Tokenization of stocks: a financial efficiency revolution in a new bottle for an old wine

*Original Title: *New Skin, Old Instincts

Original Author: PRATHIK DESAI

Original translation 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 with many years of experience in the logistics industry, previously engaged in the transportation of metals and bulk commodities. 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 can provide opportunities for diversified investments, they have a problem with trading delays: investors cannot buy and sell at any time during the trading day, and must wait until the market closes to know the transaction price after placing an order (it is worth noting that this trading model is still in use today). For investors accustomed to real-time buying and selling of individual stocks, this delayed trading experience has long been outdated.

To this end, Nathan Most proposed a solution: to develop a product that tracks the S&P 500 index but can be traded like a single stock. Specifically, this involves structuring the entire index into a new form for listing on the exchange. This idea was initially met with skepticism, as the design logic of mutual funds is inherently different from stock trading, the relevant legal framework was still absent, and the market seemed to have no such demand.

But he insisted on pushing forward with this plan.

In 1993, the Standard & Poor's Depositary Receipts (SPDR) debuted under the trading code SPY, essentially becoming the first exchange-traded fund (ETF): an investment tool representing hundreds of stocks. Initially regarded as a niche product, it gradually became one of the most actively traded securities globally. On most trading days, the trading volume of SPY even exceeds that of the underlying component stocks. The liquidity of this synthetic product surprisingly surpasses that of its underlying assets.

Today, this segment of history has again become enlightening. The reason is not the emergence of new funds, but the changes that are occurring on the blockchain.

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

These tokens are positioned as "risk exposure tools" rather than ownership certificates; holders are neither shareholders nor do they have voting rights. This is not a traditional purchase of equity, but rather holding a token linked to the stock price. This distinction is crucial and has sparked controversy, with OpenAI and Elon Musk expressing concerns over the tokenized stocks offered by Robinhood.

@OpenAINewsroom

Robinhood CEO Tenev later had to clarify that these tokens actually provide retail investors with access to these private assets.

Unlike traditional stocks issued by the company, these tokens are created by third parties. Some platforms claim to offer a 1:1 backing by custodizing real stocks, while others are purely synthetic assets. Although the trading experience may seem familiar, with price movements mirroring those of stocks and interfaces resembling brokerage applications, the underlying legal and financial substance is often much weaker.

Even so, they still attract a specific type of investor, especially non-U.S. investors who cannot directly engage in the U.S. stock market. Suppose you live in Lagos, Manila, or Mumbai and want to invest in Nvidia; you typically need to open an offshore brokerage account, meet high minimum deposit requirements, and go through a lengthy settlement period. Tokenized stocks, as tokens that trade on-chain and track the underlying stock movements of exchanges, eliminate these trading barriers. No wire transfers, no forms to fill out, no entry restrictions—just a wallet and a trading market.

This investment channel appears novel, but its operating mechanism shares similarities with traditional financial instruments. However, real issues still exist: most platforms like Robinhood, Kraken, and Dinari do not operate in emerging markets outside of the U.S. stock market. Taking Indian users as an example, it remains unclear whether they can legally or practically purchase tokenized stocks through these channels. If tokenized stocks truly want to broaden global market participation, they will face not only technical challenges but also regulatory, geographical, and infrastructure hurdles.

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 the magnitude of stock fluctuations, the timing of price rises and falls, or the direction of trends without actually buying the stock. In either case, these tools have become an "alternative channel" for investing in underlying assets.

The emergence of tokenized stocks follows a similar logic. They do not claim to replace traditional stock markets, but rather provide another avenue for those who have long been excluded from public investment to participate.

The development of new derivatives often follows a traceable pattern: the early market is filled with confusion, investors are uncertain about pricing, traders are hesitant due to risk, and regulatory bodies take a wait-and-see approach; subsequently, speculators enter the market, testing the boundaries of products and exploiting market inefficiencies for arbitrage; if the products prove to be practical, they will gradually be accepted by mainstream participants and ultimately become market infrastructure. Index futures, ETFs, and even Bitcoin derivatives from CME (Chicago Mercantile Exchange) and Binance are all examples of this. They were not initially designed for ordinary investors, but rather resemble a playground for speculators: while trading is faster and risks are higher, it is also more flexible.

Tokenized stocks may follow a similar path: first, retail investors use them to speculate on hard-to-buy assets like OpenAI or companies that are not yet listed; then arbitrageurs discover that the price difference between tokens and stocks can be profitable and also join the market; if trading volume can stabilize and infrastructure keeps up, institutional sectors may also join, especially in jurisdictions with well-established compliance frameworks.

