Tokenized Stocks Navigate Legal Gray Zone Amid Regulatory Questions

Industry executives and attorneys warn that tokenized stocks and private equity face significant legal challenges due to the absence of clear regulatory frameworks. These emerging assets are situated in a “gray zone,” offering holders rights fundamentally different from those granted by traditional securities.

John Murillo, Chief Business Officer at fintech firm B2BROKER, stressed the importance of discerning the specific rights afforded by any tokenized equity instrument. He advised investors to examine attributes like dividend entitlements and voting rights, cautioning:

“Investors do not own actual shares; they hold tokens issued by intermediaries, which may entitle them to payouts if the underlying shares increase in value or are sold.”

Murillo further noted the lack inherent in tokenized instruments: “There is no direct claim on company assets, no voting rights, and no access to internal financial information.”

This ambiguity gained prominence following Robinhood’s promotion of tokenized “private equity” offerings for European users representing OpenAI and SpaceX. OpenAI subsequently clarified these tokens did not represent company equity.

Legal analyst Tyler Yagman of Ferraro Law corroborated the concerns, stating: “Incidents like the ‘OpenAI Token’ event will recur, creating confusion among retail investors.”

Despite the regulatory uncertainty, Yagman acknowledged compelling use cases for tokenized equity. He stated tokenized securities “integrate multiple functions of a securities marketplace into a single technology” and “democratize” access to previously exclusive asset classes, advocating for clear regulations.

Related: TradFi body urges SEC reject special treatment for tokenized stocks

Related: NASA contemplating tokenization pilot project for space-based RWAs

Key Players Push for US Tokenized Equity Trading Amid SEC Openness

Robinhood is not alone in exploring or offering tokenized equity trading. Other entities include:

• Crypto exchanges Kraken and Bybit, offering tokenized shares of over 60 publicly listed companies
• Centrifuge, a blockchain platform integrating RWAs into DeFi, partnering with S&P Dow Jones Indices to tokenize the S&P 500 index
• Crypto exchange Coinbase, reportedly seeking SEC approval for tokenized stock trading

The U.S. Securities and Exchange Commission appears receptive to industry requests. Chairman Gary Gensler commented: “We are accepting a very broad invitation from participants in these markets… to come talk to us.”

Magazine: Tokyo Stock Exchange implements live tokenization testing program