Heavyweights in the sector are vying for the long-sought objective of converting physical assets into digital tokens as cryptocurrencies grow increasingly integrated with the conventional financial system.
Vlad Tenev, CEO of the trading platform Robinhood, stated during a recent tokenization launch event in the south of France with a James Bond theme, “Tokenization is going to open the door to a massive trading revolution.”
Tokenization, according to proponents, is the next big thing in cryptocurrency and can help remove barriers that have benefited the rich and make trading more affordable, transparent, and accessible for regular investors.
However, detractors claim that tokenization poses a threat to the investor protections and securities laws that have made the U.S. financial system the envy of the world for a century.
Additionally, one of the most well-known businesses in the world swiftly opposed Robinhood’s attempt to tokenize shares of private companies.
Tokenization: What is it?
The fundamental concept of tokenization is to use the blockchain technology that underpins cryptocurrencies to produce digital tokens that can be exchanged like cryptocurrencies by almost anybody, anywhere, at any time, and that serve as substitutes for assets like bonds, real estate, or even a portion of the ownership of a work of art.
Crypto venture capitalist Katie Haun stated in a recent podcast that the desire to tokenize other financial assets has been fueled by the explosive growth of stablecoins, a sort of cryptocurrency that is usually purchased and exchanged for $1.
According to her, tokenization will transform investing in a manner akin to how streamers fundamentally altered television viewing habits.
“On a Thursday night, you had to sit there and watch Seinfeld,” Haun said.
“You can’t watch a Korean show like Squid Games; you have to tune in at a certain time and can’t pick what you want to watch.
The market for Netflix was growing. Similarly, I believe that the market for tokenizing real-world assets will grow.
Increasing speed.
Earlier last month, Robinhood started providing its European users with tokenized stock trading of key U.S. public firms.
Additionally, certain customers received tokens that represented shares in two highly valued private businesses, OpenAI and SpaceX.
Numerous additional businesses are jumping in.
While Coinbase has petitioned regulators to open the market to its U.S. consumers, cryptocurrency exchange Kraken now permits users from other countries to trade tokenized equities.
Tokenized money market funds are presently available from Wall Street behemoths Franklin Templeton and BlackRock.
According to McKinsey, tokenized assets may total $2 trillion by 2030.
The heyday of cryptocurrency
With the birth and early development of bitcoin by libertarian-leaning computer enthusiasts over 15 years ago and it’s increasing acceptance in mainstream banking, the demand for tokenization comes at a pivotal moment in the cryptocurrency sector.
While other cryptocurrency types, such as stablecoins, are booming in use and the Trump administration has promised to bring in what has been dubbed the “golden age” for digital assets, the most popular cryptocurrency in the world is now routinely reaching all-time highs, surpassing $123,000 on Monday.
The largest beneficiaries of the drive for tokenization, according to Lee Reiners, a lecture fellow at Duke University, may be a select group of exchanges such as Robinhood, whose trading volumes and influence increase.
According to Reiners, “which is kind of ironic given the origins of crypto, which was to bypass intermediaries.”
The Trump bump
Another factor driving interest in tokenization is the election of President Donald Trump, who signed a new stablecoin regulation law on Friday and has made it a major priority of his administration to establish more crypto-friendly regulations.
Securities and Exchange Commission Chairman Paul Atkins stated, “Tokenization is an innovation, and we at the SEC should be focused on how we advance innovation at the marketplace.”
Is it lawful?
The definition of a security is a contentious issue, especially in the context of cryptocurrency, and securities regulation can be complicated.
After German regulators expressed concerns about possible infractions of their nation’s securities law, the cryptocurrency exchange Binance withdrew their tokenized securities offers in 2021.
The SEC has adopted a far more limited stance under Trump than it did under the previous administration, halting or dropping lawsuits against cryptocurrency companies it had previously accused of breaking securities law.
American University Washington College of Law professor Hilary Allen claimed that Trump’s win has given cryptocurrency firms the confidence to market their products more aggressively.
“The biggest risk is that tokenization will be exploited as a regulatory arbitrage strategy to circumvent regulations,” she stated.
In contrast, the SEC has taken a cautious stance on tokens.
Following Robinhood’s launch, SEC Commissioner Hester Peirce, a vocal advocate for cryptocurrency, said in a statement that companies selling tokenized shares have to think about “their disclosure obligations” under federal law.
Blockchain technology, despite its immense capacity, cannot magically change the character of the underlying asset, according to Peirce.
Everyone is watching private businesses.
Private businesses, which are exempt from the stringent financial reporting regulations that apply to publicly traded enterprises, are among the tokenization domains that are most actively monitored.
A growing number of popular businesses are increasingly relying on affluent and institutional investors to raise substantial quantities of money while remaining private, rather than going public as frequently as they once did.
Proponents of tokenization argue that it is unjust to the little guy.
For a very select few wealthy, well-connected insiders who have early access to these deals, these are enormous wealth creators, according to Johann Kerbrat, a Robinhood executive.
“This inequality can be resolved with cryptocurrency.”
“Please exercise caution.”
However, the firm itself quickly reacted negatively to Robinhood’s distribution of tokens intended to symbolize an investment in OpenAI, claiming that it was not a part of or supportive of Robinhood’s scheme.
OpenAI stated on social media that “any transfer of OpenAI equity requires our approval—we did not approve any transfer.”
“Please use caution.”
Private businesses are exempt from the stringent public reporting obligations that apply to public firms regarding their financial health.
Allen claimed that the push for tokenized sales of private company shares is “eerily familiar” to how events transpired before the establishment of the SEC almost a century ago and that such reporting rules have helped safeguard investors and lend legitimacy to the U.S. financial system.
She stated, “Where we’re going is where we were in the 1920s.”
“People were losing their life savings by betting on things they didn’t understand, and door-to-door salesmen were offering stocks and bonds, half of which had no basis.”
