Tokenized Equities Explained: The Rise of Digital Stocks and Regulatory Challenges

Brokerages and investors are alike are eyeing the rising trend of tokenized equities.

Robin Hood is currently seeing some pushback as it tries to offer European trades exposure to tokens of private giants such as OpenAI and SpaceX.

Now tokenized equities utilize blockchain to make trading more accessible and efficient, and they're expected to help.

Industry grow into the trillions over the next decade, but we're in the very early stages and brokerages are navigating an uncertain regulatory environment while traders are trying to explore the space.

Joining me to weigh in this morning is Cash Danda, core contributor at Jupiter.

Cash.

Thank you so much for joining me.

So first and foremost, we've been hearing more and more over the past few weeks about tokenized equities, and I think it's important for viewers out there to understand what exactly this is.

So how do they work?

Yeah, well, tokenize equities is a bit of a catch-all term, so there's multiple different kind of flavors, if you will.

First, you have things like the Robin Hood kind of private equity deals where they're trying to put those on chain, and as you just mentioned, there's some problems with that model.

So let's going to leave that aside for a second.

The dominant model right now are tokenized equities that function almost like stablecoins where there's a digital representation of it on the blockchain with the underlying equity owned in a brokerage account somewhere that kind of supports it.

These are really better kind of described almost as like stock coins of a sort because they don't give you underlying voting rights, but they give you price exposure as well as exposure to things like stock splits and dividends and so forth.

Finally, there's a third category which we might call dual listed equities, and these are tokens that actually represent real equity.

They don't even represent it.

They actually are real equity in the sense that you have full governance and voting rights.

Your name is held in the ledger of record as an actual owner of the shares, and you.

Kind of the same exact kind of setup that a regular shareholder might have except yours is a little bit easier to move around and so on and so forth.

So there's these three kind of categories right now we're seeing a lot of interest and activity in the second category with these kind of representations that give you price exposure and we're starting to see more experiments in the dual listing category as well.

And one name that's been making headlines regarding tokenized equities is Robin Hood, and that company says it's not concerned about regulatory uncertainty over tokenized stocks.

So are some of the brokerages out there actually having trouble when it's coming to entering the space?

Most of the tokenized equity offerings that are kind of popular right now, so I'll include X Stocks, which is a joint effort between Backed and Kraken and a few other players, or Ono Finance has a similar offering.

They operate under what's called Regulation S exemptions, which allows you to sell equities to non-US citizens fairly straightforwardly.

Uh, so the regulatory clarity is there for them.

Now for people within America or, you know, associated territories, it's a little bit more complicated and I do think some more regulatory clarity will be required.

But the beautiful thing about going on chain is that once you're on chain, you really do open up the access to everyone across the world who's able to participate in those.

And Super state is also involved in the space.

So what's the difference between dual listing and also tokenized equities?

Yeah, I think the dual listing is really the most exciting kind of set of experiments that we're starting to see.

Superstate is doing it, as you mentioned.

We're working at Jupiter with the Kazakhstan Central Stock Exchange around similar experiments, and many others are exploring this as well.

In the same way that you might dual list. equities on let's say the London Stock Exchange and the New York Stock Exchange, we're seeing more demand for companies who want to access global liquidity, and the best way to do that is to list not just on the New York Stock Exchange, but also on chain itself, largely on Solana.

Doing so gives you access to a global capital base.

There are many billions, if not trillions of dollars of capital that are on chain and coming on chain soon.

And so you dramatically expand the kind of base that you can have.

Now those dual listing IP dual listing equities are fundamentally different in the sense that they do require KYC or know your customer uh kind of obligations for you to be able to trade them.

So there is a potentially smaller kind of target market for those, but certainly it's still much larger than just the number of people that are in America.

Other tokenized equity offerings like X stocks, in fact, they don't require KYC, and they're kind of freely tradable by anyone anywhere.

And you mentioned the regulatory landscape, so I do want to get your take on this SEC Commissioner Hesterur says tokenized equities are traditional securities.

So how does this fit into typical crypto as well as the overall securities debate here?

I think when you think about the regulatory regulatory bodies, the real important thing is to decide, OK, who actually has oversight of these.

The good news is, for especially for US equities, there's a very robust kind of compliance and regulatory infrastructure with the SEC with very clear disclosure requirements and so forth.

It does seem at this time that tokenized equities do not create any additional, you know, kind of disclosure requirements and so on.

So as long as you are following the existing SEC rules, there should not be additional issues.

They come up on the regulatory end.

This is going to vary jurisdiction by jurisdiction.

Of course the story is kind of starting in America, but as I mentioned with Kazakhstan and other markets, there's many other kind of emerging markets that have different regulatory regimes that are kind of purposely using this dual listing strategy that we talked about earlier to attract new companies and new capital into their markets.

So I think the picture is still very much being written right now.

We don't know exactly where this is going to go.

Surely for large caps.

Stocks in the US, it seems relatively straightforward to bring those on chain as tokenized equities.

The dual listing also seems to be working in credit to Superstate and many others who have been fighting those battles, but I think there is still a lot more to be done now.

The US stock market, as you likely know, is somewhere in the neighborhood of like $55 trillion but the global equity market is something like $120 trillion but we are fast approaching the opening bell here at the New York Stock Exchange, so we will have to leave it there.

Thank you so much for joining us.