The Problem
In early 2021, an army of retail traders made massive bets on meme stocks and briefly melted down the market. Trading volume swelled so much that Robinhood had to halt buy orders for stocks like GameStop for a few days.
The reason wasn't a conspiracy. Wall Street's creaky infrastructure could not settle trades fast enough.
Robinhood CEO Vlad Tenev and others called for an overhaul. Since then, stock trades now settle a day sooner than in 2021. But the financial industry is pushing ahead with a more radical solution: turning stocks into digital assets that can be traded and settled instantly on a blockchain.
The Solution
It's not just crypto firms and fintech players leading the charge for "tokenization." Big banks like JPMorgan are also using blockchains to facilitate trades in certain assets.
Tokenization—which Tenev has described as a "freight train" poised to eat Wall Street—has already brought fundamental changes to how stocks and other assets are traded.
The current DTCC system of "T+1" closes out trades the next business day. That feels outdated when so much business is conducted instantly and around the clock.
How It Works
Companies like Superstate are working with firms to issue versions of their shares that trade on blockchain. The arrangement means firms don't have to rely on intermediaries to hold or track their stock. Stock trades can be settled instantly.
Robinhood takes a different approach. It doesn't help firms tokenize their stocks, but instead takes stocks available on the open market and offers them in a blockchain "wrapper" as a sort of derivative. These offerings are currently available only in Europe.
Who Benefits
For the average investor who trades only from time to time, tokenized assets won't mean much. Active traders will appreciate the move to blockchain since it opens the door for more trading after hours and on weekends.
Institutional investors will benefit since it will free up collateral that might otherwise be tied up waiting for settlement.
"Imagine you're a hedge fund and want to buy $1 million of Tesla stock," says Johann Kerbrat, SVP of Robinhood Crypto. "You buy it on Friday, so you don't have the money anymore, but you don't get the shares in your account until Monday. So for three days, you can't do anything."
What's Being Tokenized
It's not just stocks. BlackRock's BUIDL fund offers access to money-market funds and U.S. Treasuries via blockchain. It's already grown to $2 billion in assets under management.
JPMorgan is offering tokenized versions of private equity assets on its in-house Kinexys blockchain. The process makes capital calls easier to track and manage.
Kraken's tokenized versions of select U.S. stocks are doing brisk trade in markets like Brazil and South Africa, where traders still pay hefty commissions that can amount to 10% or more.
The Market Size
It's still early days. The SEC has yet to give the green light to tokenized equities in the U.S.
As of mid-November, the total value of tokenized assets worldwide was about $660 million. The most popular ones include tokenized versions of index-tracking ETFs and Big Tech stocks such as Tesla, Nvidia, and Alphabet.
The Supporters
The DTCC is eager to move into blockchain. It offers a potential way to expand into private markets.
"DTCC believes in the power and potential of tokenization to evolve and modernize market infrastructure," said Brian Steele, DTCC's president of clearing and securities services.
The Concerns
Not everyone thinks a rush to tokenization is good. Citadel Securities has asked the SEC to adopt a go-slow approach.
The trading giant fears some crypto-aligned firms want to use the rulemaking process to gain exemptions from long-standing consumer protection obligations. There's concern that a rapid shift could undermine trust in a U.S. equities market that is the biggest in the world.
Already, there have been notable discrepancies between the prices of traditional shares and tokenized versions offered by the likes of Kraken. It's unclear if every firm offering tokenized equities has adequate guardrails for custody and fiduciary obligations.
What happens in the event of a crypto firm going bankrupt while holding tokenized shares of a customer's stock?
The Bottom Line
Big banks like JPMorgan are racing to tokenize stocks on blockchain for instant settlement, with $660 million in assets already tokenized globally, though Citadel Securities warns the rush could undermine consumer protections and destabilize the world's largest equities market.