A growing number of cryptocurrency companies are racing to issue digital tokens pegged to real stock prices, touting them as a revolutionary bridge between crypto and Wall Street. These “tokenized stocks” promise around-the-clock trading and global access to popular equities via blockchain networks. But the fast-growing products are also raising alarm among regulators and traditional finance experts who warn of investor risks and potential threats to market stability[1][2].

Major crypto platforms including Robinhood, Gemini and Kraken have already rolled out tokenized stock trading services in Europe, while others like Coinbase and the startup Dinari are seeking approval to launch similar offerings in the United States[3]. Even Nasdaq – one of the world’s largest stock exchange operators – recently proposed allowing trading of tokenized shares, underscoring how mainstream this concept is becoming[4]. The combined market value of publicly traded tokenized stocks aimed at retail investors has surged to around $412 million as of September, up from just a few million a year earlier, according to industry tracker RWA.xyz[5]. Crypto firms are keen to capitalize on this momentum. Many see stock tokens as a way to diversify their businesses beyond cryptocurrencies and attract new users, especially amid what they view as a generally supportive climate for financial innovation in certain jurisdictions[6]. Proponents claim that moving stocks onto blockchains could “revolutionize stock markets” by enabling 24/7 trading with near-instant settlement – boosting liquidity and reducing costs in the process[5].

How Tokenized Stocks Work

Tokenized stocks are essentially digital representations of real equities recorded on a blockchain ledger[7]. Each token’s price is designed to mirror the market price of a specific stock or exchange-traded fund (ETF). In practice, crypto companies have adopted different models to achieve this peg. Some tokens are fully backed 1:1 by actual shares of the company held by a licensed custodian or in a special-purpose vehicle (SPV); in those cases, the token acts as a claim on the underlying stock[8]. Other tokenized stocks do not hold the physical shares at all, but instead rely on derivative contracts or algorithms to provide economic exposure that tracks the stock’s price[8]. In both scenarios, if the real stock of, say, Tesla or Apple goes up or down, the token’s value should move in tandem. The blockchain infrastructure simply enables these tokens to be issued, traded, and settled in a crypto-like fashion, often on decentralized networks or crypto exchanges, rather than through traditional stock market venues.

Crucially, holding a tokenized stock is not the same as owning the actual stock. These products are often marketed to feel like stock investments, but they “rarely offer the same rights, disclosures and protections as traditional equities”[2]. In most cases, token holders are not registered shareholders of the underlying company. That means they typically lack voting rights in shareholder meetings and do not receive dividends directly from the company (unless the token issuer chooses to pass through some dividend equivalent)[9][10]. “You’re buying exposure to those shares through… a synthetic instrument,” explained Diego Ballon Ossio, a partner at law firm Clifford Chance in London, noting that much of the burden is on investors to understand “what exactly it is that [they’re] buying.”[11] In other words, a tokenized stock often behaves more like a contract for difference than a share of stock – its value may track the equity, but it confers none of the direct ownership benefits. This structure can also introduce counterparty risk: investors must trust the token issuer or platform to actually hold the underlying assets (if any) and honor redemption or payout obligations[9]. If the issuer fails to do so, the token could become worthless. It doesn’t help that different providers structure their stock tokens in different ways – with varying terms and collateral – a patchwork that one tokenization startup CEO called “a real big worry” for transparency and investor understanding[12].

The Promise: 24/7 Trading and Global Access

For crypto exchanges and financial upstarts, the appeal of tokenized stocks lies in opening up new frontiers of trading that blend the stock market with the always-on ethos of crypto. One major selling point is the ability to trade popular stocks at any time, unconstrained by Wall Street’s standard trading hours. Unlike traditional stock exchanges that close on evenings and weekends, blockchain-based markets can operate 24 hours a day, 7 days a week, allowing investors to buy or sell equity exposure even when the Nasdaq or NYSE is offline[5]. This around-the-clock access could be especially valuable for traders in overseas time zones or during news events outside U.S. market hours. It also means trades can settle almost instantly on-chain, rather than taking the typical two business days to clear – an efficiency upgrade that a Robinhood Crypto executive said removes the need for “multiple days to settle” stock trades[13]. Faster, near-instant settlement not only could reduce counterparty risk in clearing but also frees up investor capital more quickly[14].

Another touted benefit is broader accessibility. By tokenizing equities, companies can offer stock-like exposure to people who might otherwise struggle to access foreign markets or meet the requirements of a traditional brokerage. For example, Robinhood’s recent rollout of tokenized U.S. stocks on a crypto network (Arbitrum) lets customers across 30 European countries purchase tokens tied to U.S. tech giants like Apple or Tesla[15]. In a conventional setting, many of those investors would need a U.S.-based brokerage account or face other barriers to buy U.S. shares. Tokenized stocks can be more user-friendly and inclusive: they often allow fractional ownership, so an investor could spend, say, $10 to get a fraction of an Amazon share in token form – something many brokerages also offer, but typically within their own walled gardens[16]. Some crypto platforms are integrating stock tokens into familiar interfaces without requiring users to manage separate crypto wallets or private keys, aiming to lower the technical barrier for newcomers[17]. The upshot is a vision of global, democratized access to equities, where a retail trader in Asia or Africa could gain exposure to U.S. or European stocks with just a smartphone and a crypto app.

