Tokenization of Equity

Robinhood’s latest announcement of “Stock Tokens”, seems like a new dawn for financial markets is upon us. The trading platform has released a new investment vehicle in the form of “tokenized contracts recorded on a blockchain” that will trade on extended hours and provide international retail investors access to US markets. Now I wonder, what will the potential ripple effects in the broader financial markets look like, how these new investment vehicles will be regulated and how will owners of these stock tokens be protected.

Ever since blockchain technology became mainstream and cryptocurrencies have gained considerable value over the past decade, there’s no question in my mind that it has always had the potential to disrupt traditional financial markets. With Robinhood’s latest announcement, we are seeing for the first time the integration of a distributed ledger into a mainstream retail investing platform that will facilitate trading of US equities internationally in the form of tokens. No brokerage needed, just a Robinhood account. One of the most interesting aspects of these stock tokens is that some of them track the price value of private companies. The most notable one being that of OpenAI. However, how could Robinhood offer tokenized shares of a company that, not only is it private, but is also under a non-profit structure?

Robinhood’s CEO, Vlad Tenev, explicitly stated at a Cannes product launch event that these stock tokens of both OpenAI do not equate an ownership stake on the company. Rather, they give customers indirect exposure via a special purpose vehicle (i.e. not even Robinhood holds OpenAI equity). After the launch announcement, an OpenAI spokesperson wrote on X that they did not partner with Robinhood on this and warned customers to be cautious as these tokens are real company shares. There are other trading platforms with similar offerings that, unlike Robinhood, do ensure that they have the underlying asset on their balance sheet. However, most of them still lack the necessary KYC guardrails and company disclosures characteristic of traditional markets and exchanges. There have been reports of stock tokens that trade at a huge premium in comparison to the underlying asset it tracks due to secondary trading activity, after hours trading and lack of regulatory oversight. So, are tokenized equities truly advantageous? Do their benefits overcompensate their risks?

Since we are at the very early beginnings of this new way of trading, it still feels like an experiment. Customers should be very careful of how they deal with these stock tokens, where they’re buying them from and do extensive research on what such tokens represent. Regulators are still lagging behind on what these new investment vehicles are and how they should be dealt with. Therefore, no one is truly protected at this very point in time nor ensured that what they are buying is an actual equity share of either a private or public company. Nonetheless, one undeniable advantage of these stock tokens is the access they provide to retail investors without minimum capital requirements or US brokerage accounts for example. Specially, access to highly valuable private markets. However, if it’s not a highly known, well-established private company such as Stripe, OpenAI or SpaceX, would retail investors even want to invest? Is it worthwhile to invest in an unknown private company with no disclosure obligations without taking in considerable risk? Lack of liquidity I would argue is an issue that private companies face, especially in their early stages, that tokenized equity has the potential of solving. However, at this very point in time, since a stock token does not equate equity rather than just a vehicle that tracks the price of the underlying asset, when people purchase them it’s like placing a sports bet. I truly hope that sooner rather than later, we will have clear guidelines of what these tokens are, how they are issued and by who, who can buy them and under what agency they will be regulated so that we can finally have real tokenized equity of both private and public companies. The value I feel this new form of trading will bring to markets will be enormous and will allow underrepresented investors to participate in a sector they haven’t been able to in the past and do so at the same time as everyone else.