Tokenized Stocks Face Legal Hurdles Due to Regulatory Ambiguity

Tokenized stocks and private equity face significant legal challenges due to their ambiguous regulatory status. These emerging real-world assets (RWAs) do not grant holders the same legal rights as traditional asset owners, according to industry executives and attorneys. Investors in tokenized equity instruments must understand the fundamental attributes, such as dividend streams, profit-sharing arrangements, or capital appreciation, as they do not own actual shares but hold tokens issued by intermediaries. These tokens may entitle holders to payouts if the underlying shares increase in value or are sold, but there is no direct claim on company assets, no voting rights, and no access to internal financial information.

This distinction became evident when the mixed-asset trading platform announced offering OpenAI and SpaceX “private equity” tokens to users, leading OpenAI to clarify that the tokens are not equity in the company. Attorney Tyler Yagman of a legal firm highlighted the potential for confusion in marketing tokenized securities to retail investors. Despite this, tokenized equities offer a compelling use case by integrating multiple functions of a securities marketplace into a single technology. Yagman called for clear and comprehensive regulations to democratize access to previously inaccessible asset classes.

Several brokerage firms are exploring tokenized equities trading, with platforms like Kraken and Bybit already offering trading in over 60 publicly listed companies. Centrifuge, a blockchain platform, announced a partnership to tokenize the S&P 500 stock market index. Crypto exchange giant is reportedly seeking approval to offer tokenized stock trading. The US Securities and Exchange Commission (SEC) has shown receptiveness to industry requests for tokenized financial assets, with chairman Paul Atkins emphasizing the importance of advancing innovation in the marketplace.

The regulatory ambiguity surrounding tokenized equity is a significant concern for the financial industry. The legality of tokenized shares can differ greatly depending on the region, with some areas subjecting them to stringent regulatory scrutiny while others allow minimal oversight. This lack of clear guidelines creates a challenging environment for companies and investors, as they navigate compliance and legal risks. Attorneys have emphasized the importance of regulatory compliance to mitigate these risks, reducing the likelihood of facing penalties and liabilities in both litigation and arbitration cases.

For investors, the regulatory grey zone poses challenges in assessing the risks and benefits of tokenized equity. The lack of clear guidelines can deter potential investors due to the unclear legal status and make it difficult to compare tokenized equity with traditional securities. Despite these challenges, companies and investors can navigate the regulatory grey zone by seeking legal advice, implementing robust compliance measures, and engaging with regulators to seek clarification and advocate for clear guidelines. By doing so, they can mitigate legal risks and capitalize on the opportunities presented by tokenized equity.