What investors need to know about the SEC's plan to allow tokenized stock trading
Benoit Tessier/Reuters
- The SEC is working on a framework to allow for 24/7 trading of tokenized stocks.
- Stock tokens would track the price of actual shares, offering more liquidity and faster settlement.
- The idea offers some advantages for traders, but there are risks, market pros say.
A plan in the works from the Securities and Exchange Commission could reshape stock trading in the US.
Bloomberg reported this week that the SEC is gearing up to let investors trade tokenized stocks, issuing an "innovation exemption" for the cryto-like assets that would create a new 24/7 market that's parallel to the existing stock market.
So, what's that mean exactly, and what should investors know?
"An example could be a tokenized version of Apple or Nvidia would be a blockchain-based asset designed to track or represent the underlying stock," Shay Boloor, chief market strategist at Futurum Equities, told Business Insider.
Crypto enthusiasts have said any real-world asset can be tokenized, from real estate to stocks to business loans. The purported advantage is liquidity and immutable proof of ownership backed by the blockchain.
Regarding the SEC's plan, Boloor said that in order for it to be feasible, tokens must be backed by actual shares of a company that are held by a regulated custodian.
He added that such a system would benefit investors by allowing round-the-clock trading and faster settlement, however some skeptics have also emerged.
Michael Burry, the investor famous for betting against the US housing market in 2008, suggested the move would have dire consquences.
"We may be headed full-on to a Snow Crash cyber-punk future with no long-term personal relationships and digital value embedded in all of us directly correlated to the value provided to a society that increasingly devalues humanity," he wrote, referencing the popular cyberpunk novel by Neal Stephenson.
Burry didn't go into greater detail about why he sees so much risk in tokenized assets, but Boloor also noted that while 24/7markets may be more convenient for traders, there is the potential for higher volatility and manipulation.
Tokenized trading would also shift the market from regulated exchanges to more lightly regulated crypto platforms.
Last November, The World Federation of Exchanges told the SEC's crypto task force that tokenization could "distort" the market by creating an uneven playing field between stock and crypto exchanges.
Daniel Labovitz, CEO of equity exchange platform Green Impact Exchange, laid out several reasons investors may want to approach tokenized stock trading with caution.
"The tokens may not represent actual ownership of the company, and token holders may not get all of the benefits of a share, like voting [or] dividends," he said. "Another problem is fragmentation: when the same security trades in different markets that aren't connected to each other, the price of the assets can diverge, meaning that some buyers will overpay for their token."
Labovitz added that this isn't the first time the idea of trading blockchain-based tokens to gain stock exposure has been introduced. He recalled that in 2021, FTX offered tokenized versions of popular tech stocks such as Tesla and Apple.
These tokens sometimes traded significantly higher than the price of the underlying stock. They largely vanished in 2022 when the crypto exchange famously declared bankruptcy and ceased operations. Robinhood has also said that it has tokenized some shares of privately held companies, including OpenAI, though the ChatGPT maker warned investors against buying the,
The SEC declined to comment further on the plan.
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