The early market may look chaotic: lack of liquidity, large bid-ask spreads, and sudden price jumps on weekends. But the derivatives market always starts this way; it has never been a perfect replica, more like a stress test — allowing the market to see if there is demand before the assets themselves adjust.

There is an interesting aspect to this model, which can be seen as an advantage or a disadvantage, depending on how you perceive it —— the issue of time difference.

Traditional stock markets have opening and closing times, and most stock derivatives follow the trading hours of the stock market. However, tokenized stocks do not have to adhere to this rule. For example, if a US stock closes at $130 on Friday and suddenly a big news breaks on Saturday (like an earnings report leak or a geopolitical event), the stock market is not open, but the token may already start to rise or fall. This way, investors can factor in the impact of news during the market's off hours into their trades.

Only when the trading volume of tokenized stocks significantly exceeds that of traditional stocks will the time difference become a problem. The futures market addresses such issues through funding rates and margin adjustments, while ETFs stabilize prices through designated market makers and arbitrage mechanisms. However, tokenized stocks have not yet established these mechanisms, so prices may deviate, liquidity may be insufficient, and whether they can keep up with stock prices depends entirely on the reliability of the issuer.

But this kind of trust is very unreliable. For example, when Robinhood launched tokenized stocks for OpenAI and SpaceX in the EU, both companies denied participation, claiming that they had neither collaboration nor formal relationship with the business.

This does not mean that tokenized stocks themselves are problematic; rather, you need to think clearly: are you purchasing a price exposure, or a synthetic derivative with ambiguous rights and recourse?

@amitisinvesting

For those who are anxious about this matter, there's really nothing to worry about. OpenAI released this statement just to be cautious, after all, they had to do it. As for Robinhood, they have simply launched a token to track OpenAI's valuation in the private market, just like the tokens for over 200 other companies on their platform. You are not actually buying shares of these companies, but the stocks themselves are merely certificates; the digital form of these assets is what really matters. In the future, there will be thousands of decentralized exchanges that will allow you to trade it, whether OpenAI is private or public. At that time, liquidity will be abundant, and the bid-ask spread will narrow significantly, allowing people from all over the world to trade. And Robinhood is just the first to take this step.

The underlying architecture of these products is also varied. Some are issued under European regulatory frameworks, while others rely on smart contracts and offshore custodians. A few platforms like Dinari are trying to adopt more compliant operating models, while most platforms are still testing the boundaries of the law.

The U.S. securities regulatory agency has not yet clarified its position. Although the U.S. SEC has expressed its stance on token issuance and digital assets, tokenized products of traditional stocks remain in a gray area. Platforms are very cautious about this; for example, Robinhood launched its products in the EU first and did not dare to go live in the U.S. market.

However, the demand has become very clear.

The Republic platform provides synthetic investment channels for private companies like SpaceX, and Backed Finance packages public stocks to issue them on the Solana chain. These attempts are still in their early stages but have never ceased, and the underlying model promises to address the issue of participation barriers rather than the logic of finance itself. Tokenized stocks may not increase the returns on holdings, as that was never the intention; perhaps it simply aims 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; rather, they are competing on the "ease of participation." If investors can gain exposure to the price fluctuations of Nvidia stock with just a few clicks within an application holding stablecoins, they may not even care whether it is a synthetic product.

This preference has precedents. Exchange-traded funds like SPY have proven that packaged products can become mainstream trading markets, and the same goes for other derivatives such as contracts for difference (CFD), futures, and options. Initially, they were just tools for traders, but ultimately they served a broader user base.

These derivatives often lead the movements of the underlying assets; in market volatility, they capture emotions faster than the sluggish traditional markets, amplifying fear or greed.

Tokenized stocks may follow a similar path.

Current infrastructure is still in its early stages, with liquidity fluctuating and regulatory frameworks being ambiguous. However, the underlying logic is clear: create something that can reflect asset prices, is easy to obtain, and is something that ordinary people are willing to use. If this "alternative" can stabilize, more trading volume will flow in. Ultimately, it will no longer be a shadow of the underlying asset, but will become the market's barometer.

Nathan Most did not initially intend to reshape the stock market; he simply saw efficiency gaps and wanted to find a smoother way to interact. Today's token issuers are doing the same thing, only they have replaced the fund "packaging" of the past with smart contracts.

It is worth observing whether these new tools can maintain trust during a market crash. After all, they are not real stocks, nor are they regulated; they are merely "tools that are close to stocks." However, for many people who are far from traditional finance or live in remote areas, being "close" is already enough.

Source: Foresight News