Tokenized stocks: a revolution in financial efficiency in new bottles

07-10

This article is machine translated

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Original Title: New Skin, Old Instincts

Original Author: PRATHIK DESAI

Translated by: Saoirse, Foresight News

In the late 1980s, Nathan Most worked at the American Stock Exchange. However, he was neither a banker nor a trader, but a physicist who had been deeply involved in the logistics industry for years, working in metal and commodity transportation. His focus was not on financial instruments, but on practical systems.

At that time, mutual funds were the mainstream way for investors to gain broad market exposure. While these products offered diversification opportunities, they suffered from trading delays: investors could not buy or sell at any time during the trading day, and had to wait until market closing to know the transaction price (it is worth noting that this trading model continues to this day). For investors accustomed to real-time stock trading, this lagging trading experience was already outdated.

To address this, Nathan Most proposed a solution: develop a product that tracks the S&P 500 index but can be traded like a single stock. Specifically, he aimed to structurally package the entire index and list it on the exchange in a new form. This concept was initially met with skepticism, as the design logic of mutual funds was different from stock trading, the legal framework was blank, and the market seemed to have no such demand.

But he still insisted on pushing forward with this plan.

In 1993, the Standard & Poor's Depositary Receipts (SPDR) made its debut with the trading code SPY, which was essentially the first Exchange Traded Fund (ETF): an investment tool representing hundreds of stocks. Initially viewed as a niche product, it gradually became one of the most actively traded securities globally. On most trading days, SPY's trading volume even exceeded the constituent stocks it tracked. The liquidity of this synthetic product surprisingly surpassed its underlying assets.

Today, this history is once again meaningful. The reason is not the emergence of a new fund, but the transformation happening on the blockchain.

Investment platforms like Robinhood, Backed Finance, Dinari, and Republic are successively launching tokenized stocks. These blockchain-based assets aim to map the stock prices of private companies such as Tesla, NVIDIA, and even OpenAI.

These tokens are positioned as "risk exposure tools" rather than ownership certificates. Holders are neither shareholders nor have voting rights. This is not a traditional stock purchase, but holding a token linked to the stock price. This distinction is crucial and has already sparked controversy, with OpenAI and Elon Musk expressing concerns about Robinhood's tokenized stocks.

@OpenAINewsroom

Robinhood CEO Tenev subsequently had to clarify that these tokens are actually a channel for retail investors to access these private assets.

Unlike traditional stocks issued by companies, these tokens are created by third parties. Some platforms claim to provide 1:1 backing by custodying real stocks, while others are entirely synthetic assets. Although the trading experience seems familiar, with price movements consistent with stocks and interfaces similar to brokerage apps, the legal and financial substance behind them is often more fragile.

Nevertheless, they still attract a specific type of investor, especially non-US investors who cannot directly access US stocks. If you live in Lagos, Manila, or Mumbai and want to invest in NVIDIA, you would typically need to open an overseas brokerage account, meet high minimum deposit requirements, and go through a lengthy settlement cycle. Tokenized stocks, as tokens traded on-chain and tracking the underlying stock exchange's price movements, eliminate these trading barriers. No wire transfers, no form-filling, no access restrictions - just a wallet and a trading market.

This investment channel may seem novel, but its operating mechanism has commonalities with traditional financial instruments. However, practical issues remain: most platforms like Robinhood, Kraken, and Dinari do not operate in emerging markets beyond US stocks. For Indian users, for example, it is still unclear whether they can legally or practically purchase tokenized stocks through these channels. If tokenized stocks truly want to expand global market participation, the resistance they face will not only be technical but also include regulatory, geographical, and infrastructure challenges.

Derivatives Operating Logic

Futures contracts have long provided a way to trade based on expectations without directly holding the underlying asset; options allow investors to bet on stock price volatility, rise and fall timing, or trend direction without actually buying the stock. In either case, these tools became "alternative channels" for investing in underlying assets.

The birth of tokenized stocks follows a similar logic. They do not claim to replace traditional stock markets but provide another way for people long excluded from public investment to participate.

The development of new derivatives often follows a pattern: initially, the market is full of confusion, investors are uncertain about pricing, traders are wary of risks, and regulators take a wait-and-see approach. Then speculators enter, probing the product's boundaries and exploiting market inefficiencies. If the product proves useful, it is gradually accepted by mainstream participants and becomes market infrastructure. Index futures, ETFs, and even CME and Binance's Bitcoin derivatives followed this path. They were not initially meant for ordinary investors but were more like playgrounds for speculators: faster trading, higher risks, but also more flexible.

