HSBC revealed on Monday that mounting tension surrounding how the U.S. should regulate tokenized equities as major Wall Street firms and crypto industry leaders clash over competing visions for the future of on-chain markets. The bank noted that decentralized finance (DeFi) protocols have become the primary focus for regulatory scrutiny. 

Tokenization involves issuing digital representations of real-world assets (RWAs) such as stocks, bonds, real estate, and private equity on a blockchain. According to HSBC, tokenization, which was once an experimental idea, has become a serious consideration for both TradFi and DeFi firms that aim to operate regulated on-chain trading venues.  

Citadel Securities says many DeFi protocols meet exchange standards

HSBC revealed on Monday that the recent meeting of the Securities and Exchange Commission’s (SEC) Investor Advisory Committee showed divisions on how a potential market for tokenized U.S. equities should be regulated. According to the bank, several TradFi representatives at the meeting argued that the commission should apply the existing exchange obligations to decentralized trading protocols. In contrast, some crypto executives called for frameworks that specifically target DeFi infrastructure. 

Citadel Securities, a market-making giant, recently submitted a 13-page letter to the SEC, arguing that many DeFi trading protocols meet the statutory definition of an exchange and should therefore be regulated as such.  According to Citadel, granting broad exemptions to DeFi platforms may enable regulatory arbitrage and create a parallel market for tokenized stocks that lacks the investor protections present in TradFi.

Scott Bauguess, Vice President for Global Regulatory Policy at Coinbase, told the committee that decentralized exchange models function differently from centralized exchanges and should not be treated as traditional exchanges. According to Bauguess, the new market structures require modernized rules that reflect decentralization, open-source infrastructure, and automated liquidity systems. 

SEC Chair Paul Atkins reiterated that tokenization is part of the agency’s broader effort to modernize the U.S. capital markets. Atkins emphasized that any pathway must consider regulatory compliance. SEC Commissioner Caroline Crenshaw, on the other hand, raised concerns over the risks associated with tokenized equities, including market integrity, custody, and investor protections. 

HSBC plans to expand its Tokenized Deposit Service to the U.S. and the UAE

HSBC has added its tokenized portfolio across several markets and recently launched its Tokenized Deposit Service, a blockchain-based system that enables corporate clients to move funds across borders quickly. The service is already live in the UK, Singapore, Hong Kong, and Luxembourg. The bank plans to extend the service to the U.S. and UAE during the first half of 2026. 

Daragh Maher and Nishu Singla, HSBC’s analysts, revealed that while the regulators have shown openness to innovation, the SEC is unlikely to allow a domestic on-chain equities market to operate under lighter standards than the traditional exchanges.  According to HSBC’s analysts, the SEC may consider a controlled-environment model that allows for limited experimentation under predefined rules to test tokenized equities and determine if they can operate within the U.S. regulatory landscape. 

According to HSBC analysts, regulatory pressure across the U.S. may ultimately force tokenized equities systems to be built on fully permissioned and regulated blockchains. They noted that such environments would allow regulators to maintain oversight of identifiable teams and U.S.-facing market activities without putting investors at unregulated protocol risks. 

The SEC is expected to issue its decision in the coming months, which may define how and whether on-chain markets for U.S. stocks will develop within the country’s existing securities framework. HSBC noted that despite the differences, the most consistent theme across TradFi leaders, DeFi advocates, and U.S. regulators is that tokenization is expected to grow significantly from its current base.

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