Tokenized Stocks Near You: 5 Key Insights

The Rise of Tokenized Stocks

Wall Street firms are actively exploring the transformation of traditional assets like stocks into digital tokens, leveraging the technology that powers cryptocurrencies such as Bitcoin. While tokenized stocks have not yet entered the U.S. market, which is the world’s largest, they are already being traded in markets across Europe and Asia. Advocates argue that tokenized stocks could revolutionize the way investors trade, offering 24/7 trading capabilities and the ability to own fractional shares of high-priced stocks. However, skeptics question the necessity of trading on weekends or during late-night hours, pointing out that low trading volumes can lead to inefficiencies and higher costs.

The movement to tokenize assets has already taken hold for certain types of investments, including Treasurys and gold. Tokenized stocks, however, remain largely unexplored in the U.S. Despite this, major exchanges like Nasdaq and the New York Stock Exchange are working on introducing tokenized stocks, signaling a potential future where shares are traded on blockchain platforms.

What Are Tokenized Stocks?

Tokenized stocks are digital representations of shares from publicly traded companies, recorded on a blockchain. Each token corresponds to a single share of stock. Currently, most of the tokens available for trading are considered derivatives rather than actual stocks, meaning they do not grant full ownership rights such as voting or dividend entitlements. However, the future vision is for these tokens to offer the same benefits as traditional stocks.

For instance, Nasdaq is developing a plan to make tokenized stocks the official digital version of existing stocks. A tokenized version of Amazon stock offered by Kraken’s xStocks tracks the underlying share price, though it can diverge during periods of low trading activity. Platforms like xStocks also allow for fractional ownership, enabling investors to purchase small portions of a stock for just a few dollars.

Why Investors Are Interested in Tokenized Stocks

The appeal of tokenized stocks lies in their ability to enable 24/7 trading, a feature that crypto investors are familiar with but was previously unavailable in traditional markets. This flexibility, combined with the possibility of fractional ownership, makes expensive blue-chip stocks more accessible to a broader range of investors.

Additionally, Wall Street executives believe that blockchain technology could streamline the settlement process for stock transactions, reducing intermediary costs. The current T+1 settlement process, where cash and shares change hands after the next business day, could be accelerated through tokenization. This could lead to faster transactions and potentially smoother market operations during times of stress, such as the 2008 or 2020 financial crises.

Where Can People Trade Tokenized Stocks Now?

Currently, individual investors in the U.S. do not have access to tokenized stocks. However, companies such as Robinhood, Coinbase, Kraken, and Gemini have introduced blockchain-based versions of U.S. stocks and exchange-traded funds for non-U.S. customers. Asset managers like BlackRock and JPMorgan Chase also offer tokenized money-market funds, though these are primarily targeted at institutional or high-net-worth investors.

Both Nasdaq and NYSE are seeking regulatory approval to issue securities represented as digital tokens on a blockchain. Their proposals are seen as crucial steps toward bringing tokenized stocks to the U.S. market, but they are still pending final approval from regulators.

Risks Associated with Tokenized Stocks

Despite their potential, tokenized stocks come with significant risks. Some digital tokens tracking popular U.S. stocks have experienced large deviations from their underlying prices, primarily due to thin trading volumes. This makes them vulnerable to sharp price fluctuations when there is a mismatch between buying and selling activity.

Regulators have also raised concerns about the potential for insider trading and market manipulation, as current oversight mechanisms may not apply to tokenized stocks. In traditional markets, exchanges monitor suspicious activity, and brokerages must verify customer identities. These controls are not yet in place for tokenized assets.

What’s Next for Tokenized Stocks in the U.S.?

Major exchanges like Nasdaq and NYSE have not yet received final approval from the Securities and Exchange Commission (SEC) for their tokenization proposals. Meanwhile, smaller crypto companies are exploring alternative methods to make tokenized stocks available to individual investors.

In January, the SEC issued guidance on tokenization, distinguishing between tokens issued by companies themselves and those created by third parties such as exchanges. More recently, federal banking agencies indicated that for banks to hold tokenized assets as real assets on their balance sheets, the tokens must provide the same legal rights as the original securities.

As the landscape continues to evolve, the future of tokenized stocks in the U.S. remains uncertain, but the potential for transformation is clear.