As the world talks more and more about “modernizing” existing financial market infrastructure, a new white paper from Nasdaq estimates that 52% of institutions expect to use tokenized collateral by the end of 2026.
It seems like everything can be a symbol, and they can be everywhere, at once.
But the more you look, the less things seem.
Tokens can be many things
One thing is clear: tokens can be many apart things.
Tokens range from non-fungible tokens (NFTs) like the “Bore Ape” to cryptocurrencies themselves, from Dogecoin to Bitcoin to stablecoins and more recently, company stocks. This is something that investors (and companies that may see their stock traded as tokens) probably haven’t appreciated yet.
SEC announces a token classification
In November 2025, Paul Atkins, Chairman of the US Securities and Exchange Commission (SEC), gave a speech laying out his vision of token “taxonomy” to address the fact that everything is being called a token.
Given that the SEC regulates “securities,” the classification began on the basis that “not all tokens are securities.” For example, the SEC released a statement that “meme coin”, a type of crypto asset inspired by Internet memes, characters, current events or trends, is not viewed as a security because it does not involve the offering and sale of securities under federal securities laws. Rather, this classification focuses on the time-tested “Howe Test”, where, to qualify as a security, a contract must meet four requirements:
- Investment of money: There must be other considerations as to the initial outlay of capital or value.
- General Enterprises: Investor money is pooled with other investors in a common venture, creating interdependence among the participants.
- Profit Expectation: Investors should expect to earn returns on their investments, whether through capital appreciation or income distributions.
- Benefits derived from the efforts of others: The profits must come primarily from the work and management of a third party (promoter or operator) rather than from the investor’s own efforts..
In that setting, NFTs or cryptocurrencies do not qualify as securities (since they are not the “efforts of others”, like company employees). In fact, Chair Atkins has divided the digital world into four categories, only one of which is securities:
Table 1: Token Classification
property valuation the old fashioned way
For those of us in the markets:
- We know that not all securities are required to pay dividends, the expectation of capital gains is also “profit”.
- But we are also accustomed to being able to calculate the underlying “fair value”, even if it represents some future cash flow with precise discounted valuation math.
Not all cryptos have assets backing them
Cryptocurrencies have been touted as a potential medium of exchange, just like money. But crypto doesn’t benefit from “the efforts of others.” So, this is not a security.
However, a subset of “cryptocurrencies” are backed by real money (aka stablecoins – like USDC). How these cryptocurrencies work in the US is covered in the US GENIUS Act.
As we see in the chart below, even after the recent selloff in many cryptocurrencies, stablecoins remain just a fraction of the total market cap of all cryptos.
Chart 1: Cryptocurrency market cap over time
Most other coins may someday have utility – potentially in settlement and trading. But they have value only because the markets say they have value.
Bitcoin is somewhat unique due to the relatively expensive cost of mining and the limit on the supply of tokens, which in theory supports scarcity and value.
Security tokens are no different from traditional ETFs, ADRs, futures or swaps
Turning to tokens representing public companies (securities), as the market evolved we see that they can take many forms.
A “native token” = a stock in digital form
Right now, when an investor owns Apple or Amazon in the US, it is recorded in a database owned by the DTCC. It is “digital” but not on Distributed Ledger Technology (DLT).
Owners of stock have the right to vote and receive dividends.
It is possible that a company’s stock could be represented on a blockchain database (or even Nasdaq*). In that case, the buyer of the token should also have the right to vote and receive dividends. However settlement of tokens can be “atomic” and custody can be in your personal wallet.
Chart 2: Issuer-backed tokens represent stakes in the company
*A DTCC-sponsored token would, in theory, work the same way – even if the token would need to be converted back to a private (DTCC) ledger – because it would represent a share of the actual company. However, it is important to note that DTCC tokens are not native tokens; They are entitled to shares held in the custody of DTCC, meaning that the tokens themselves are not actual shares.
An asset-backed token – similar to an ETF or ADR
A fund or bank can accept the flow of investors, buy the underlying stocks and issue tokens based on those holdings.
These “tokens” would actually function much like ADRs and ETFs nowadays.
Buyers and sellers will know the “fair” value for the token – the value of the underlying company.
Chart 3: Asset-backed tokens look like ETFs or ADRs today
For these tokens, costs and arbitrage capabilities will be important to ensure investors get prices comparable to buying the stock directly.
Importantly, even if the underlying could be “made/redeemed” without disruption, there would be a difference in fair value due to the nuclear settlement. This is because buying tokens will get paid for their trade immediately, while buyers of stocks will have to earn interest on their money for an additional day (until T+1 settlement).
Things become more complicated and expensive if different tokens on the same stock are not fungible, or transfer costs are high. In those instances, market makers may need to hold (and finance) a long position in one token and a short position in another indefinitely.
At the extreme, if there is no way to convert (create or redeem) the tokens into the underlying asset, these tokens may trade like closed-end funds with persistent premiums (or discounts).
Additionally, in vehicles backed by third parties (such as special purpose vehicles or SPVs), investors are exposed to the credit risk of the SPV, as the value of the token depends on the ability of the token issuer (SPV) to honor redemptions or maintain the backing assets. The use of leverage in these structures can further magnify both gains and losses, increasing the potential for volatility and systemic risk if the issuer experiences financial difficulties or if market conditions deteriorate.
An unbacked token – similar to a future or swap
There is no inherent risk in one of the most liquid financial instruments in the world today – and that is futures.
Instead of holding the underlying company or asset, financial futures have “open interest” – an equal number of buyers and sellers seeking economic exposure to an asset.
Chart 4: Tokens with no asset backing work like futures or swaps today
The economics of the underlying are retained by futures expiration. At that time, the profit on each position is determined based on the underlying asset and cash (or the underlying security) is exchanged between buyers and sellers.
A major utility of futures, including perpetual futures, is that they allow market participants to efficiently hedge risk or speculate on price movements without owning the underlying asset. Perpetual futures provide continuous exposure without a set expiration date, and margin requirements are necessary because they help manage risk and ensure that participants maintain enough collateral to cover potential losses.
As a result, consistent public prices for the underlying asset are important to ensure that the contract broadly tracks the price of the underlying asset.
However, we have already seen “token” derivatives issued at private companies – such as the Space-X token. Interestingly, in this matter the company itself said that it had nothing to do with the token.
Valuing private companies creates complications. Tokens on illiquid assets will less frequently have “margin calls,” which can expose investors to single-party credit risks – similar to how swaps sometimes work.
Everything, everywhere, but also very different things, all at once
It seems, at least for now, that everything can be tokenized.
And regulators around the world have begun clearing the way for investments such as stocks, bonds and funds to be traded in token form.
Call it DeFi and disruption, but in many ways these structures are no different from what we’ve been trading with for decades. It’s just that we now call them many different things to help investors understand how they work.
The term “token” can actually mean several different types of exposure. This is something that regulators (and investors) need to take into account when making rules (and investment decisions).
Knowing how markets and arbitrage work is important for investors to know the difference.
