Tokenized Stocks Spark Concerns Among Traditional Investors
NEW YORK/PARIS, October 8 – The recent surge of crypto companies launching tokenized stocks has raised concerns among traditional financial institutions and regulators regarding the risks these new products may pose to investors and overall market stability.
Fueled by a supportive stance from the former Trump administration, the crypto industry is eager to tap into global excitement surrounding cryptocurrencies.
In Europe, platforms like Kraken have initiated the sale of tokenized stocks, with Robinhood and startup Dinari seeking approval for similar offerings in the U.S. Meanwhile, NASDAQ recently became the first major exchange to propose providing tokenized stocks.
Proponents argue that tokenized stocks, which utilize blockchain technology to represent traditional stocks, could transform the market by enabling 24/7 trading, immediate settlement, higher liquidity, and lower transaction costs. According to RWA.XYZ, the value of tokenized public stocks for retail investors soared to $412 million by September, a significant climb from just millions a year prior.
However, as appealing as they might seem, these products often lack the rights and protections associated with traditional stocks, resembling riskier derivatives instead. This, according to numerous industry executives and legal experts, raises investor risks and could disrupt market integrity and liquidity.
Diego Baron Osio, a partner at a British law firm, noted that individuals will bear more responsibility to fully understand their purchases.
While various companies have created their own stock tokens on the blockchain, most are pegged to established public companies and issued by third parties such as Ondo Global Markets and Dinari. The backing of these tokens varies significantly—some are tied to underlying assets on a 1:1 basis, while others offer economic exposure through derivatives.
There’s still ambiguity about which regulations apply to these tokenized stocks, leading to different rights and protections for investors. Many products don’t provide ownership, voting rights, or traditional dividends, potentially increasing risks associated with counterparty exposure.
“The diversity in rights and disclosures across different tokenized products is a significant concern,” commented Gabriel Otte, CEO of Dinari, a company offering 1:1 collateral.
Recently, Robinhood announced plans to initiate trading with tokens linked to public companies and will offer notable stocks in private firms. To facilitate this, they issued a token linked to OpenAI. This token acts as a derivative contract, backed by a stake in a vehicle holding OpenAI’s convertible notes. The news faced some backlash from OpenAI and prompted European regulators to increase scrutiny on Robinhood.
According to Johann Kerbrat, general manager of Robinhood Crypto, the company has clearly identified this token as a derivative. He emphasized that it allows for quicker resolution times.
Despite Robinhood’s efforts, it hasn’t yet finalized blockchain transactions.
In Europe, firms like Robinhood and Kraken comply with derivative regulations under “Mifid.” Yet, some legal experts argue that these regulations may not be sufficient for overseeing new products. Paul Atkins, a pro-crypto figure at the SEC, has hinted at potential exemptions for tokenized products, but this sparks resistance from major Wall Street institutions, calling for a formal rulemaking process.
“Just because something is represented on the blockchain, it doesn’t inherently change the protections afforded to investors,” cautioned Peter Ryan from the Securities Industry and Financial Markets Association.
In a July letter to the SEC, Citadel Securities highlighted concerns, arguing that tokenization could siphon liquidity from open markets.
A spokesperson from the SEC refrained from comment, while Citadel Securities provided no further input beyond their initial letter. Meanwhile, officials from the European Securities and Markets Agency are aware of the potential risks linked to tokenization and are keeping a close watch on developments.
The World Exchange Federation has encouraged regulatory bodies to consider token fragmentation and its associated risks, advocating for Nasdaq’s proposal as a solution that treats tokens like traditional stocks.
Coinbase is currently discussing plans with the SEC for launching tokenized securities that would grant investors full legal rights akin to conventional stocks.
Some companies have asserted their deep connections to regulations concerning securities, money laundering, and bankruptcy. Mark Greenberg from Kraken emphasized their commitment to high standards, including 1:1 collateral and clear investor disclosures, while dismissing derivative offerings as inadequate.
In contrast, Ian de Bode, Chief Strategy Officer at Ondo Finance, argued that tokenization actually enhances investor protections.
