Tokenized equities: why?

plus: a new type of bank, copper, distortions and more

“A journey of a thousand miles must begin with a single step.” – Lao Tzu ||

Helloooo everyone! I hope you’re all doing well.

I know I’ve been quiet over on the Substack chat recently, apologies, the energy drain of this flu has been real but it’s almost over… Might pop back in there later!

---

PUBLISHED IN PARTNERSHIP WITH: ✨ALLIUM✨

Allium provides blockchain data and analytics for institutions and fintechs, helping teams generate key insights from on-chain activity. Leaders like Visa, Stripe, and Grayscale rely on Allium to power mission-critical analyses and operations.

For more information: www.allium.so.

---

IN THIS NEWSLETTER:

• Tokenized equities: why?

• A new type of bank?

• Macro-Crypto Bits: copper, yields, and yikes

If you’re not a premium subscriber, I hope you’ll consider becoming one! You get ~daily commentary on markets, tokenization, regulation and other signs that crypto IS impacting the macro landscape. As well as relevant links and music recommendations ‘cos why not.

WHAT I’M WATCHING:

Tokenized equities: why?

As “stablecoin summer” rages on, a contender for a new focus of attention is elbowing its way on stage: tokenized equities.

So far this month, large-network names such as Gemini and Kraken announced the launch of tokenized stocks to non-US investors, and Robinhood’s presentation in Cannes last week added some additional “mainstream” sparkle to the list.

Only, there’s a lot of confusion here, some of it outright misleading, and it needs to be cleared up. In doing so, we uncover the core weakness in current tokenized equity initiatives, but also the potential further down the line.

First, let’s look at what Robinhood promised – I’m choosing to focus on Robinhood here as it’s the highest-profile tokenization effort I’ve seen to date, but the comments largely hold for other initiatives as well.

Robinhood users in the European Union can, with a few swipes, buy and sell shares of a range of US stocks – only, they’re not actually buying the stocks, they’re buying a token on Arbitrum that represents the stock. Essentially, it’s a derivative, but that term was not used. The emphasis in Robinhood’s presentation was on “equities” which implies ownership, but the tokens do not confer any ownership rights, and their holders are not shareholders. Suggesting they are, even if only implicitly, is misleading as mainstream investors may not understand the nuance.

So, what is the token acquirer buying? The right to participate in any share price appreciation or losses. Pure speculation, in other words, which is fine, nothing wrong with that. What’s more, it’s what most retail investors care about – they’re not really interested in the ownership aspect. But still, the terms “equities”, “stock” and “shares” have a legal definition that is being stretched here, and it’s not clear investors know this.

What can the holders do with their derivatives? Buy and sell them, that’s it. For now, there’s no transferability.

What, then, are the advantages when access to US stocks is available to European investors via other means? Well, there’s the ease of transaction for onboarded users. Oh, and 24/5 trading. Neither of these are blockchain-specific, though, so it’s worth asking whether the colossal expense of building a new market structure for incremental gains is worth it. Put differently, you don’t need a blockchain for a slick interface nor for broader trading hours.

(Stay with me, I’m not a sceptic, I just think we’re focusing on the wrong features.)

More liquidity for private shares, you say? Only, as I’ve written about before, private assets aren’t publicly traded for a reason: usually, it’s because they don’t want to go through the hassle of detailed disclosures and expensive compliance. Tokenizing them for more liquidity and broader access, essentially converting them into public assets without the requisite investors protections, sounds like something that just might attract regulatory attention.

Yesterday a report emerged that the Bank of Lithuania, which regulates Robinhood Europe, is questioning the company about its planned offering of tokenized shares of private companies OpenAI and SpaceX. And OpenAI itself has issued a public statement saying it does not support Robinhood’s move here.

(post on X by @OpenAINewsroom)

I have a feeling the issues aren’t going to stop here. Robinhood’s launch has kicked a loud can that regulators were hoping they could ignore for a while longer, because tokenized equities are obviously securities and therefore regulated, right? Not a priority!