There’s also an innovation angle: once stocks are digitized as tokens, they become interoperable with the rest of the crypto finance ecosystem. Traders can potentially hold crypto and stock tokens in one wallet and even deploy stock tokens in decentralized finance (DeFi) protocols. For instance, a Swiss-based firm called Backed Finance buys real stocks through a broker, then mints equivalent “bSTOCK” tokens on blockchain that are fully backed by those shares[18]. Because those tokens exist on public chains as standard ERC-20 tokens, users have been able to, for example, supply them into liquidity pools on decentralized exchanges and earn yields[18][19]. This effectively turns blue-chip stocks into yield-generating assets in the DeFi world. Although this on-chain stock market is nascent – with only a few million dollars of liquidity so far – it demonstrates new possibilities like using stocks as collateral for crypto loans, or creating index baskets of stocks and crypto assets combined. For investors who primarily operate in crypto, tokenized stocks offer a way to diversify into traditional assets without leaving the crypto realm, reducing overall portfolio risk by adding assets that don’t move in lockstep with the crypto market[20].

Industry leaders say the benefits could be transformative. Vlad Tenev, CEO of Robinhood, recently likened tokenization to a “freight train” barreling toward traditional finance – a force he believes will ultimately merge the crypto and stock markets into one digital continuum[21]. Tenev argued that tokenized stocks might become “the default way for people outside the U.S. to get exposure to American equities,” much as stablecoins have become a go-to way to hold digital dollars[22]. That vision reflects the high hopes among crypto entrepreneurs that tokenized assets can break down old barriers and bring a new generation of investors into the fold.

Risks, Legal Uncertainty and Market Integrity

Against the backdrop of enthusiasm, however, are significant risks and regulatory question marks. A key concern is that tokenized stocks today often lack the investor protections that come with actual stock ownership. As noted, these tokens usually don’t entitle holders to governance rights or guaranteed dividends, and their issuers may not provide the kind of audited disclosures that public companies must[2][9]. “Just because a security is represented on blockchain, that doesn’t change the core investor protections… that apply to securities,” warned Peter Ryan, head of international capital markets at the Securities Industry and Financial Markets Association (SIFMA), emphasizing that the mere shift in medium (from traditional shares to tokens) does not exempt these products from securities laws[23]. In many jurisdictions, however, the rules have not yet been clearly defined. The crypto stock tokens occupy a gray area: are they unregistered securities, derivatives, or something else entirely? So far, U.S. regulators have been cautious. Robinhood’s tokenized equities and similar products are available only to customers in Europe at present, in part because the regulatory status in the U.S. is uncertain[24]. The U.S. Securities and Exchange Commission (SEC) has not approved any exchange to sell stock tokens broadly to retail investors. Industry players like Coinbase and Robinhood have reportedly engaged with the SEC about potential limited exemptions or a framework that would allow tokenized stocks with full shareholder rights[25], but no green light has been given yet.

This uncertainty has already led to flashpoints. When Robinhood launched tokens tracking private companies like OpenAI (which is not publicly listed), the move drew immediate pushback – OpenAI said it had not authorized any such tokens and suggested the sale was potentially illegal[26]. The incident prompted scrutiny from Robinhood’s European regulator as well. Legal experts noted that by offering exposure to a private firm’s valuation without the firm’s consent or disclosures, the tokenization scheme was potentially bypassing securities laws that protect investors in public offerings[27]. Normally, companies go through an IPO to raise capital from the public, triggering extensive regulatory requirements; if tokens allow effectively raising funds or speculation on a company’s value without an IPO, regulators see a serious challenge to the existing framework[27]. This and earlier episodes (such as Binance’s short-lived 2021 foray into stock tokens that ended after warnings from European regulators) illustrate the high likelihood of regulatory intervention. Authorities in major markets have signaled concern: the World Federation of Exchanges, which represents traditional bourses, recently urged regulators to crack down on unlicensed tokenized stock trading, citing insufficient investor safeguards and possible liquidity fragmentation in markets[28]. In the U.S., an SEC official under a crypto-friendly administration had floated the idea of limited exemptions for tokenized stock issuers, but that idea met stiff opposition from Wall Street firms including Citadel Securities, which argued that any such major market structure change needs formal rulemaking and should not undermine proven investor protections[29][30].

