The SEC paves the way for stock tokenization: repeal of key Reg NMS rules
The U.S. Securities and Exchange Commission (SEC) has taken a decisive step toward the digital transformation of traditional markets. The regulator proposed repealing two fundamental rules of Regulation NMS—Rules 611 and 610(e)—which have defined the structure of U.S. stock trading for two decades.
Rule 611, known as the "trade-through rule," prohibited executing trades at prices worse than the best quotes on other trading venues. Rule 610(e) restricted the display of quotes that could lock or cross prices on other exchanges. As SEC Chairman Paul Atkins stated, these rules, originally designed to protect investors, have over time turned into a barrier to innovation, creating "unintended consequences" that hinder market development.
In my view, this is one of the most significant regulatory shifts in recent years. The repeal of these rules directly opens the door for tokenized stocks in decentralized finance (DeFi), which was previously technically impossible.
DeFi on the Verge of a Breakthrough
Experts have already called this initiative critical for DeFi development. Alex Thorn, head of research at Galaxy Digital, explained that current rules physically prevent automated market makers (AMMs) from trading tokenized stocks. Decentralized protocols operate based on mathematical formulas and cannot account for liquidity on external venues like Nasdaq in real time. "An AMM cannot stop a trade because the price on Nasdaq is better. After the rules are repealed, tokenized stocks will be able to trade legally in DeFi pools," Thorn emphasized.
Instead of rigid restrictions, the SEC plans to implement a flexible approach based on the principle of "best execution" of trades. This means that brokers and platforms will be responsible for choosing the optimal execution route, but without mandatory adherence to the best price across all exchanges.
Timeline and Prospects
The public comment period for the proposal will last 60 days after publication in the Federal Register. Final changes are expected to take effect in the first quarter of 2027. Until then, the SEC may launch pilot projects on tokenization, granting participants temporary exemptions from current rules.
It is important to note that SEC Commissioner Hester Peirce previously urged the crypto industry to temper expectations: the regulator does not plan to allow the issuance of synthetic assets but is merely creating infrastructure for legal trading of real tokenized securities.
My analysis: This SEC move is not just a technical adjustment but a strategic signal to the market. Tokenization of stocks has received the green light, and the question now is only the speed at which traditional financial institutions adapt to the new rules. DeFi protocols that first integrate support for tokenized stocks will gain a massive competitive advantage. However, investors should remember that regulatory optimism does not eliminate the risks associated with liquidity and smart contract security.