Stock Exchanges Sound Alarm on Tokenized Stocks

The World Federation of Exchanges (WFE), representing major stock exchanges globally, is calling for stricter regulation of tokenized stocks. They argue these tokens, which represent ownership of company shares on a blockchain, introduce new risks for investors and could undermine market integrity.

What are Tokenized Stocks?

Tokenized equities are digital tokens built on blockchain technology that are designed to mirror the value of traditional stocks. While they aim to represent ownership, holders typically don't receive the same rights as shareholders in the underlying company.

Companies like Coinbase and Robinhood are venturing into this space, attracted by the potential for reduced trading costs, faster settlement times, and round-the-clock trading.

WFE's Concerns

The WFE expressed its worries in a letter to the SEC, ESMA, and IOSCO, highlighting that these tokens “mimic” equities without offering equivalent rights or trading safeguards. They are particularly concerned about the marketing of these products as stock tokens or equivalents when they lack the same legal and financial backing.

The WFE warns that companies whose stock is being tokenized could suffer reputational damage if the tokenized version fails. They emphasize the need for clear regulatory frameworks addressing ownership, custody, and marketing practices to protect investors.

Key Takeaways:

• Investor Protection: The primary concern is that investors may not fully understand the risks associated with tokenized stocks compared to traditional shares.
• Market Integrity: Regulators are urged to ensure tokenized stocks adhere to existing securities laws and do not create loopholes.
• Reputational Risks: Companies whose stocks are tokenized could face negative consequences if the tokens falter.

Regulators worldwide are now under pressure to clarify the legal landscape and ensure investor protection as this emerging market develops.