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Robinhood stock surged last week on news that the brokerage would offer tokenized stocks to users in Europe.
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Tokenization is the act of creating a digital representation of an asset on the blockchain.
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The technology could allow for more seamless trading, but investors should be aware of unique risks.
Robinhood stock surged last week after the company announced that users in Europe would be able to trade “tokenized” versions of popular US stocks and ETFs, including shares of private companies like SpaceX and OpenAI.
OpenAI ultimately responded by issuing a warning that it doesn’t endorse the move and wasn’t involved in issuing any equity to back these tokenized shares.
Still, the excitement for the blockchain-enabled assets remains high, and Robinhood CEO Vlad Tenev brushed off OpenAI’s concerns on Tuesday, adding that the firm is in talks with European regulators to start offering tokenized shares to users of its platform.
Here’s what to know about the crypto-like assets.
What are tokenized stocks?
“Tokenization” isn’t a term many people outside the crypto community are probably familiar with. It’s essentially the process of turning something into a digital token and securing it to the blockchain, which is the super-secure digital ledger that can track ownership or transactions and cannot be tampered with. It’s the digital infrastructure that underpins bitcoin.
Tokenization, the thinking goes, allows for faster trading and settlement, and allows for assets to be traded outside of normal exchange hours.
Many things can be tokenized, in theory. If you recall the NFT craze, those were basically tokenized representations of digital artwork. For stocks, a tokenized version would be backed by the real thing. However, investors should be aware that the tokens might not necessarily be precisely correlated with the price of the underlying asset.
Eric Croak, CFP, President of Croak Capital, noted that despite the terminology, tokenized shares of OpenAI and SpaceX are not equity by any standard legal definition.
“You do not get ownership rights. You do not vote. You do not get a dividend,” he stated. “In most cases, these tokens are just synthetic exposure, i.e., someone else owns the real thing and issues you a digital claim that tracks the price they assign. It’s more like a futures contract dressed up as equity.”
Johnny Gabriele, head analyst of Blockchain Economics and AI Integration at The Lifted Initiative, provided further context on the move to tokenized private shares.
“They don’t need permission to tokenize an asset they already own,” he noted. “However, that does make that a derivative of a private stock, which is very, very different from owning an equity that trades on the New York Stock Exchange.”
Who can trade these assets?
They’re not available to everyone. Robinhood’s rollout of tokenized stocks was extended to European users of its platform, and for the most part, US investors cannot trade them.
Some firms are experimenting with tokenized assets on their own proprietary blockchains, but tokenized stock trading is mainly available to offshore investors.
How should investors think about owning tokenized stocks vs. the real thing?
Simply putting something on the blockchain doesn’t make it a safe investment.
While OpenAI and SpaceX are two of the world’s most valuable privately held companies, they aren’t subject to the same financial disclosure requirements as public companies.
Assessing whether investing in tokenized shares of private companies is a good idea can quickly become complicated.
“Just because it’s on a blockchain does not mean there is someone on the other side of the trade. Investors assume they can get out whenever they want, but many of these platforms have restrictions, lockups, or limits on how much you can sell at once.”
Ian Kane, founder and CEO of blockchain infrastructure firm Firepan, noted the opacity and legal ambiguity risks that come with owning tokenized shares. He described the dynamic as having economic exposure rather than an ownership stake.
“Investors should scrutinize who’s issuing the token, what legal rights are embedded, and how pricing is determined. If you can’t get a clear answer in five minutes, walk away as it’s either too complicated or too opaque for retail capital,” he said.
Regulation is also a challenge. Tokenization is a new frontier of finance, and the rules of the road are still being set. If a platform violates local regulations, investors could lose access to their accounts.
Read the original article on Business Insider
