Tokenized Stock 'Mimics' Threaten Market Integrity, Warns WFE
Key Concerns Over Tokenized Stocks
Global stock exchanges are raising alarms about 'tokenized stocks,' arguing they are essentially unregulated 'copycats' that lack the investor protections afforded to traditional shareholders. The World Federation of Exchanges (WFE), representing these exchanges, has formally voiced its concerns, stating that these instruments could compromise market stability.
The WFE argues that these 'mimics' operate in regulatory grey areas, potentially leading to investor risk and market fragmentation. The organization released a statement emphasizing the need for regulatory action.
"The emergence of unregulated platforms offering so-called tokenised equities raises serious concerns. These offerings often bypass established safeguards, creating risks for investors, undermining market integrity, and enabling regulatory arbitrage."
Recent interest in tokenized stocks has been fueled by platforms like Robinhood, which introduced the offering to its European user base, providing access to U.S. equities. Backed Finance has also launched a similar product (xStocks) in collaboration with Kraken and Solana-based platforms. Coinbase, too, has expressed interest in listing similar products.
WFE Calls for Regulatory Action
The WFE contends that tokenized stocks are essentially derivatives that do not provide the same level of retail investor protection as traditional stocks. In their communication with regulators, the stock exchanges cautioned that this trend could fragment liquidity and divert users from regulated exchanges.
"Tokenised equities traded outside established and regulated venues may divert order flow from exchanges and other regulated venues, ultimately working against the interest of investors, especially retail."
WFE CEO Nandini Sukumar stated the organization's support for innovation, but insisted that tokenized stock issuers should be held to the same stringent regulatory standards as traditional exchanges.
"These mimicked products do not meet the high standards which investors are used to."
She further elaborated that some firms are actively seeking to circumvent regulations, either by seeking 'no action' relief or operating in legal grey areas, adding that retail investors might incorrectly assume they have the same rights as traditional shareholders.
"Investor protection must remain paramount, and regulation must evolve to ensure that new technologies are not used as a mask for risk and opacity."
Industry Response
This pushback from traditional finance mirrors recent opposition to other crypto innovations. For example, a U.S. banking group has advocated for amendments to the GENIUS Act to address loopholes concerning interest payments on stablecoins.
Alexander Grieve, VP of government affairs at Paradigm, suggested that these actions indicate a growing concern among traditional finance firms about protecting their market share, urging the crypto industry to prepare for potential regulatory battles.