regulatory control.

3.2 Suggestions for Individual Investors

(1) Choose a regulated, reputable platform: Although stock tokenization sounds like a new hotspot in the blockchain world, investors still face platform risks first. Especially for beginners or investors with limited market knowledge, it is advisable to prioritize platforms that have passed strict regulatory reviews, have complete qualifications, and are reputable, to ensure the safety of their funds and legal rights. For example, tokenized stocks issued in cooperation with traditional brokers, banks, or large financial institutions will have more complete compliance processes, KYC/AML mechanisms, and customer fund segregation systems.

(2) Diversify investments and control positions: The cryptocurrency market and the traditional market have significant differences in volatility, and the tokenization of stocks is precisely at the intersection of the two, which means that there is the possibility of enjoying dual returns, but also the potential to bear dual risks. Therefore, investors should avoid blindly concentrating their holdings in a single asset or focusing on one platform, and instead spread allocations across different asset classes and platforms to reduce investment risks.

(3) Invest in familiar assets: Tokenized stocks are essentially another representation of existing assets. In the new market environment, it is advisable to prioritize companies, products, or industries that you are familiar with, ensuring that investment decisions are based on familiar industry logic to avoid market sentiment affecting rational choices.

(4) Clarify product structure and rights and obligations: The underlying design of tokenized stocks varies significantly; they may represent real holding-type stocks (with shareholder rights to the underlying assets) or price contract-type stocks (which only track price and do not enjoy shareholder rights). Before investing, one should clarify which type of structure they are purchasing and understand the structural differences in terms of dividend distribution, voting rights, liquidity, exit mechanisms, and assess the corresponding risks to avoid investment misjudgments.

(5) Compliance with Taxation: Tokenized stocks do not fall into the "tax gray area". Regardless of how the trading form changes, investors' tax obligations still exist. Therefore, it is recommended that investors keep good records of transaction details, cash flow, and cost information throughout the trading process to ensure accurate calculation of capital gains or dividend income during reporting. At the same time, pay attention to the tax classification of tokenized stocks in the relevant jurisdiction, as different tax classifications may have varying tax rates and reporting methods. Actively fulfilling tax obligations not only helps avoid legal risks but also maintains compliance eligibility in the face of future regulatory tightening, preventing retrospective issues due to past problems.

4. Conclusion

In summary, stock tokenization is at the intersection of technological transformation and institutional reshaping. It is not only an important part of the digital transformation of the global Capital Market but also a key link connecting TradFi and DeFi. In the short term, it may be more reflected in the optimization of liquidity, settlement efficiency, and trading hours, but in the long term, its real potential lies in reconstructing the issuance, circulation, and management of global assets, forming a wealth ecosystem that circulates between the on-chain and the real economy.

However, opportunities and challenges have always coexisted. Issues such as the absence of rules and investor protection determine that the maturity of this market will inevitably be accompanied by institutional adjustments and regulatory games. For industry participants, grasping the policy window period and actively promoting the integration of technology and Compliance will be key to gaining a first-mover advantage; for investors, rationally choosing platforms, diversifying allocations, and complying with tax regulations will be the survival rules in this emerging market.

It is foreseeable that with the improvement of on-chain infrastructure and the deep integration of TradFi and the encryption ecosystem, stock tokenization is expected to become the common language of the next stage of the crypto industry and the global capital market, giving rise to new investment logic and wealth opportunities. In this process, participants who can balance innovative vitality with Compliance will occupy an important position in the future financial landscape.