Kraken and SEC talk tokenized stocks and trading systems

On Monday, crypto exchange Kraken discussed tokenization of traditional assets and a tokenized trading system with the top US regulator, the SEC. Their meeting comes just a few months after Kraken debuted its xStocks, a service offering tokenized versions of more than 50 US stocks and ETFs.

Four Payward, Inc. and Kraken Securities LLC representatives were present at the meeting, joined by two participants from the law firm Wilmer Cutler Pickering Hale and Dorr LLP. Discussions centered on the tokenized trading system, the applicable regulatory framework, legal obligations, and the potential advantages of tokenization.

Kraken’s xStocks has over $2.5B in combined DEX and CEX trading volume

The meeting caught the crypto community’s attention, with Nate Geraci, President of the ETF Store, posting about it on X. He commented, “Kraken met with the SEC Crypto Task Force today to discuss tokenization of traditional assets … Included the legal & regulatory framework for operating a tokenized trading system in the US. It’s coming.”

To his post, some responded with optimism that tokenization would soon take off in the US, while others expressed concerns that the SEC might limit its scope or drag out the approval process.

Nonetheless, Kraken is looking to push forward the concept and infrastructure for tokenized trading while addressing provisions that may fall under federal securities laws. At its core, the meeting sought to gauge the SEC’s ability to provide regulatory certainty and foster innovation. 

Kraken first revealed plans to offer tokenized stocks on May 22 to non-US investors. Now the platform is collaborating with Backed Finance to provide the service. At first, xStocks was available only on Solana and BNB Chain, but it has since expanded to the Tron blockchain, where Backed issues the stocks as TRC-20 tokens. Not to mention, xStocks has since earned over $2.5B total in DEX and CEX volume as of August 21.

The SEC denied approval to Binance’s tokenization project

In April 2021, the Binance exchange attempted to get the SEC’s approval for its tokenization initiative. The platform wanted to offer tokenized Tesla stock in the US then, but the commission rejected the proposal. Kraken, however, may have a better chance to earn the commission approval under the current Trump administration, which has signaled a more crypto-friendly stance.

Still, the World Federation of Exchanges (WFE) has recently asked regulators such as the SEC, ESMA, and IOSCO to step up oversight of tokenized stocks, which may hinder the exchange’s approval process. The WFE believes tokenized stocks mimic equities but lack fundamental protections like shareholder rights, creating risks for investors and threatening market integrity.

Tokenized stocks are still carving out a place in the market. Their combined value currently sits at around $360 million, though down roughly 11% over the last 30 days. By comparison, nearly $26.5 billion worth of real-world assets have been tokenized, meaning the stocks account for only 1.35% of the total.

However, Binance’s analysis suggests that tokenized stocks could scale into the trillions. By their calculation, putting just 1% of global equities on-chain would drive the sector’s market capitalization above $1.3 trillion. Last week, Kraken even reported survey results showing that 65% of 1,000 US investors with exposure to both stocks and crypto anticipate crypto outpacing equities over the next decade.

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