(NEW YORK)–The expansion of securities tokenization on the blockchain may represent a potential threat to the traditional over-the-counter (OTC) capital markets.
As regulatory frameworks evolve, public companies are conducting cost-benefit analyses that increasingly favor blockchain-based listings over conventional OTC listings.
The Cost Structure Crisis
The financial burden of maintaining an OTC listing has become increasingly prohibitive, with annual costs sometimes reaching $100,000 or more when accounting for audited financials, legal counsel, transfer agent fees, and ongoing disclosure obligations mandated by SEC regulations and OTC Markets Group standards.
These expenses represent a significant percentage of operating budgets for early-stage companies, often diverting resources away from core business that would otherwise fund product development or talent acquisition.
While regulatory compliance remains necessary regardless of venue, the operational costs associated with blockchain listing are dramatically lower than the OTC markets.
Lack of Liquidity
The most damaging trend for the OTC markets has been the precipitous decline in trading liquidity over the past few years.
This liquidity crisis stems from reduced broker-dealer participation following increased regulatory scrutiny, diminished retail investor interest, and migration of institutional capital toward established exchanges like the NASDAQ and NYSE. The result is a market where bid-ask spreads have widened, and liquidity has steadily declined.
Blockchain listing offers a compelling alternative through global accessibility and continuous trading capabilities. Operating 24/7 across international time zones, these platforms aggregate liquidity from worldwide investor bases. The T+0 settlement—where trade clearing occurs instantaneously—eliminates counterparty risk and frees capital immediately for reinvestment.
Loss of Convertible Venture Funding
OTC markets historically served as a critical access point for venture-stage companies to raise growth capital through convertible note offerings. Recent regulatory crackdowns on abusive financing terms, while protecting investors, have inadvertently severed essential funding channels for legitimate emerging companies unable to access traditional institutional financing.
Blockchain-based capital formation through security token offerings (STOs) presents potential solutions by connecting issuers directly with global investor pools while maintaining regulatory compliance. Smart contracts can encode investor protections, automated compliance checks can verify accreditation status, and transparent blockchain records provide regulators with unprecedented oversight and audit capabilities.
Inability to Clear Shares
If raising money wasn’t hard enough, brokerage firms have systematically withdrawn from OTC markets, citing compliance costs, reputational risks, and limited profitability. This consolidation leaves retail investors with fewer options for depositing, holding, and trading OTC securities.
Remaining broker-dealers have responded to increased regulatory burdens by raising fees substantially. Deposit fees, legal reviews, and trading commissions have all escalated, with some firms imposing minimum account values or restricting access to higher-tier OTC markets.
Blockchain-based securities trading eliminates many intermediary costs and access barriers. Digital wallets provide direct custody without traditional broker-dealer involvement, and transaction costs are typically fixed regardless of trade size.
Conclusion
Excessive costs, evaporating liquidity, restricted capital access, investor impediments, and industry migration creates a compelling case that traditional OTC markets face potential obsolescence.
While regulatory uncertainties around blockchain securities remain, the fundamental economics and operational efficiencies strongly favor tokenized alternatives.
Ludlow Research serves as an advisory firm guiding private and public issuers through the complex SEC compliance and regulatory framework required for transitioning securities to blockchain platforms, ensuring proper governance structures and adherence to federal securities laws throughout the tokenization process.
This is part of an on going series at Ludlow Research titled “The Last Days of the OTC Market: How Blockchain is Rewriting Capital Formation”
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