Significance of Native Tokenization
Carlos Domingo, CEO of Securitize—a digital asset securities firm backed by BlackRock—highlighted the significance of “native” tokenization for accurately representing securities on the blockchain during an interview with Decrypt on Thursday. This method of tokenization is gaining increasing attention as the distinction between different types of security tokens may lead to investor confusion, a concern echoed by the U.S. Securities and Exchange Commission (SEC).
Benefits of Native Tokenization
According to Domingo, a stock that is natively tokenized on a blockchain like Ethereum ensures that shareholders retain the same rights they would expect from traditional stock ownership, such as voting and receiving dividends. He noted that native tokenization eliminates counterparty risk and mitigates fragmentation issues typically associated with other forms of tokenized assets.
As an example, he pointed to BlackRock’s $2.8 billion Institutional Digital Liquidity Fund (BUIDL), which Securitize launched last year in a native tokenized format; the firm acts as the asset manager’s transfer agent, directly managing and recording the fund’s shares on the blockchain. This development is a significant departure from conventional transfer agents that generally rely on proprietary databases.
Market Trends and Regulatory Considerations
Domingo elaborated on this model by using Exodus, a cryptocurrency software platform, as another case where one token corresponds to one share of its stock, which commenced trading on Securitize’s platform in 2022. Interest in tokenized assets appears to be experiencing a resurgence, especially with figures like Robinhood offering tokenized stock trading on Ethereum’s Arbitrum and Kraken launching xStocks on Solana and BNB Chain.
In a recent statement, SEC Commissioner Hester Peirce emphasized the need for firms offering tokenized products to engage with regulators to ensure compliance with federal securities laws. She strongly clarified that tokenization does not exempt these offerings from regulatory scrutiny, arguing that while blockchain technology is transformative, it does not change the essential characteristics of the securities involved.
Anthony Tu-Sekine, a partner at law firm Seward and Kissel, reiterated to Decrypt that while much of the conversation about tokenization focuses on the crypto landscape, it fundamentally relates to enforcing existing securities regulations. He remarked that there is a misconception that blockchain audits could lead to lighter regulation, which is far from the truth.
Investor Warnings and Market Restrictions
Peirce’s warning to investors comes in light of Robinhood’s recent foray into stock tokens, which it claims provide “indirect exposure to private markets.” However, there are significant restrictions, as U.S. customers are not permitted to acquire these stock tokens, which cannot be transferred to other wallets, and users must complete a KYC verification process.
Kraken’s xStocks are also off-limits to U.S. customers but are offered freely on decentralized exchanges, adding a layer of complexity to the regulatory landscape. As the SEC calls for deeper consideration of federal securities regulations, it also aims to cultivate a collaborative atmosphere around cryptocurrency and tokenization, as illustrated in a recent roundtable on the subject.
Historical Context of Tokenized Stock Trading
Historically, tokenized stock trading has been attempted by notable exchanges like Binance and the now-defunct FTX, but such initiatives have been largely abandoned. In 2019, crypto lending platform Abra ventured into offering contracts as tokens that tracked prices of U.S. stocks and ETFs, yet ceased this offering following an SEC inquiry, culminating in penalties from both the SEC and the CFTC due to violations regarding unregistered securities. Abra settled those allegations without admitting or denying guilt.
