Crypto race to tokenize stocks raises investor protection flags

[TradingPuzzles]

Crypto race to tokenize stocks raises investor protection flags

A race by crypto companies to sell tokens pegged to stocks is raising alarm bells among traditional financial firms and regulatory experts who warn that the fast-growing novel products pose risks to investors and market stability.

Buoyed by President Donald Trump's pro-crypto stance and his administration's push for friendly regulations, the crypto industry is rushing to capitalize on a global surge in enthusiasm for the sector.

Robinhood (HOOD.O),, Gemini (GEMI.O), and Kraken among others have launched tokenized stocks in Europe, while Coinbase (COIN.O), , Robinhood and startup Dinari are seeking approval to launch similar products in the United States. Nasdaq, meanwhile, last month became the first major exchange to propose offering tokenized shares.

The industry says tokenized shares — blockchain-based instruments that track traditional equities — could revolutionize stock markets by allowing shares to be traded 24/7 and settled instantly, boosting liquidity and reducing transaction costs. The combined value of tokenized public stocks geared toward retail investors as of September grew to $412 million, compared with just a few million dollars 12 months ago, according to tokenization tracker RWA.xyz.

Although many products are marketed like stocks, they rarely offer the same rights, disclosures and protections as traditional equities. Instead, they more closely resemble riskier derivatives, according to a Reuters review of several products and interviews with a dozen industry executives and legal experts. That increases the hazards for investors, while tokenization more broadly could undermine market integrity and fragment liquidity if left unsupervised, critics say.

"You're buying exposures to those shares through creating some sort of synthetic instrument," said Diego Ballon Ossio, a partner at law firm Clifford Chance in London. "A lot of the burden gets shifted on you to understand what exactly it is that you're buying."

A few companies have issued their own experimental stock tokens on the blockchain - software that acts as a shared digital ledger - but most tokenized shares are pegged to public companies and issued by third parties like Ondo Global Markets and Dinari. Some tokens are backed 1:1 by underlying stocks, while others provide economic exposure through derivatives.

Johann Kerbrat, general manager of Robinhood Crypto, said the company clearly flags that its tokens are derivatives.

"It's just one step forward to be able to have the benefits of no longer having multiple days to settle," he added.

While Robinhood is issuing public company tokens on the blockchain, it is not yet settling the trades on the blockchain, a spokesperson said.
Gemini declined to comment.

[jacson4]

Tokenizing stocks is exciting, but investor safety needs equal attention.

[alex10]

Rapid innovation without guardrails can easily trigger another crash.