The Regulatory and Structural Risks of Tokenized Stocks for Retail Investors

The tokenized stock market, projected to reach $1.34 trillion by 2030, is reshaping global finance through 24/7 trading and fractional ownership [4]. Yet, this innovation comes with profound risks for retail investors, particularly in custody, liquidity, and regulatory ambiguity. As platforms like Robinhood and Coinbase introduce tokenized shares of private companies, the lack of traditional investor protections—such as voting rights and dividend entitlements—has created a dangerous disconnect between perceived and actual ownership [1].

Regulatory Uncertainty and Market Fragmentation

The U.S. Securities and Exchange Commission (SEC) has repeatedly affirmed that tokenized securities are subject to existing securities laws, emphasizing compliance with registration, disclosure, and anti-fraud rules [4]. However, legislative efforts like the CLARITY Act aim to redefine oversight by narrowing SEC jurisdiction and expanding the Commodity Futures Trading Commission’s (CFTC) role [3]. This shift risks creating enforcement gaps, as seen in the SEC v. Ripple Labs case, where the agency’s application of the Howey test to tokenized assets remains contested [1]. Meanwhile, the European Securities and Markets Authority (ESMA) has warned that tokenized stocks may mislead investors into believing they hold traditional equity when they do not [4].

Structural Risks: Custody, Settlement, and Liquidity

Tokenized stocks face inherent structural challenges. Custody issues arise from reliance on smart contracts, which lack the legal enforceability of traditional custodial systems. A 2025 study revealed that 40% of investors cite liquidity as a major barrier, with tokenized assets often trading on fragmented platforms with minimal price discovery [1]. For example, tokenized real estate and private credit assets show long holding periods and limited secondary market activity, undermining the promise of liquidity [1]. Settlement risks further complicate matters: while tokenization theoretically enables atomic settlement, regulatory and technical hurdles prevent the seamless transfer of voting rights and dividend entitlements [3].

Investor Protection Gaps and Real-World Harms

Retail investors are particularly vulnerable. Platforms like Robinhood have faced scrutiny for offering tokenized shares of private companies (e.g., OpenAI) without disclosing limitations such as the absence of shareholder rights [1]. The collapse of Celsius Network in 2022 exemplifies systemic risks: its centralized lending model and governance token (CEL) lost 60% of value during a crypto "bank run," leaving investors unable to access funds [2]. Similarly, the SEC’s enforcement actions against unregistered tokenized securities highlight the fragility of markets lacking robust compliance frameworks [1].

The Path Forward: Balancing Innovation and Protection

Regulators and market participants must address these risks through enhanced disclosures, legal clarity, and investor education. The SEC’s "Project Crypto" initiative and the EU’s Markets in Crypto-Assets Regulation (MiCA) represent steps toward modernizing oversight, but gaps persist. For instance, smart contract vulnerabilities—such as coding flaws or hard forks—remain unaddressed in most frameworks [3]. Retail investors are advised to engage only with platforms operating under robust regimes, such as Singapore’s CMS or the EU’s MiCA, to mitigate systemic risks [1].

In conclusion, while tokenized stocks offer transformative potential, their structural and regulatory risks demand urgent attention. Without a balanced approach that prioritizes market integrity and investor protection, the promise of this innovation may come at a steep cost for retail participants.

Source:
[1] Tokenized Stocks: Promise vs. Pitfalls for Retail Investors [https://www.ainvest.com/news/tokenized-stocks-promise-pitfalls-retail-investors-2509/]
[2] A Deep Dive into the Celsius Liquidity Crisis [https://calebandbrown.com/blog/why-crypto-lender-celsius-froze-withdrawals/]
[3] Investor Risks in Tokenized Stocks: A Regulatory and Market Analysis [https://www.ainvest.com/news/investor-risks-tokenized-stocks-regulatory-market-analysis-2509/]
[4] Tokenized Stocks: Navigating Risks and Opportunities [https://www.onesafe.io/blog/understanding-tokenized-stocks-risks-opportunities]