Global regulators and exchange industry associations are increasing their scrutiny of tokenized stocks, expressing concerns about investor protection and market integrity. These organizations are urging stricter regulatory oversight of these products, arguing that they do not represent actual equities and expose investors to significant risks.
The World Federation of Exchanges (WFE), a U.K.-based industry group representing exchanges and clearing houses worldwide, the European Securities and Markets Authority (ESMA), a European Union agency, and the International Organization of Securities Commissions (IOSCO), an international body that sets standards for securities regulation, have jointly sent a letter to the U.S. Securities and Exchange Commission's (SEC) Crypto Task Force, calling for a crackdown on tokenized stocks.
Tokenized stocks are digital representations of traditional equities issued on a blockchain. Proponents of tokenized stocks claim that these tokens facilitate 24/7 trading, reduce costs, and expedite settlement. The value of tokenized assets has already climbed past $26 billion, according to industry data.
However, the WFE argues that tokenized stocks "mimic" the equities they are designed to represent but lack the investor protections built into traditional markets. The organization warns that investors could be misled into thinking that these tokens are equivalent to stocks when they are not. Tokenized equities represent ownership of securities but do not grant investors actual shareholder rights in the underlying companies. This includes voting rights, dividends, and custody protections. In many cases, traders cannot redeem their shares and can only sell them back on the issuing platform. The WFE also suggests that companies whose stock is being mimicked could face reputational harm if the tokens fail.
The WFE is calling on regulators to clarify ownership rights and custody responsibilities, apply securities rules to tokenized assets, and bar them from being marketed as equivalent to stocks. They are asking regulators to address the issue and clarify the legal frameworks for ownership and custody.
Several major crypto platforms, including Coinbase, Kraken, and Robinhood, are moving deeper into tokenized equity products. Robinhood recently launched tokenized stocks in Europe, while Coinbase is seeking U.S. approval. Following the news that global stock exchanges are urging regulators to crack down on tokenized stocks, shares of Coinbase and Robinhood declined in premarket trading on Monday.
Regulators have already begun to issue warnings regarding tokenized securities. According to SEC Commissioner Hester Peirce, tokenized securities are subject to securities regulations. The SEC's Crypto Task Force has also been monitoring these offerings. Regulators in the U.S. and Europe are facing increasing demands to strike a balance between safety and innovation.