Only, some of the issues are now becoming urgent.

Last week, the Securities Industry and Financial Markets Association (SIFMA) sent a letter to the SEC urging it to not allow the trading of tokenized equities outside of the Regulation National Market System (Reg NMS) framework until public comment can be collected and the implications considered. Among their concerns are uneven rulemaking, custody/trading overlap, investor protection and more.

This is yet another example of incumbents pushing back against disruptors, the crypto ecosystem is familiar with that. But it does highlight that the regulatory path ahead for tokenized securities is not necessarily going to be smooth, despite the current SEC’s pro-crypto approach.

It’s also not clear yet how welcoming EU market regulators will be at the easier access to American stocks for local investors, especially given the new urgency, according to the European Central Bank, in channelling domestic savings into European projects. The EU is most likely heading into some kind of capital control regime, and easier access to US assets via derivative structures sounds like an easy target to take on.

(post on X by @ecb)

Whether focusing on Robinhood or other tokenized equity issuers, the underlying question remains the same: why? What can holders do with tokenized equities that they can’t with traditional equities, beyond faster settlement (in some cases) and a wider trading window? Neither are technology issues, they’re to do with design and market regulation. I get that the product will appeal to crypto natives who would rather stay in the ecosystem for investment diversifications – but is that real innovation?

Don’t get me wrong, I’m here for the blockchain-based evolution of markets, I believe it will solve many of the global economy’s ills. I also believe that the spoils go to the brave, and that waiting for authorities to move on something without a catalyst to do so leads to little more than grey hairs. So, hats off to Robinhood for kicking this particular can, and I expect it will be able to navigate the official objections and roadblocks. Let’s hope so, anyway, because what comes next is the true innovation.

Let’s look at what else the company announced last week: Robinhood is building Robinhood Chain, its own blockchain optimized for tokenized equities. It is already inviting developers to take a look and experiment with building apps for this new ecosystem. If Robinhood gets the green light to enable transferability (a regulatory bramble bush since equities are not transferrable P2P) then presumably the tokenized equities held in Robinhood wallets can be used in those apps for collateral, additional yield, fast swaps, perhaps game access – there is much to be explored here, and the exciting part is conferring new types of utility on “shares”. That is a step change in market functionality.

But it could go even further. Robinhood is a central counterparty and has made no pretence of wanting to decentralize the stack. But one thing Tenev said towards the end of his tokenization speech last week stood out – he mentioned that one of the goals was to enable tokenized shares to be transferred to self-hosted wallets. This would be a very big deal, transferring Robinhood-issued “derivatives” that track shares outside of the Robinhood garden. From there, they could presumably move around the ecosystem, hopping between chains and in and out of apps (regulations permitting, of course). That’s a market step-change that would finally begin to realize the potential of blockchain-based markets – it’s not speed and it’s not market access, it’s agility and flexibility.

So far, most tokenization efforts let us to the same things with the same assets, only slightly differently. So far, I fail to see the big deal.

But when you add new functionalities that can interact with other functionalities, we can envision new markets. Just as the internet did much more than enable us to share documents faster, just as cars did much more than enable us to get from A to B more quickly, just as the printing press was not only about more words, new markets will produce changes we are unable to imagine today. Everything starts with baby steps, and they should be celebrated – but let’s save the hype for what’s next.

A new type of bank?

Related to the above, I’ve been wanting to dive into the plans for a new tech-focused bank, backed Palmer Luckey (co-founder of Anduril) and Joe Lonsdale (co-founder of Palantir), with participation from Peter Thiel’s Founders Fund.

It’s a brilliant idea, and I never say that lightly. Here we have some experienced tech “stars” with deep pockets and powerful contacts moving to fill the gap in the market left by the collapse of Silicon Valley Bank. Only, the plans don’t stop there.