Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend the Exchange's Rules To Enable the Trading of Securities on the Exchange in Tokenized Form

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release 34-104384; File No. SR-NASDAQ-2025-072]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend the Exchange's Rules To Enable the Trading of Securities on the Exchange in Tokenized Form</SUBJECT> <DATE>December 12, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On September 8, 2025, The Nasdaq Stock Market LLC (“Nasdaq” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> a proposed rule change to amend the Exchange's rules to enable the trading of securities on the Exchange in tokenized form. The proposed rule change was published for comment in the <E T="04">Federal Register</E> on September 22, 2025. <SU>3</SU> <FTREF/> On November 3, 2025, pursuant to Section 19(b)(2) of the Act, <SU>4</SU> <FTREF/> the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change. <SU>5</SU> <FTREF/> This order institutes proceedings under Section 19(b)(2)(B) of the Act  <SU>6</SU> <FTREF/> to determine whether to approve or disapprove the proposed rule change. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> Securities Exchange Act Release No. 103989 (September 16, 2025), 90 FR 45426 (“Notice”). Comments received on the proposed rule change are available at: <E T="03">https://www.sec.gov/comments/sr-nasdaq-2025-072/srnasdaq2025072.htm.</E> </FTNT> <FTNT> <SU>4</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>5</SU>   <E T="03">See</E> Securities Exchange Act Release No. 104173, 90 FR 51424 (November 17, 2025). The Commission designated December 21, 2025, as the date by which the Commission shall approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. </FTNT> <FTNT> <SU>6</SU>  15 U.S.C. 78s(b)(2)(B). </FTNT> <HD SOURCE="HD1">II. Summary of the Proposal</HD> As described in more detail in the Notice, <SU>7</SU> <FTREF/> the Exchange is proposing to amend its rules to enable the trading of equity securities and exchange traded products on the Exchange in tokenized form. <SU>8</SU> <FTREF/> Specifically, proposed rules Equity 1, Section 1, and Equity 4, Rules 4756, 4757, and 4758 would specify how Nasdaq proposes to trade tokenized securities. <FTNT> <SU>7</SU>   <E T="03">See</E> Notice, <E T="03">supra</E> note 3. Capitalized terms not defined in this order are defined in the Exchange's rules. </FTNT> <FTNT> <SU>8</SU>   <E T="03">See id.</E> at 45427. </FTNT> First, the Exchange is proposing to amend its definition of a security, at Equity 1, Section 1, to include tokenized securities. <SU>9</SU> <FTREF/> The proposed rule change specifies that the term “tokenized” in this instance refers to digital representations of paper securities that utilize digital ledger or blockchain technology, as opposed to “traditional” securities, which are also digital representations of paper securities, but do not utilize blockchain technology. <SU>10</SU> <FTREF/> According to the Exchange, as long as tokenized securities are fungible with, have the same CUSIP number as, and afford their holders the same material rights and privileges as do traditional securities of an equivalent class, the Exchange would trade tokenized securities together with traditional securities on the same Order Book and according to the same execution priority rules. <SU>11</SU> <FTREF/> A tokenized equity security would be deemed to provide the same material rights and privileges as a traditional security if, among other things, it conveys an equity interest in an underlying company, a right to receive any dividends that the company issues to its shareholders, a right to exercise any voting rights that shareholders are due, and a right to receive a share of the residual assets of the company upon liquidation. <SU>12</SU> <FTREF/> The Exchange would not treat tokenized instruments to be equivalent to their traditional counterparts if they do not convey such rights, in whole or in material part, or share the same CUSIP, but instead the Exchange would treat these instruments as distinct ( <E T="03">e.g.,</E> derivative securities or ADRs). <SU>13</SU> <FTREF/> <FTNT> <SU>9</SU>   <E T="03">See id.</E> at 45429. </FTNT> <FTNT> <SU>10</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>11</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>12</SU>   <E T="03">See id.</E> Nasdaq believes that tokenizing securities should not occur in a manner that deprives issuers of their ability to determine where and how their shares trade. However, according to Nasdaq, it is limited in its ability to afford issuers a choice as to whether their shares are or become tokenized by other markets. Nevertheless, Nasdaq encourage the Commission to consider the issue as it develops a new regulatory regime for tokenized securities. <E T="03">See id.