Tokenized Stock: Regulatory Hurdles Outweigh Tech Challenges

Stock Tokenization: Compliance is King

The concept of tokenized real-world assets (RWAs) aims to broaden participation in capital markets. While offering easier access to assets like U.S. equities and government bonds is appealing, simply providing access isn't enough. For stock tokenization to truly succeed, it must overcome significant operational, legal, and educational hurdles.

Past Attempts and Regulatory Pushback

Tokenizing stocks isn't new. During the 2020-2021 crypto boom, exchanges like FTX and Binance experimented with tokenized equities to provide global users with easier access to U.S. markets.

• FTX: Partnered with CM Equity in 2020 to offer tokens backed 1:1 by shares of companies like Tesla and Apple.
• Binance: Launched a similar offering in 2021.

However, regulatory warnings from BaFin and the SEC, which deemed these products unlicensed securities, forced both FTX and Binance to discontinue their services. These instances highlighted that the main obstacle isn't technology, but regulatory compliance.

The Fragmented Regulatory Landscape

Regulatory approaches to tokenized stocks vary significantly across jurisdictions:

• U.S.: The SEC views tokenized equity offerings as securities, subject to strict requirements including broker-dealer and ATS licenses.
• Europe: Tokenized stocks fall under MiFID II and MiCA regulations.
• Asia and the Middle East: Regulators like MAS, FINMA, and ADGM have created sandboxes for RWA tokenization, primarily for qualified investors.

Regulators are open to market experimentation and likely to adapt their frameworks as more data emerges from ongoing pilot programs.

Understanding Different Tokenized Stock Models

The term "tokenized stock" can refer to different mechanisms, each with trade-offs:

• Custodial-backed models: Tokens fully collateralized by real-world equities held in regulated custodians. They may offer economic exposure but often lack shareholder rights.
• CFD models: Tokenized stocks provide synthetic price exposure without actual asset ownership, often for short-term trading.
• DeFi synthetic models: Enable permissionless, on-chain exposure to real-world asset prices but carry risks like oracle failures and smart contract vulnerabilities.

It's important to note that owning a tokenized Tesla stock doesn't necessarily mean owning part of Tesla Company. Users often lack voting rights, dividends, or guaranteed redemption mechanisms. Greater emphasis must be placed on educating retail users to ensure they understand the risks associated with these assets.

Building a Responsible Future

As tokenized finance expands, industry stakeholders must prioritize infrastructure that balances openness with integrity. This includes auditability, clear asset linkages, and regulatory-aligned stablecoin frameworks. Exchanges can promote responsible asset design, transparent disclosures, and risk-managed user access.

Towards a More Transparent Financial System

The future of RWAs like tokenized stock aims for a more understandable, interoperable, and resilient financial system. Tokenization should expand participation with clarity, distinguishing between exposure and entitlement, and liquidity and redemption.

By prioritizing standards, transparency, and a willingness to confront complexity, tokenized finance can complement and improve traditional markets. Platforms like Codeum can help projects securely launch tokenized assets by providing thorough smart contract audits and KYC services.