Tokenized Stocks Divide Regulators: Innovation vs. Market Stability

The rapid expansion of tokenized stocks, blockchain-based instruments tracking traditional equities, has sparked growing concerns among traditional financial institutions and regulators over investor protection and market stability. As crypto firms like Robinhood, Gemini, and Coinbase pursue tokenized equity offerings in the U.S. and Europe, critics warn that these products often lack the legal rights, disclosures, and protections inherent to conventional stocks Crypto race to tokenize stocks raises investor protection flags^[1]. The combined value of tokenized public stocks geared toward retail investors surged to $412 million as of September 2025, up from just a few million dollars a year earlier, according to RWA.xyz Crypto race to tokenize stocks raises investor protection flags^[1].

Tokenized shares, marketed as 24/7 tradable and instantly settled alternatives to traditional equities, frequently resemble derivatives rather than direct ownership. For example, Robinhood's tokenized offerings include derivative contracts backed by fund units in special-purpose vehicles, rather than direct stock ownership Crypto race to tokenize stocks raises investor protection flags^[1]. Similarly, tokens pegged to companies like Nvidia and Tesla vary in structure and rights, with some offering no voting rights or dividends Crypto race to tokenize stocks raises investor protection flags^[1]. Legal experts emphasize that these synthetic instruments shift the burden of understanding risks onto investors Crypto race to tokenize stocks raises investor protection flags^[1].

Regulatory scrutiny is intensifying. The World Federation of Exchanges (WFE) has urged global regulators to enforce securities laws for tokenized assets, citing risks to market integrity and liquidity fragmentation Regulators Warn Investors About Risks of Tokenized Stocks^[2]. In the U.S., the SEC's crypto-friendly chair, Paul Atkins, has proposed exemptions for tokenized securities, a move opposed by Wall Street firms like Citadel Securities, which argue that such exemptions could destabilize traditional markets Crypto race to tokenize stocks raises investor protection flags^[1]. The European Securities and Markets Authority (ESMA) has also highlighted the need for clearer oversight, acknowledging the potential reputational risks for companies whose shares are tokenized without their consent Regulators Warn Investors About Risks of Tokenized Stocks^[2].

Industry players remain divided on regulatory frameworks. While Nasdaq proposed rule changes to enable tokenized securities trading on its platform-ensuring fungibility with traditional shares and identical material rights-critics argue that current derivatives rules, such as Europe's MiFID, are insufficient to address the complexities of tokenized assets . Coinbase is reportedly seeking SEC approval for tokenized stocks that would grant investors full legal rights, while Kraken and Ondo Finance emphasize compliance with anti-money laundering and bankruptcy protections Crypto race to tokenize stocks raises investor protection flags^[1].

The debate underscores a tension between innovation and investor protection. Proponents argue that tokenization enhances liquidity and reduces transaction costs, but regulators caution that misrepresenting tokenized assets as traditional stocks could mislead investors. As the SEC and global authorities weigh their responses, the outcome may shape whether tokenized equities evolve as a legitimate financial instrument or remain a niche product fraught with regulatory and market risks.