Blockchain-based fintech firm Ondo Finance is urging the US Securities and Exchange Commission (SEC) to hold off on Nasdaq’s proposed rule change to allow for the trading of tokenised securities. In an open letter to the commission, the firm states its belief that the proposal currently lacks transparency and might be a threat to fair market access if approved.
Nasdaq submitted a filing to the SEC to support the trading of tokenised securities on its markets in September this year. The proposal was for a simplified approach to the trading of tokenised securities under existing regulatory frameworks, with the Depository Trust Company (DTC) handling post-trade settlement for these products. All shares, whether tokenised or traditional, will be traded with the same order entry and execution rules, with the same identification number (CUSIP), and give their holders the same rights and benefits.
In a criticism of the proposal, Ondo Finance writes, “New market rules must be built on clear, public information available to all market participants to use when providing comments. Without more information about how the DTC will handle tokenised settlement, neither regulators, market participants, nor investors can properly assess how this proposal would function.”
Ondo is not alone in its criticism. Many other industry insiders have also expressed concern about the proposal.
Details, please
The open letter describes the filing in its current form as “deficient”. One reason given was that “it relies on Nasdaq’s ‘preliminary sense’ of the process that it understands the DTC to be contemplating for settling securities in token form, no direct evidence of which is on the record”.
Furthermore, “such lack of timely access to relevant information on tokenisation initiatives – expected by Nasdaq to be introduced by DTC within one year – represents a material burden on competition for Ondo and other companies with business interests in such initiatives”.
The lack of information in the second instance is inconsistent with the fair competitiion requirements stated in the Exchange Act while in the first instance, hinders judgement of whether the proposal is in line with the act at all.
Unfair advantage
The second half of the letter reiterates Ondo’s concern about the proposal’s lack of consideration for fair competition. It claims that Nasdaq’s analysis has failed to “account for the actual economic impact of its preferential access to information regarding DTC’s plans that were relevant to its development of the proposal”.
Such access would heavily favour large, established incumbent institutions “regardless of their capabilities to contribute to the tokenisation of US equity markets”. A system that creates restrictions to valuable market information and high entry barriers for certain groups might stifle competition and innovation. Many new blockchain-based products and services rely on access to legacy equity trading and settlement systems; digitally native firms and new market entrants operating in this space will likely be at a disadvantage.
Ondo notes that the deficiencies mentioned “are capable of being cured if and when sufficient additional information regarding the related DTC initiatives is available publicly”. It urges the SEC to encourage DTC to “release such information as promptly as practicable”. Ondo remains open to supporting the proposal upon release of the information.