From a market integrity standpoint, one worry is that creating parallel markets for stocks on crypto rails could splinter liquidity and price discovery. If significant trading of a stock shifts to tokenized form on a blockchain, separate from the primary exchange where that stock is listed, the stock’s overall liquidity is divided. Critics say this could lead to inconsistent prices or arbitrage gaps between on-chain tokens and the actual stock price[31]. Citadel Securities, in a letter to the SEC, warned that uncontrolled tokenization could siphon liquidity away from public markets, potentially harming the robustness of the traditional equity market[32]. So far, the volumes on tokenized stock markets remain very small – often a tiny fraction of the real stock’s trading volume. (On one recent day, all on-chain trading of an Nvidia stock token amounted to about $150,000, while nearly $28 billion of Nvidia shares traded on NASDAQ in the same period[33].) But as advocates eagerly point out, the crypto markets never sleep. During hours when Wall Street is closed, a tokenized stock could theoretically move in price based on global news or investor sentiment, then reconcile with the official market price when exchanges reopen. This opens the door to potential volatility or manipulation in off-hours trading[34] – scenarios that regulators and exchanges are carefully watching. The thin liquidity of current tokenized stocks exacerbates this, as even modest trades on-chain can swing prices when few others are trading, and price gaps have already been observed in these early markets[35].

Additionally, there’s the basic counterparty risk: investors in tokenized stocks are relying on the issuer (be it an exchange or a DeFi protocol) to operate soundly and not abscond with funds or suffer a hack. If the token is supposed to be backed by real shares, the custodian must actually hold those shares and keep them safe. A failure of the issuer or custodian – through fraud, insolvency or cyberattack – could mean token holders simply lose their money, since they have no direct claim in most cases to any insured brokerage account or investor compensation scheme. “Derivative offerings [are] IOUs,” remarked Mark Greenberg, head of crypto exchange Kraken’s tokenization unit, contrasting them with fully collateralized tokens backed by real stocks[36]. In other words, a token that isn’t 1:1 backed by a share is only as good as the promise of the issuer. This is why some firms like Kraken and Dinari stress that they follow a “gold standard” approach – holding actual stock for every token and providing transparent disclosures – to mitigate these risks[36][12]. Still, without clear and uniform regulations, the level of protection can vary widely from one token provider to another.

Impact on Traditional Markets and the Road Ahead

Thus far, tokenized stocks remain a niche, but their rapid rise has the attention of mainstream financial players. Traditional stock exchanges and big trading firms are weighing how to respond. Rather than be disrupted, incumbents are looking to adapt – evidenced by Nasdaq’s move to explore tokenized trading under its regulated umbrella[4]. The World Federation of Exchanges has indicated it actually supports Nasdaq’s initiative, precisely because it would apply the same rigor and investor protections to tokenized stocks as to regular shares[28]. In fact, many experts argue that if tokenization is to grow, it should converge with existing market structures rather than operate as a lawless shadow market. Coinbase’s discussions with the SEC reportedly involve a model where token holders would enjoy the full legal rights of stock ownership, suggesting one possible path where tokens become simply a new technological wrapper around traditional securities, subject to the usual rules[37].

Regulators globally are studying whether new rules are needed. In the EU, platforms offering tokenized stocks have so far operated under a patchwork of existing laws – often treating the tokens as a type of derivative or certificate under MiFID (the EU’s financial regulation), even though that framework wasn’t designed with blockchain in mind[38]. European authorities say they are aware of the potential risks and are monitoring developments, and new EU-wide crypto asset regulations (like MiCA) could eventually address tokenized assets more directly. In the U.S., lawmakers have also taken interest: a draft bill in the Senate this summer directed the SEC to modernize rules for digital asset securities, including clarifying how brokerages and exchanges could handle tokenized stocks within the regulatory perimeter[39]. If enacted, such measures might create a path for compliant tokenized equity trading, potentially bringing the concept into the financial mainstream with proper oversight.

Meanwhile, voices on both sides of the debate continue to make their case. Advocates insist that with the right investor protections and transparency, trading stocks on-chain can be done safely and even improve on the status quo. “Done right, tokenization enhances investor protections, rather than eroding them,” argued Ian De Bode, chief strategy officer at fintech firm Ondo Finance[40]. The technology, they say, can make markets more efficient and inclusive if integrated prudently. Detractors counter that without significant safeguards, these products may undermine market integrity and leave investors exposed to new perils. The coming years are likely to see intensive experimentation – and no doubt, heightened regulatory scrutiny – as crypto companies and traditional institutions alike test how far the tokenization of stocks can go. Will we see a future where Apple and Amazon trade on a blockchain at all hours, or will these tokens remain a fringe product used by a subset of investors? For now, the trend is clearly growing, but its ultimate impact on the broader financial ecosystem will hinge on whether trust and legitimacy can keep pace with technological innovation. The financial world is watching closely as this bold attempt to fuse crypto and stocks unfolds, balancing its promise of innovation with the imperative of protecting market order and investors’ faith in it.

Sources: Reuters[5][2][11][32]; RSM US[14][16]; Cointelegraph[15][18]; CoinDesk[22]; and others.