</E> at 45428 n. 8. </FTNT> <FTNT> <SU>13</SU>   <E T="03">See id.</E> at 45429. The rule proposal does not address whether and how Nasdaq may choose to trade these non-fungible tokenized instruments in the future. </FTNT> Second, the Exchange is proposing to amend its Order Entry Rule, at Equity 4, Rule 4756, to describe how a Participant  <SU>14</SU> <FTREF/> can communicate its desire to clear and settle a security in tokenized form. <SU>15</SU> <FTREF/> The proposed amended Rule states that a Participant that wishes for its order to clear and settle in tokenized form must notate its preference upon entry of the order in the System  <SU>16</SU> <FTREF/> by selecting a flag that the Exchange designates for this purpose, in accordance with the Exchange's procedures. <SU>17</SU> <FTREF/> When a Participant enters an order with the tokenization flag selected, the Exchange will communicate the Participant's order handling instruction to The Depository Trust Company (“DTC”) on a post-trade basis. <SU>18</SU> <FTREF/> DTC would then carry out the Participant's instruction in accordance with DTC's rules, policies, and procedures, or if it is unable to do so, it would make alternative clearing and settlement arrangements with the Participant. <SU>19</SU> <FTREF/> <FTNT> <SU>14</SU>  Nasdaq Rules Equity 1, Section 1(a)(5). </FTNT> <FTNT> <SU>15</SU>   <E T="03">See</E> Notice, <E T="03">supra</E> note 3, at 45429. </FTNT> <FTNT> <SU>16</SU>  Nasdaq Rules Equity 1, Section 1(a)(3). </FTNT> <FTNT> <SU>17</SU>   <E T="03">See</E> Notice, <E T="03">supra</E> note 3, at 45429. </FTNT> <FTNT> <SU>18</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>19</SU>   <E T="03">See id.</E> </FTNT> Third, the Exchange is proposing to amend its Book Processing Rule, at Equity 4, Rule 4757, to specify that if an order contains tokenized securities or indicates a preference to clear and settle securities in token form, it would not affect the priority in which the Exchange executes that order. <SU>20</SU> <FTREF/> <FTNT> <SU>20</SU>   <E T="03">See id.</E> </FTNT> Fourth, the Exchange is proposing to amend its Order Routing Rule, at Equity 4, Rule 4758, to state that when the Exchange routes orders that Participants have designated for clearing and settlement in token form, in accordance with the Exchange's order entry rules and procedures, then the Exchange will communicate this tokenization instruction to DTC upon receiving an execution for an order that was routed to another trading venue. <SU>21</SU> <FTREF/> <FTNT> <SU>21</SU>   <E T="03">See id.</E> </FTNT> Nasdaq represents that apart from the above, as far as Nasdaq's systems and matching engine are concerned, the Exchange's trading procedures and behavior will be the same regardless of whether a member opts to trade tokenized or traditional shares of a stock. <SU>22</SU> <FTREF/> The proposed rule change to offer trading in tokenized securities would become effective once the requisite infrastructure and post-trade settlement services have been established by DTC, with any required regulatory approvals having been obtained. <SU>23</SU> <FTREF/> It is Nasdaq's understanding that DTC is working to develop the necessary infrastructure, services, and procedures to facilitate such tokenization and the related post-trade settlement infrastructure and services. <SU>24</SU> <FTREF/> The post-trade settlement services, including the eligibility of a member's orders to be settled in tokenized form, would be determined by DTC's policies and procedures. <SU>25</SU> <FTREF/> <FTNT> <SU>22</SU>   <E T="03">See id.</E> Nasdaq's pricing structure and rates will not vary depending upon whether a transaction involves a share of a tokenized stock. </FTNT> <FTNT> <SU>23</SU>   <E T="03">See id.</E> at 45430. </FTNT> <FTNT> <SU>24</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>25</SU>   <E T="03">See id.</E> </FTNT> <HD SOURCE="HD1">III. Proceedings To Determine Whether To Approve or Disapprove SR-NASDAQ-2025-072 and Grounds for Disapproval Under Consideration</HD> The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act  <SU>26</SU> <FTREF/> to determine whether the proposed rule change should be approved or disapproved. Institution of proceedings is appropriate at this time in view of the legal and policy issues ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 16k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━