A growing trend among cryptocurrency companies to offer tokens pegged to traditional stocks is raising concerns among financial firms and regulatory experts. These novel products, experiencing rapid growth, are seen as potential risks to investors and the overall stability of the market. Several companies, including Robinhood, Gemini, and Kraken, have already launched tokenised stocks in Europe, while others like Coinbase and Dinari are seeking regulatory approval to introduce similar products in the United States. Nasdaq has also expressed interest in offering tokenised shares. Robinhood is a financial services company offering a platform for trading stocks, ETFs, options and cryptocurrency. Gemini is a cryptocurrency exchange and custodian that allows customers to buy, sell, and store digital assets.
The industry promotes tokenised shares as a revolutionary force in stock markets, potentially enabling 24/7 trading and instant settlements, which would boost liquidity and reduce transaction costs. As of September, the combined value of tokenised public stocks aimed at retail investors had surged to $412 million, a significant increase from just a few million dollars a year prior, according to RWA.xyz. However, critics argue that these tokenised shares often lack the rights, disclosures, and protections associated with traditional equities, resembling riskier derivatives instead. This could increase risks for investors and potentially fragment market liquidity if left unregulated.
Legal experts highlight the importance of understanding the nature of these synthetic instruments. While some tokens are backed 1:1 by underlying stocks, others provide economic exposure through derivatives, leading to varied investor rights and protections. Concerns are also rising about the lack of ownership, voting rights, or traditional dividends, as well as the potential counterparty risk exposure to the token issuer. For instance, multiple tokens pegged to Nvidia and Tesla exist with varying structures and terms and conditions.
Regulators are now facing pressure to address these concerns. While some, like Kraken, claim to adhere to the “gold standard” with 1:1 collateralisation and investor disclosures, others operate under existing derivatives rules that some experts believe are insufficient. The debate continues over how to properly regulate tokenised stocks to protect investors and maintain market integrity, with calls for formal rulemaking processes to ensure adequate oversight.
