The Crypto Industry's Rush To Tokenize Stocks Is Setting Off Alarm Bells—And Wall Street Wants Regulators To Pump The Brakes

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The dormant battle over how stocks should trade just exploded back into view this week as crypto companies race to sell blockchain-based tokens pegged to traditional equities, prompting warnings from Wall Street titans that these novel products could fragment markets and expose investors to risks they don’t fully understand.

Robinhood Markets Inc. (NASDAQ:HOOD), Gemini Trust Company and Coinbase Global Inc. (NASDAQ:COIN) are among the platforms either launching or seeking approval for tokenized stocks—blockchain instruments that track traditional equities and promise 24/7 trading with instant settlement. The combined value of tokenized public stocks aimed at retail investors surged to $412 million as of September, up from just a few million dollars a year earlier, according to tokenization tracker RWA.xyz.

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But beneath the industry’s enthusiasm lies a thorny reality: these products rarely offer the same rights, disclosures, and protections as traditional equities, instead more closely resembling riskier derivatives, according to a Reuters review of several products and interviews with industry executives and legal experts.

What You’re Actually Buying Isn’t Always Clear

Here’s where it gets complicated. While many tokenized stock products are marketed like actual shares, the fine print tells a different story. “You’re buying exposures to those shares through creating some sort of synthetic instrument,” Diego Ballon Ossio, a partner at law firm Clifford Chance in London, told Reuters. “A lot of the burden gets shifted on you to understand what exactly it is that you’re buying.”

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The structures vary wildly. Some tokens are backed 1:1 by underlying stocks, while others provide economic exposure through derivatives. Often, the products provide no ownership, voting rights or traditional dividends, while creating counterparty risk exposure to the token issuer, Reuters reported.

Consider the multiple tokens pegged to Nvidia Corp. (NASDAQ:NVDA) and Tesla Inc. (NASDAQ:TSLA)—each with different structures, terms, and investor protections. “The fact that different tokenized offerings have different rights and different disclosures... that’s a real big worry,” Dinari CEO Gabriel Otte told Reuters.

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Wall Street Is Fighting Back Against Proposed Exemptions

The crypto industry’s push is getting a boost from the Trump administration, which has indicated plans to grant tokenization firms exemptions from traditional securities rules. But that plan is facing fierce opposition from heavyweight financial players.

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Citadel Securities and the Securities Industry and Financial Markets Association say such major structural changes should go through a formal rulemaking process. “Just because a security is represented on blockchain, that doesn’t change the core investor protections and other provisions that apply to securities,” Peter Ryan, head of international capital markets at SIFMA, told Reuters.

Citadel Securities raised concerns in a letter to the Securities and Exchange Commission in July that tokenization would siphon liquidity away from public markets.

The World Federation of Exchanges recently urged regulators to crack down on tokenization, citing insufficient investor protections and liquidity fragmentation, though the group supports Nasdaq Inc.’s (NASDAQ:NDAQ) proposal because it would treat tokens like traditional stocks, Reuters reported.

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This article The Crypto Industry's Rush To Tokenize Stocks Is Setting Off Alarm Bells—And Wall Street Wants Regulators To Pump The Brakes originally appeared on Benzinga.com

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