Tokenized stocks may follow the same path: first, retail investors use them to trade hard-to-buy assets like OpenAI or unlisted companies; then arbitrageurs discover they can profit from price differences between tokens and stocks. If trading volume stabilizes and infrastructure keeps up, institutional departments might join, especially in jurisdictions with improved compliance frameworks.

The early market may look chaotic: insufficient liquidity, large bid-ask spreads, and sudden price jumps during weekends. But derivative markets always start this way, never perfect replicas but more like stress tests - seeing if there's market demand before the asset itself adjusts.

This model has an interesting aspect that can be seen as either an advantage or disadvantage, depending on your perspective - the time difference issue.

Traditional stock markets have opening and closing times, and most stock derivatives trade according to stock market hours, but tokenized stocks do not follow these rules. For example, if a US stock closes at $130 on Friday and a major news event occurs on Saturday (like an early financial report leak or geopolitical event), the stock market is closed, but the token may already be trading. This allows investors to factor in news impacts during market closure.

The time difference only becomes a problem when tokenized stock trading volume significantly exceeds traditional stocks. Futures markets address such issues through funding rates and margin adjustments, ETFs stabilize prices through designated market makers and arbitrage mechanisms, but tokenized stocks have not yet established these mechanisms. So prices may deviate, liquidity may be insufficient, and whether they can closely track stock prices depends entirely on the issuer's reliability.

But this trust is unreliable. For instance, when Robinhood launched tokenized stocks for OpenAI and SpaceX in the EU, both companies denied participation, stating they had no collaboration or formal relationship with the business.

This doesn't mean tokenized stocks are problematic, but you must consider: are you buying price exposure or a synthetic derivative with blurry rights and recourse?

@amitisinvesting

For those feeling anxious about this matter, it's actually not a big deal. OpenAI issued this statement just to be cautious, as they had to do so. As for Robinhood, they simply launched a token to track OpenAI's valuation in the private market, just like tokens for over 200 other companies on their platform. You're not actually buying these companies' stocks, but stocks are essentially certificates, and the digital form of these assets is what matters. In the future, there will be thousands of decentralized exchanges that will allow you to trade OpenAI, whether it's private or public. By then, liquidity will be abundant, bid-ask spreads will narrow significantly, and people worldwide will be able to trade. Robinhood is just taking the first step.

The underlying architectures of these products are diverse. Some are issued under European regulatory frameworks, while others rely on smart contracts and offshore custody institutions. A few platforms like Dinari are trying to operate more compliantly, while most are still probing the legal boundaries.

U.S. securities regulators have not yet taken a clear stance. Although the SEC has expressed views on token issuance and digital assets, tokenized products of traditional stocks remain in a gray area. Platforms are cautious about this; for example, Robinhood first launched its product in the EU, not daring to go live in the U.S.

However, the demand is already evident.

The Republic platform provides synthetic investment channels for private companies like SpaceX, and Backed Finance packages public stocks and issues them on the Solana chain. These attempts are still in early stages but have never stopped. The underlying model promises to address participation barriers, not the financial logic itself. Tokenized stocks may not increase stock holding returns, as that was never the intention; perhaps it just wants to make participation easier for ordinary people.

For retail investors, the ability to participate is often the most important factor. From this perspective, tokenized stocks are not competing with traditional stocks but competing on "ease of participation". If investors can gain exposure to Nvidia stock's price movements with just a few clicks on an app holding stablecoins, they may not care whether it's a synthetic product.

There are precedents for this preference. The SPY ETF has proven that packaged products can become mainstream trading markets, as have other derivatives like CFDs, futures, and options. Initially tools for traders, they ultimately served a broader user base.

These derivatives often even lead the underlying asset's trend, capturing market sentiment faster than slow-reacting traditional markets during market fluctuations, amplifying fear or greed.

Tokenized stocks may follow a similar path.

Current infrastructure is still in early stages, with liquidity fluctuating and regulatory frameworks unclear. But the underlying logic is clear: create something that reflects asset prices, is easy to acquire, and makes ordinary people willing to use it. If this "alternative" can stabilize, more trading volume will flow in. Eventually, it won't just be a shadow of the underlying asset but a market bellwether.

Nathan Most didn't initially intend to reshape the stock market; he just saw efficiency gaps and wanted to find smoother interaction methods. Today's token issuers are doing the same thing, just replacing the old fund "packaging" with smart contracts.

It's worth observing whether these new tools can maintain trust during major market downturns. After all, they're not real stocks and aren't regulated, just "tools close to stocks". But for many people far from traditional finance or living in remote areas, being "close" is enough.