Galaxy Digital has pointed out that Robinhood’s initiative to tokenize stocks on a new Ethereum-compatible blockchain could potentially divert trading volumes from established exchanges like the NYSE, which might negatively impact revenues tied to trading fees and market data.
During the ETHCC meeting this week, Vlad Tenev, CEO of Robinhood, detailed the company’s plans for “Robinhood Chain,” leveraging Arbitrum Orbit’s layer 2 Ethereum compatibility. This blockchain would enable users to trade derivatives of tokenized assets directly on-chain, thereby allowing trades outside the traditional hours of exchanges.
Tenev described the new token engine operating on the Robinhood chain, which will provide users with tokenized derivatives of various assets. This means these tokens could operate independently or interact with decentralized applications.
By minting “rappers” linked to actual stocks held by U.S. broker-dealers, Robinhood aims to introduce a 24/7 trading option, featuring a quick settlement process along with a 24/5 trading option, building on its recent acquisition of the Crypto Exchange Bitstamp.
In a report from Galaxy Digital, they suggested that Robinhood’s tokenization endeavor could effectively transfer assets from traditional market channels to blockchain, prompting major traditional financial exchanges like the NYSE to directly respond to the challenge posed by increased liquidity and market activities.
Galaxy Digital noted that this situation could undermine the competitive edge that major exchanges currently hold. The architecture of Robinhood’s platform resembles a roll-up model similar to Coinbase’s, which allows full control over the trading sequencer, enabling Robinhood to capture all transaction fees. Galaxy estimates that Coinbase’s model generates daily transaction fees exceeding $150,000.
By managing the Robinhood chain sequencers and controlling the tokenized assets, the platform intends to monetize every aspect of its trading operations, ranging from off-chain trading to on-chain functionalities.
The appeal of tokenization goes beyond just round-the-clock trading. It also includes traditional stocks used in ways that conventional markets cannot, such as utilizing tokenized assets as collateral in DeFi protocols and automating dividend distributions.
As noted by Galaxy, if established exchanges cannot provide the same advantages as tokenized assets, they risk becoming a less efficient custodian of these assets, potentially pushing more traders towards blockchain-based platforms.
However, the 24/7 trading model raises concerns about increased volatility risks for retail investors.
Additionally, there’s ongoing regulatory uncertainty. As it stands, Robinhood tokens are only accessible to users in the EU, and the Securities and Exchange Commission (SEC) has not yet publicly addressed this new model.
The Securities Industry and Financial Markets Association (SIFMA) has already urged the SEC to consider the implications for trading tokenized stocks outside the current regulatory framework.
