Holding tokenized stocks does not mean you can sell them at any time.

Written by: Andjela Radmilac

Translated by: Chopper, Foresight News

Buying tokenized stocks sounds very simple: select a familiar company, purchase tokens representing its shares, and store them in a digital wallet. It combines the familiar logic of stock investment with the convenience of crypto assets, even offering the potential to surpass traditional trading hours.

However, once you learn about the rule that trading may be paused for three months, the concept of "trading stocks around the clock" needs to be reconsidered.

This trading suspension mechanism comes from the pilot framework for tokenized securities trading venues (TSV) released by the US SEC on September 17. If a certain tokenized stock frequently hits the trading volume limit, it will trigger the suspension rule. The suspension only affects the platform that committed the violation and its related parties, specifically for that particular asset; the tokenized version of the same stock on other independent platforms is unaffected and can trade normally.

Understanding this point is key to grasping the concept of tokenized stock products. Holding token assets, enjoying corresponding shareholder rights, and having a secondary market exit channel are actually three independent aspects, but users often combine them into a single action, easily leading to cognitive biases.

The same company, different ways of holding shares

Most stocks today are already in digital form. When you buy stocks through brokers, you essentially obtain an electronic ownership record in a chain formed by a series of financial institutions. Tokenization introduces blockchain into the process of recording and transferring this ownership.

"Tokenization" merely describes the storage form of the asset; you still need to clarify the rights represented by the tokens. The SEC distinguishes various models of tokenization: in one model, a company or its agents uses blockchain records as part of the ownership system; in another model, a third party holds the actual stock and then issues tokens representing corresponding share rights.

There is also a category of synthetic exposure products, where token returns are linked to stock prices, but holders do not own actual shares of the company. Buying a token that tracks the price fluctuations of a public company does not automatically grant shareholder rights.

CryptoSlate previously reported that $25 billion worth of crypto stock tokens were transacted, but the holders did not possess shareholder status. The lesson is not to look only at familiar stock codes; you must clarify the responsible parties and corresponding rights. If tokens are issued by independent entities, the financial situation and performance obligations of the issuer, combined with the underlying company itself, will constitute your investment risk.

The SEC's pilot program has clear limitations; qualified tokenized stocks must retain economic rights and governance rights equal to those of traditional stocks, including dividends and voting rights, and synthetic products are not eligible for the pilot. Access to trading venues requires permission, meaning that participants or their wallets must meet verification standards.

Within this framework, regulators allow for a five-year pilot program on automated market maker trading. It sounds technical, but the principle is quite simple: instead of matching your order with another trader's order, software allows you to trade with a pool of assets provided by participants.

For example: the pool contains both stock tokens and settlement assets; when you buy stock tokens, the pool transfers tokens out and deposits your payment assets, and the pool adjusts quotes based on quantity changes through algorithms. Uniswap documentation describes this type of underlying design, of course, different exchanges will adopt different formulas and mechanisms.

The advantage of this system is that it can operate automatically and connect with other financial software. However, this system still requires sufficient underlying assets, stable legal rights behind the tokens, and most importantly, it needs someone willing to provide pool principal.

How the three-month suspension mechanism is triggered

This pilot program places limits on the number of stocks that exchanges can list and the trading volume for each asset. The volume cap is compared to the traditional stock market, using the previous month's average daily trading volume as a benchmark.

Two types of assets set different thresholds: the first level includes components of the S&P 500 index and Russell 1000 index as well as some exchange-traded products; the second level covers other qualified securities.

SEC documents compare the average daily trading volume of the tokenized market with that of the traditional market, aggregating all transactions from related exchanges. This metric looks at average levels; a single explosive trade will not directly trigger a violation.

For example, if a traditional stock had an average daily trading volume of 10 million shares last month, the daily trading volume cap for the corresponding tokenized first-level asset would be 25,000 shares. The focus is on this comparative standard, rather than a fixed dollar amount, and it does not restrict the position size of individual investors.

Penalties escalate in stages:

• If a single asset first exceeds the trading volume cap, a grace period is set, and the exchange must rectify the situation to ensure subsequent compliance;
• If the asset violates again afterwards, it will immediately trigger a three-month trading suspension, which will be concurrently executed on the related tokenized securities platform, with the suspension time starting from the date of the violation; trading of other assets is unaffected.

Exchanges can also voluntarily suspend trading in advance to avoid hitting thresholds. Regardless of the type of suspension triggered by trading volume, the exchange must notify users immediately and publish a public announcement within five working days.

The SEC's intent in setting the trading volume cap is to control the risk to the overall stock market during the pilot observation period, including the likelihood of price divergence between the pool and traditional stocks.

To simply envision a risk scenario: the pool has limited stock, multiple users initiate buys simultaneously, and the algorithm may push up the token price, but the underlying public company's fundamentals have not changed similarly. Arbitrage traders can correct the price difference through cross-market operations, but this requires sufficient capital and feasible cross-market paths.

Regulators have set boundaries for this trial; multiple violations will incur high operating costs, forcing exchanges to actively control trading volumes.

Holding tokenized stocks does not mean you can sell them at any time

The most pressing pain point for investors is exit channels. Suppose you buy tokenized stocks and plan to liquidate when you need money urgently; even if you still own the asset, a trading suspension will disrupt this plan.

Simply transferring the token to another wallet does not solve the issue of liquidity freeze. You need to find a compliant platform that can trade the asset or a redeemable channel as specified in the product terms. This depends on the product design, the custodian behind it, and access permissions.

This three-month suspension rule does not mean that other brokers can necessarily accept the token, nor does it imply that all forms of asset transfer will be completely banned. These are independent product-level issues. Investors cannot assume that just because tokens can sometimes transfer across applications, liquidity is always available.

This is also why we need to reconsider the appeal of "extended trading hours." Even if you can open the app at midnight to place an order, it does not guarantee that you can sell large amounts at a reasonable price. SEC Commissioner Mark Uyeda pointed out that extending trading hours may both help achieve a more balanced liquidity distribution and lead to excessive dilution of liquidity.

Before buying, the most critical information is that service providers need to provide a complete plan. If the exchange stops trading that asset, how will the tokens be handled? The answer needs to clarify custody arrangements, the status of shareholder rights, allowed methods of asset transfers, redemption paths, and associated costs. It is also important to distinguish between the functionalities that the service provider currently offers and those planned for future support.

Tokenization can simplify share transfers and integrate ownership records with trading software, reducing business delays and enhancing the convenience of financial services. The SEC's pilot program provides the industry with a testing ground to validate this concept.

The three-month suspension clause also reminds investors to return to basic investment logic: an asset must have reliable exit channels.