This observation and personal opinion are from Nothing Research Partner BonnaZhu. The following content does not constitute any investment advice.

Many things related to STO were participated in back then
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I don't want to evaluate whether there are issues with Mystonks itself, but the current predicament of tokenized securities is fundamentally due to business needs taking precedence, and regulatory lagging for many years, leading to mismatches.

Since the concept of security tokens (STO) was proposed in 2018, almost 7 years have passed. Although the United States has a set of reference operational procedures, they are neither tailored for tokenized scenarios nor are they quite outdated, and they are entirely targeted at the U.S. market.

But the problem is: most of the demand for tokenized securities actually comes from non-U.S. markets. If we insist on using the highest standards from the U.S., it often directly kills the business. However, the reality is that many projects have to refer to this process to design their product architecture for endorsement and compliance.

The story from back then is a living example: tZERO went to the extreme in compliance, but liquidity was directly choked off. When the new narrative of DeFi and wealth effect came in 2020, this track was directly disproven.

And today, market demand has surged again, but because the regulatory process has not changed at all, those who want to do it will still fall into the same vicious cycle:

- Issuance
- Custody/Clearing
- Trading/Matching
- Circulation/Transfer of Ownership

1. Issuance

Regulators generally believe that even if tokenized stocks are a 1:1 mapping, they do not equate to the legal rights of the original stocks, and therefore will be considered newly issued securities.

In the U.S. market, newly issued securities must either go through S-1 registration for public listing, which incurs high costs and complexities, or settle for Reg D private placement exemption or Reg A+ small public offerings.

- Reg D
Limited sale period (6 months to 1 year)
Only for qualified investors

- Reg A
Limited annual quota ($75 million)
High approval costs

Clearly, both of these methods are very awkward. tZERO died in the Reg D model: users bought but could not sell immediately, and had to meet the qualifications of a qualified investor. By the time it unlocked, the hype was already gone.

Of course, theoretically, there is another path: Reg S is purely aimed at overseas markets, exempting SEC regulation. Back then, FTX actually used this model, but they were a centralized exchange with KYC. However, today's tokenized stocks must go purely on-chain; how can you ensure there are absolutely no U.S. users?

2. Matching/Trading

If you are just buying stocks on behalf of someone, placing orders through NASDAQ or the New York Stock Exchange during normal trading hours, then a Broker-Dealer license is sufficient. Even if you are only providing services to overseas market users, you just need to partner with a U.S. broker to take the orders.

But the problem is that tokenized stocks are inherently tradable 24/7. If your tokenized stocks are matched during off-hours, they effectively enter the regulatory definition of an 'independent secondary market.' In the U.S., you need to register as a national exchange or at least as an ATS (Alternative Trading System).

The threshold for national exchanges is extremely high, so most projects will normally choose ATS. However, this is also a costly and slow approval route.

3. Custody/Clearing

Traditional stock custody is under the name of brokers (Broker-Dealer) and is settled through DTC, with the entire process operating within a regulated closed system.

For tokenized stocks, theoretically, their underlying stocks are still normally custodied through brokers and settled through DTC. However, stock tokens and stocks are separate; tokens exist on-chain. Although blockchain effectively replaces DTC's clearing and settlement functions, does custody also require additional solutions? Should it hold a banking-type custody license? If so, that’s another cost.

4. Circulation/Transfer of Ownership

Traditional stock transfers are completed within the clearing system and are regulated without requiring additional payment or money transmission licenses.

But tokenized stocks can circulate freely on-chain; if they involve U.S. users, it will trigger federal-level MSB (Money Services Business) and state-level MTL (Money Transmitter License) requirements.

The same stocks, once they are on-chain, will incur an entirely new set of compliance costs.

5. This is also the trickiest part

If you follow the highest standards for all links—Broker-Dealer + ATS + MSB + MTL, and strictly use Reg D for issuance, you are basically replicating tZERO. But these are all essentially U.S. market regulatory requirements, while most of your clients don't come from the U.S. at all.

However, you cannot operate like Robinhood, because they only execute trades on behalf of clients and buy real stocks, so they only need a Broker-Dealer license. Unless you are also willing to accept that your product becomes the simplest form:

- Purely using crypto to buy real stocks
- Not targeting U.S. users
- Partnering with a U.S. broker
- Only supporting trading during stock trading hours

Doing so naturally minimizes compliance risks, but commercially, it would be no different from products like Futu and Tiger, and it would be difficult to win against them in terms of experience and price.

6. A true breakthrough

To fundamentally solve the problem, there are only two paths:

- The SEC defines the rights relationship between tokens and original stocks
- U.S. companies also submit registrations for tokenization during their listing phase

This way, tokenized stocks would be registered public securities, equal in rights to non-on-chain stocks, and various trading platforms could list them. Those with U.S. licenses could provide services to U.S. users, while those without U.S. licenses would block U.S. access. The platform would only need a Broker-Dealer license for integration.

However, at this point, trading and liquidity will inevitably concentrate primarily on platforms like NASDAQ and the New York Stock Exchange, with limited value capture for most participants, and at least, the issuance side will definitely not make much profit, merely sharing in trading/matching transactions to bring some volume and orders to mainstream liquidity platforms.