The Rise of Security Tokens: New Opportunities and Challenges in the Tokenization of US Stocks

Recently, a striking new trend has emerged in the cryptocurrency industry: the concept of tokenizing American stocks and trading them on the blockchain. This idea was proposed by an executive from a major cryptocurrency exchange, sparking renewed interest in the concept of security tokens (STO) within the industry.

Against the backdrop of a lack of innovation in the current cryptocurrency market, this concept injects new vitality into the industry. If successfully promoted, U.S. stocks are expected to become the third major category of physical assets (RWA) after stablecoins and government bonds. If the regulatory environment allows, tokenized U.S. stock assets may quickly surpass the current scale of government bond tokens, as they can provide the high volatility and speculative nature favored by crypto users.

The value proposition of US stocks on the blockchain is similar to other decentralized finance ( DeFi ) products, mainly reflected in a broader free market and excellent composability:

1. Expand the trading market scale: Provide a round-the-clock, borderless, and permissionless trading venue for US stocks, which has not yet been achieved by the mainstream stock exchanges.

2. Superior composability: By integrating with existing DeFi infrastructure, US stock assets can serve as collateral and margin for constructing index and fund products, resulting in a variety of innovative applications.

For both supply and demand sides, US stocks on the blockchain have clear appeal:

• Suppliers (U.S. listed companies) can reach global potential investors through the blockchain platform, expanding the buying interest.
• Demand side (investors) can break through geographical restrictions and directly allocate and trade US stock assets.

In fact, the attempts to put US stocks on the blockchain have a long history. As early as 2020, a certain trading platform planned to go public by issuing security tokens, but the plan was shelved due to regulatory hurdles. During the last wave of DeFi hype, there were also synthetic asset products for US stocks, but they gradually faded away due to regulatory pressures.

Today, the main driving force behind the resurgence of the STO concept comes from the shift in regulatory attitudes. Regulators have moved from a past of strong opposition to innovative support within a compliance framework, creating favorable conditions for the on-chain integration of US stocks.

In the foreseeable future, STO may become one of the few narratives in this round of the crypto cycle that has significant influence, clear commercial logic, and great potential.

However, there are still many uncertainties about whether STO can truly gain momentum. Although recent actions by regulatory agencies show a relaxed attitude towards STO, when a clear compliance framework will be introduced remains unknown. This will directly affect the speed and intensity with which major companies advance STO.

The industry is closely watching the movements of regulatory agencies, especially the recent roundtable meeting of the crypto working group. The meeting aims to provide clear regulatory guidance for the crypto industry, with "defining securities status" being one of the important topics. Notably, the Chief Legal Officer of a major trading platform also participated in this meeting, which may indicate that the formulation of the STO compliance framework is accelerating.

Overall, the development prospects of STO are promising, but its success also depends on the evolution of the regulatory environment. If the relevant compliance frameworks are introduced too slowly, the current enthusiasm may gradually fade. Therefore, investors and industry professionals need to remain vigilant and closely monitor regulatory trends to seize this potential significant opportunity.