With relaxed laws in crypto in the United States (Read Here), major players in the crypto industry are starting to push the limits of legality with newer products. Coinbase, Robinhood, and Kraken are moving into RWA (real world assets), taking the low-hanging fruit to start with: stocks.
This is nothing new. Some companies have already tried this, including the late Terra Luna network. One of the main issues was the legality of it all. Except for Coinbase, which has approached the US Securities and Exchange Commission to sell stocks, others have only been announcing the chains that will be involved and “how great!” this is for crypto and people in general, without answering very serious questions about consumer safety and the legality of the stock itself.
But before we get into the concerns and real issues with this, we first need to go to the basics. What is a stock?
What is a Stock?
A stock represents ownership in a company. When you buy shares of stock, you become a partial owner of that business, with your ownership percentage determined by how many shares you own relative to the total shares outstanding.
How Stocks Work
As a shareholder, you typically get certain rights like voting on major company decisions and potentially receiving dividends (payments from company profits). If the company does well, your stock value may increase; if it struggles, the value may decrease.
How Stocks Get Issued
Companies issue stocks through several methods:
Initial Public Offering (IPO): This is when a private company first sells shares to the public. The company works with investment banks to determine pricing, file regulatory paperwork with the SEC, and market the shares to investors. This process can take months and involves extensive financial disclosure.
Secondary Offerings: Already-public companies can issue additional shares to raise more capital. This dilutes existing shareholders’ ownership percentage but brings in new funds for the company.
Private Placements: Companies can sell shares directly to specific investors (like institutional investors or wealthy individuals) without going through public markets.
Employee Stock Options: Companies often grant employees the right to buy shares at a set price as part of compensation packages.
The proceeds from stock sales go directly to the company (in primary offerings), giving them capital to invest in growth, pay down debt, or fund operations. Once issued, stocks trade on exchanges like the NYSE or NASDAQ, where investors buy and sell among themselves rather than directly with the company.
How Stocks Get Tokenized
Now that we’ve covered the basics, let’s see how a stock gets tokenized.
The Tokenization Process
Asset Preparation: The company or a third-party service provider creates digital tokens that represent fractional or whole shares of the stock. Each token corresponds to a specific ownership stake in the company.
Blockchain Platform: The tokens are created on a blockchain network (like Ethereum, Polygon, or specialized security token platforms). Smart contracts define the token’s properties, including transfer rules, dividend distributions, and voting rights.
Regulatory Compliance: Since tokenized stocks are still securities, they must comply with securities laws. This often involves working with regulatory bodies and ensuring proper investor accreditation and reporting.
Custody and Storage: The underlying traditional shares are typically held by a qualified custodian, while investors hold the digital tokens that represent claims on those shares.
The Promise and the Problems
The benefits of this cannot be denied: 24-hour global transactions, self-custody, and future programmable assets could be a game changer for regular consumers looking to get into the stock market, particularly the American one. (Yes, there are other stock markets around the world.) But the reality is there are still a lot of questions that have not been answered that could harm consumers or cause a lot of trouble in the future. So we’ll start with the most basic concerns.
Dividends
A dividend stock is a stock that pays dividends—regular cash payments that companies distribute to their shareholders from their profits.
How Dividends Work
When a company earns profits, it can either reinvest that money back into the business or return some of it to shareholders as dividends. Companies that consistently pay dividends typically have stable, predictable cash flows and mature business models.
If you buy a dividend stock in Robinhood, you get paid in US dollars—simple. But it’s not clear how this will work with a tokenized stock. The obvious answer would be with stablecoins, but that has not been confirmed yet. Also, depending on the country you’re in, this could have complications with exchange rates and taxes.
Voting Power
Once you’ve purchased stock in a public company, you get voting rights depending on the type. This voting power lets you influence the direction of where the company will go in their yearly Annual General Meeting (AGM). Depending on the amount of stock you have, you can have a say. With these tokenized assets, we really don’t know if this would be possible, since some companies require you to be either a registered entity or a resident and citizen of the country where the company is based. Again, this will depend on various factors, but it’s still not clear how it will work out.
Consumer Protection
Recently, Robinhood introduced tokenized assets of OpenAI and other companies that are not public and, for now, are non-profit organizations. This is an automatic red flag. Not only that, but the fact that they announced they will tokenize private companies without saying how you can be protected from fraudulent companies engaging in insider trading and pump-and-dump schemes with the tokens is concerning. It also doesn’t specify if you’re covered by the Securities Protection Acts if you’re abroad.
This is just starting, but it will take time to know what’s going to happen. This benefits a lot of people who are unable to buy stocks abroad, although there are many companies around the world that do this, and most of them have no protections for consumers. So don’t expect this tokenization to be any different. This also opens the floodgates for shady characters in the crypto industry to engage in their usual activities, such as rug pulls and pump-and-dumps, in a new form of asset. So please be very careful when using this.
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