Stock tokenization is seen as a promising way to democratize access to publicly available company stocks, but it has not gained traction as expected. Advocates of tokenization argue that existing regulations block the widespread adoption of fairness tokenization.
Slow burns of equity tokenization: Hype and reality
Stock tokenization is widely accepted as an ideal tool to create publicly listed companies stocks available to the public, but its adoption pace doesn’t match the hype. The recent controversy sparked by the tokenized open equity stock giveaway from fintech company Robinhood serves as a case in point.
As has been widely reported by several media outlets, Openai, an artificial intelligence company, opposed to the tokenization of Robinhood’s stock, suggesting that fintech companies would act without consent. However, supporters of the fintech company rejected the claim that Openai’s green light was needed to tokenize the latter stock, as tokenized inventory already supports AI companies with Robinhood’s interests.
The immediate rage surrounding Robinhood’s tokenized open equity has largely subsided, but this episode still relies on the widespread adoption of tokenized stocks navigating some horrifying hurdles despite its huge promise to unleash trillions of dollars worth. This recent debate, perhaps a fleeting headline, highlights the complete realisation of industry consensus and investor education that must be addressed thoroughly before the true potential of this innovative financial product.
Regulatory obstacles and investors’ differences
Another key hurdle equity tokenization supporters have confirmed that it is hindering its embrace. This is especially true in the United States where the Securities and Exchange Commission “essentially revamps 1940s regulations for blockchain infrastructure.”
According to Alex Davis, founder and CEO of Mavryk Dynamics, Western regulatory regimes significantly limit access to wealth-based investment opportunities and prevent the widespread adoption of tokenized stocks. He argued that these regulations discriminate against retail investors.
“US regulations such as Reg D, Reg A, Reg C and Reg S create a gap between certified investors (essentially 1%) and retail investors representing 99% of people,” Davis said.
He also told us how current regulations distinguish so-called sophisticated investors from others who are based on wealth rather than actual knowledge or financial literacy. Davis argues that such an approach creates a “system where only the wealthy people can access early stage opportunities.” This leaves you with your initial public offering (IPO) or stock market purchases as the only way to be exposed to hot assets like AI stocks.
Unfortunately for most retail investors, by the time a company is open to its public, it has often grown significantly, with most of the value created being captured by sophisticated investors. Davis added:
“As a result, retail investors have limited options and often buy stocks that are already at peak value. In some cases, the national market is merely an insider exit ramp, and retail investors hold assets that are lacking.”
Unlocking new opportunities: Tokenization promise
While it may continue to slow the embrace of tokenization, similar to the regulatory hurdles and the controversy sparked by the tokenized Openai stock give investors an unparalleled ability or opportunity. Andrei Grachev, managing partner at DWF Labs, identified several of these in his written response to questions from Bitcoin.com News.
“The ownership of fractions will be seamless. You can own $50 in Berkshire Hathaway. The transaction continues 24/7, not just market time. Most importantly, these assets can be integrated directly with the Defi protocol for lending, farming or structured products,” Grachev said.
According to an executive at DWF Labs, retail investors are already using tokenized stocks as collateral for on-chain lending at rates that traditional brokers cannot offer.
But for Davis, who was involved in major tokenization transactions, the most important ability created by this novel concept is the ability to create highly personalized investment portfolios. So, instead of limiting investors to more than 2,000 publicly available US stocks, tokenization “will be exposed to millions of investable assets and allow for custom portfolios to be built to suit individual risk profiles, yield preferences, geography and values.”
Global Race for Tokenization Leadership
Meanwhile, both Davis and Grachev disagree that any region or country is likely to achieve broader mainstream adoption of the stocks that were first tokenized. For Grachev, Europe is already expanding as it has MICA regulations. This “provides an explicit regulatory framework that allows the platform to be deployed without uncertain speculation.” The US is currently catching up, but Grachev believes that the country’s regulatory uncertainty creates institutional hesitation.
Meanwhile, Davis supports the United Arab Emirates (UAE). Because we have already put in place regulations that allow for the tokenization of assets through assets that refer to virtual assets (ARVA) tokens, “makes the process much easier.” However, when asked to choose between the European Union and the US, Davis said he would choose the latter because he is a “global economic power.” He said the EU’s over-adjustment preference is Achilles’ heels who see it fall behind the US
