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The crypto world has two recent buzzwords: “tokenization” and “real-world assets” (RWAs).a Gone are the days when crypto evangelists dreamed of tearing down traditional financial institutions altogether. Now, crypto firms seem intent on replicating the financial system, minus regulations that might safeguard consumers or economic stability. Next in their sights? Stock exchanges. a. Crypto’s use of “real-world assets” to describe traditional stocks is amusing to me — the unspoken corollary being that blockchain-native assets might best be called “imaginary”. Prominent crypto firms such as Robinhood, Republic, Coinbase, and Kraken are rapidly moving towards “tokenizing” traditional stocks, and pressuring regulators to allow it. Instead of buying your shares of publicly traded firms via a brokerage account that places orders on the NYSE or Nasdaq, you would use a crypto trading app to purchase a token representing a share.b Companies hoping to develop such platforms usually promote the idea by saying that a blockchainified stock market would expand trading hours,c and would be more accessible to international investors who didn’t want to go through the somewhat onerous process of opening an American brokerage account. b. Whether these representations actually involve the companies issuing the tokens holding 1-1 shares of the stock to back their stock tokens, or would instead essentially be a naked option, is a concerning and unanswered question.

These companies don’t usually admit that, by encasing stocks in a blockchainy wrapper, they hope to tap into lucrative equities markets while sidestepping the expensive compliance and oversight requirements of traditional American brokerages and exchanges. This fits the long history of companies trying to use blockchains as a magic get-out-of-regulation-free wand, reminiscent of the 2017 bubble when companies used “initial coin offerings” (ICOs) to try to sidestep IPO regulations.d Indeed, Robinhood has been heavily lobbying for “a new regulatory approach [that’s] needed to allow tokenization to flourish” and not “stifle growth and innovation”.1 Regular readers of this newsletter will recognize this language as the standard rhetoric of a crypto company asking for carveouts and exemptions from regulations we collectively learned are necessary, oh, about a century ago — when a speculative bubble emerged around stocks sold to the public based on false or incomplete information and we wound up in the Great Depression. Some companies have gone even further, tokenizing shares in private companies. When Robinhood announced its tokenized equities offering (only available to European investors at the moment while the company works on lobbying US lawmakers and regulators), they also announced that they had tokenized shares in the private companies SpaceX and OpenAI. This prompted concerns from European regulators and OpenAI themselves, who tweeted: “These ‘OpenAI tokens’ are

Money Stuff’s Matt Levine put it well in his must-read newsletter on the topic when he wrote: The “legal friction” [Robinhood mentions] is that some companies are private because they do not want to comply with securities disclosure rules, and tokenization’s solution is that they can sell stock to the public without complying with those rules. ... Saying “we should get rid of the disclosure rules” sounds bad, retrograde, greedy. Saying “tokenization” sounds good, modern, cool. Crypto companies already barreling forward with blockchainified stocks have hit some resistance from someone they may not have expected: SEC Commissioner Hester Peirce, who has otherwise been such a staunch ally of the crypto industry that she earned (and embraced) the moniker “Crypto Mom”. On July 9, she cautioned, “As powerful as blockchain technology is, it does not have magical abilities to transform the nature of the underlying asset. Tokenized securities are still securities.”4 While this is temporarily reassuring, bills like the CLARITY Act, currently making their way through Congress, threaten to undermine the SEC in this area. In a July 9 Senate Banking Committee hearing, former CFTC Chairman Timothy Massad agreed with Ranking Member Elizabeth Warren that the bill “could undermine [the SEC’s] authority substantially”, effectively turning blockchains into the regulatory escape hatch the industry desires.5