The Race to Launch Tokenized Stocks Is On. Here’s What That Means for US Investors

Tokens that are designed to be digital twins of stocks have subtle differences that make them less identical and more fraternal to the securities they’re supposed to replicate.

Tokenization was theoretical when BlackRock chief Larry Fink publicly discussed it in early 2024, but has landed in the real world via popular trading platforms including Robinhood (HOOD), Kraken and Coinbase Global (COIN). While they haven’t cleared regulatory hurdles for U.S. investors’ yet, rollouts of stock tokens in Europe started in June, ratcheting up the competition between trading venues that offer, or plan to offer, them to their customers.

Coinbase CEO Brian Armstrong, who unveiled the crypto exchange’s tokenization ambitions in late July, quantified the business case for it: Just 3% in equities trading market share would double the current crypto market. “We’ve always said we’re updating the system and building the bridge to bring equities on to crypto rails is the next phase of our strategy,” he said.

Anything can be made into tokens, from mortgage contracts representing real estate to shares in special purpose vehicles (SPVs) that reference the price of the underlying assets—whether they are publicly traded stocks or stakes in private companies, the latter of which made headlines when Robinhood unveiled OpenAI and SpaceX stock tokens.

Robinhood chief Vlad Tenev, during the company’s recent earnings call, said that the true opportunity in tokenization is in inaccessible assets like private market assets, according to a transcript provided by AlphaSense. He also said there was a “very positive” reception to stock tokens. “It’s clear customers want this,” he said. “They not only want it in Europe but they want it in the U.S. as well.”

OpenAI, the ChatGPT maker, has publicly said that it was not associated with the OpenAI stock tokens launched by Robinhood. The private-asset “stock tokens” weren’t technically equity, but derivative contracts.

Kraken, the U.S.’s oldest crypto exchange, has taken a different tack to tokenization. It partnered with a company called Backed to roll out xStocks. They trade on Solana and BNB Chain, but will likely show up on other blockchains as the so-called xStocks Alliance, a network of exchanges and decentralized finance protocols, grows. Kraken’s consumer business chief Mark Greenberg, in an interview with Investopedia, said that the exchange’s stock tokens aren’t derivatives, but “actually backed by real stocks.”

As Greenberg explained it: Its partner Backed runs an SPV in New Jersey that holds stocks, and for each stock an investor buys, they mint a corresponding token, which they destroy when the underlying stock is sold, and the cash value given to the user. They are not technically equity but debt instruments that grant their holders the right to the cash value of the underlying shares, but not the shares themselves. Kraken hopes to eventually enable XStocks holders to redeem the underlying assets rather than their cash value, Greenberg said.

Coinbase may come up with a whole different model, but the crypto exchange has not yet set a timeline. That said, U.S. securities regulators appear to be more receptive to them than they were in the past.