Tokenized stocks are becoming popular as a way for the general public to access investment opportunities that have long been reserved for wealthy individuals and other accredited investors. But while retail traders’ interest in the emerging asset class is accelerating, some experts are warning against a breakout.
Tokenization refers to the process of creating digital versions of real-world assets, such as stocks, bonds, and real estate certificates, on a blockchain or decentralized network. And as the tokenization of real-world assets booms, blockchain-based stocks are starting to gain traction.
However, experts are divided on tokenized stocks. These products are popular with some as a way to invest in private companies at an early stage and can lead to huge profits. But tokenized stocks are less regulated and can pose greater legal and financial risks for inexperienced traders, some experts say.
“In the case of tokens, it’s not issued by a company,” said James Angell, an associate professor at Georgetown University. “It’s a side bet on the company’s future.”
The tokenized real-world asset market is booming. That total has more than quadrupled over the past year to about $18.2 billion, according to data from RWA.xyz, and tokenized stocks are also growing along with the broader RWA market.
As a result, several high-tech companies are actively working to meet the demands of the growing asset class. Last summer, robin hood We rolled out support for over 200 tokenized US stocks, including SpaceX and OpenAI, to customers in the European Union. And in September, Ondo Finance launched a platform that offers more tokenized versions of U.S. stocks and exchange-traded funds on the Ethereum blockchain to investors in Africa, Europe, and other markets. coinbase This year also announced its own plans to offer tokenized stocks as part of its “exchange anything” vision.
Angell told CNBC that the popularity of tokenized stocks has a lot to do with investor enthusiasm for private markets, which have historically been more profitable for traders.
“The appeal of private enterprise is the desire to participate in wealth creation early on, as successful businesses are built,” Angell said. Typically, “when a company eventually goes public, retail investors are basically exhausted.”
However, as demand increases, there are also growing calls for investors to be cautious.
According to Angell, tokenized stocks are different from traditional stocks. For example, token holders have no rights or dividends in the company the token represents.
“If I own stock in a company, I’m a shareholder with clearly defined legal rights,” Angell said. “I can vote in annual elections. I can also receive dividends… (but) even if I have a token in a private company, it is not clear what legal rights I have.”
Additionally, private companies that are accessible to retail investors through tokenized shares are not subject to similar reporting requirements, making their financials more opaque than their publicly traded peers. This makes it even more difficult for individual investors to be sure they are making wise investments.
These issues add to the fact that tokenized equities are relatively new and regulatory guidelines for this asset class remain largely undefined.
Azeem Khan, co-founder of privacy-focused blockchain company Miden, told CNBC: “We’re still in a situation where regulations and governments aren’t keeping up with innovation and technology.”
And the token itself “hasn’t been tested very much so far,” Angell said. “Like Warren Buffett, don’t invest in things you don’t understand.”
