Robinhood's Tokenized Stocks: A New Frontier in Equity Trading

Robinhood has rolled out tokenized stocks on the Arbitrum network for EU customers, allowing users to trade stock tokens without handling wallets or seed phrases. Other firms have followed, with Gemini adding tokenized equities to Arbitrum and 60 token classes launching on Solana via Backed's xStocks. Experts question whether tokenized stocks grant true ownership, as they are technically derivatives backed by actual shares held by custodians. Robinhood is operating in legal gray areas, with some regulators urging caution and others exploring tokenization as an innovation. Tokenization enables 24/7 trading and DeFi use, potentially disrupting traditional markets.

Robinhood has recently rolled out tokenized stocks on the Arbitrum network for EU customers, enabling users to trade stock tokens without managing wallets or seed phrases. This move follows similar initiatives by other firms, such as Gemini adding tokenized equities to Arbitrum and 60 token classes launching on Solana via Backed's xStocks [1].

Accessibility and Innovation

Tokenized stocks offer several advantages. They provide round-the-clock trading, which is a significant improvement over traditional markets that are closed 81% of the time. This 24/7 accessibility can be particularly beneficial for global investors. Additionally, tokenization can facilitate the use of decentralized finance (DeFi) tools, such as borrowing, lending, and swapping stock tokens [1].

Ownership and Legal Concerns

Despite these advantages, there are concerns about the true ownership of tokenized stocks. Many experts argue that these tokens only promise a claim on a real share held by a custodian, rather than granting true ownership. For instance, Robinhood's tokenized stocks fall under EU derivative rules, even though they are backed by actual shares held by licensed broker-dealers [1].

Legal experts have raised red flags about these models. Robinhood faced regulatory scrutiny when it tokenized its private shares without transfer approval, leading to an investigation by Lithuanian authorities [1]. These legal uncertainties highlight the need for clearer regulations before tokenized stocks can fully take off.

Market Disruption and Risks

Tokenized stocks have the potential to disrupt traditional markets by providing more accessible and efficient trading options. However, they also come with risks. After-hours trading can lead to price slippage or wider spreads, and multiple token issuers for the same stock could fragment liquidity, increasing counterparty risk [1].

Moreover, tokenized stock models have faced challenges in the past. Projects like Synthetix saw little uptake and faded quickly, while Binance and Mirror pulled their versions due to regulatory pressure. Even FTX’s tokenized ETFs collapsed after the FTX breakdown [1].

Gemini's Expansion

Gemini has expanded its tokenized stock offerings to include iconic brands like Nike, McDonald’s, and Starbucks for EU investors via the Arbitrum blockchain. This move follows Gemini's broader strategy to merge traditional finance with blockchain efficiency. By offering fractional ownership and 24/7 trading, Gemini aims to attract retail investors looking to diversify their portfolios [2].

Conclusion

Tokenized stocks represent a significant shift in the financial landscape, offering increased accessibility and innovation. However, they also face legal and regulatory challenges that need to be addressed. As the industry works towards building a legal framework and gaining institutional trust, tokenized stocks could reshape how people invest.

References

[1] https://www.tipranks.com/news/tokenized-stocks-are-back-from-the-dead-thanks-to-robinhood
[2] https://coinfomania.com/gemini-lists-nike-mcdonalds-starbucks-stocks-for-eu-on-arbitrum/