Tokenized stocks offer new opportunities for investors, but carry unique risks
Tokenized stocks are gaining ground as a way for ordinary people to access investment opportunities long reserved for high-net-worth individuals and other accredited investors. But as retail traders’ interest in the emerging asset class grows rapidly, some experts are also warning them about increasing breakouts.
Tokenization refers to the process of creating a digital version of a real-world asset (for example, a stock, bond, or real estate deed) on a blockchain or decentralized network. As asset tokenization accelerates in the real world, blockchain-based stocks are also gaining traction.
But experts are divided on tokenized stocks. The products have become popular with some as a means of investing in private companies in the early stages, potentially leading to large returns. But some experts say tokenized stocks are less regulated and can pose more legal and financial risks for inexperienced investors.
“A token is an instrument that is not issued by the company,” said James Angel, an associate professor at Georgetown University. “This is a side bet on the company’s future prospects.”
The tokenized real-world asset market is booming. Its total value more than quadrupled last year to nearly $18.2 billion. RWA.xyz dataTokenized stocks, as well as the broader RWA market, are growing.
As a result, many technology companies have stepped in to meet demand for the growing asset class. last summer, robinhood It has offered support for more than 200 tokenized US stocks, such as SpaceX and OpenAI, to customers in the European Union. And Ondo Finance in September launched a platform It offers investors in Africa, Europe and other markets more tokenized versions of US stocks and exchange-traded funds on the Ethereum blockchain. coinbase It also announced plans to introduce tokenized stocks this year as part of its “exchange for everything” vision.
The popularity of tokenized stocks has a lot to do with investors’ desire to access private markets that have historically been more profitable for traders, Angel told CNBC.
“The appeal of private companies is the desire to start creating wealth early once a successful business is established,” Angel said. Typically, “retail investors basically get excited when public companies finally go public.”
However, as demand increases, calls for investors to be careful also increase.
According to Angel, tokenized stocks are not the same as traditional stocks. For example, holders have no rights or dividends in the companies their tokens represent.
“If I own a share in the company, I am a shareholder with well-defined legal rights,” Angel said. “I can vote in annual elections. I can receive all kinds of dividends… [but] “It’s unclear what legal rights I have if I have a token in a private company.”
In addition, the financial statements of private companies, which retail investors can access through tokenized shares, are more transparent than their publicly traded counterparts because they are not subject to the same reporting requirements. This makes it difficult for retail investors to determine whether they are making a sensible investment.
These issues contribute to the fact that tokenized stocks are relatively new and regulatory rules for the asset class remain largely undefined.
“We are in a place where regulations and government are still not keeping up with innovation and technology,” Azeem Khan, co-founder of privacy-focused blockchain Miden, told CNBC.
The tokens themselves are “pretty untested at this point,” Angel said. “Be like Warren Buffett, don’t invest in anything you don’t understand.”
