Observations and personal views from Nothing Research Partner BonnaZhu. The following content does not constitute any investment advice.

In the past, I participated in many STO-related things.
I would like to take this opportunity to have a chat.

I won't comment on whether Mystonks itself has problems, but the current predicament of tokenized securities is essentially due to business needs taking precedence, while regulation has lagged for many years, leading to mismatches.

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has a set of operational processes to refer to, they are neither tailored for tokenized scenarios nor are they quite outdated, and they are entirely aimed at the U.S. market.

The problem is that most of the demand for tokenized securities actually comes from non-U.S. markets. If we must use this highest standard from the U.S., it often directly kills the business. However, the reality is that many projects have to reference this set of processes to design their product architectures in order to gain endorsement and compliance.

The story from back then is a vivid blood example: tZERO went to the extreme of compliance, but liquidity was directly choked off. In 2020, with the new narrative of DeFi and wealth effects, this track was directly falsified.

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

- Issuance
- Custody/Clearing
- Transaction/Matching
- Circulation/Transfer of Title

1. Issuance

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

In the U.S. market, newly issued securities must either go through the S-1 registration for public listing, which involves high costs and complexities, or settle for less by seeking Reg D private placement exemptions 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 USD)
High approval costs

Clearly, both methods are very awkward. tZERO died in the Reg D model: users bought but could not sell immediately and had to meet the qualifications for qualified investors. By the time it was unlocked, the heat had already dissipated.

Of course, theoretically, there is another route: Reg S is aimed purely at overseas markets, exempting SEC regulation. Back then, FTX actually used this model, but it was a centralized exchange with KYC. Today's tokenized stocks need to be purely on-chain. How can you ensure 100% that there are no U.S. users?

2. Matching/Transaction

If you are just buying stocks on behalf of others, placing orders through Nasdaq or the New York Stock Exchange during regular trading hours, then a Broker-Dealer license is sufficient. Even if you are only providing services for overseas market users, you just need to find a domestic U.S. broker to cooperate with.

The problem is that tokenized stocks are inherently transferable and tradable 24/7. If your tokenized stocks are matched during non-trading hours, they actually enter the regulatory definition of an 'independent secondary market'. In the U.S., this requires registration 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, but this is also a costly and slow approval path.

3. Custody/Clearing

Traditional stock custody is under the name of a broker-dealer, completing settlement through DTC, with the entire process running within a regulated closed system.

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

4. Circulation/Transfer of Title

Traditional stock transfers are completed within the clearing system, regulated in nature, and do not require additional payment or money transmission licenses.

However, tokenized stocks can circulate freely on-chain. If it involves U.S. users, it will trigger federal-level MSB (Money Services Business) and various state-level MTL (Money Transmitter License) requirements.

The same stock, when it goes on-chain, incurs an entirely new set of compliance costs.

5. This is also the most tricky part

If you go through all the links according to the highest standards—Broker-Dealer + ATS + MSB + MTL, and strictly use Reg D for issuance, you are essentially replicating tZERO. But these are essentially regulatory requirements from the U.S. market, while most of your clients do not come from the U.S. at all.

However, you cannot operate like Robinhood, as they are merely executing client trades with 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
- Finding a domestic U.S. broker for cooperation
- Supporting trading only during stock trading hours

This approach minimizes compliance risks, but commercially, it is no different from products like Futu and Tiger, and it is very difficult to win against them in terms of experience and pricing.

6. The real breakthrough

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

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

This way, tokenized stocks become registered public securities, equating them with non-blockchain stocks, and various trading platforms can list them. Those with U.S. licenses can provide services to U.S. users, while those without U.S. licenses can block U.S. access. Platforms only need to integrate with a Broker-Dealer license.

However, at this point, transactions and liquidity will inevitably concentrate on platforms like Nasdaq and the New York Stock Exchange, and the value capture space for most participants will be very limited. At least the issuance side will definitely not make much profit; they will only share in the transaction/matching part, contributing volume and orders to mainstream liquidity platforms.