Et voila! Robinhood to tokenise Stocks and ETFs in EU

At the Ethereum Community Conference (ECC) in Cannes, France, Robinhood announced the launch of over 200 "tokenised" stocks and ETFs including private companies such as SpaceX and OpenAI for customers in the European Union. These tokenised equities aim to offer 24/5 trading access, dividend support and zero commissions or added spreads from Robinhood (though other fees may apply). Initially issued on the Arbitrum blockchain, the tokens are expected to migrate to Robinhood's own Layer 2 blockchain, which is currently under development.

In addition to tokenised equities, Robinhood introduced several new offerings including crypto perpetual futures (known as 'perps') for EU customers and crypto staking for US users, starting with Ethereum and Solana. Other features include deposit bonuses, a crypto rewards credit card, an AI-powered investment assistant, smart exchange routing, tax lot tracking and advanced trading charts.

A Robinhood spokesperson stated that “[t]hese tokens give retail investors indirect exposure to private markets, opening up access, and are enabled by Robinhood’s ownership stake in a special purpose vehicle”.

OpenAI Strikes Back

However, in a post on X, OpenAI stated that it is not a partner, was not involved in and does not endorse the OpenAI tokens:

Last month, Kraken launched its own tokenised stock offering for select jurisdictions called xStocks. FTX and Binance have pioneered similar offerings in the past. These are also synthetic products which don't actually hold underlying products.

The tokenisation of stocks raises a number of regulatory and consumer protection considerations. Tokenised stocks are likely to be treated as derivatives under Cayman and US law, which may not always track the underlying stock price and which will not generally have the same voting or dividend rights. The owner of a tokenised stock will generally have no claim on the underlying asset and may be subject to redemption restrictions such as KYC and fees.

In the case of xStocks, it is only select users who complete KYC with Kraken who can mint and redeem tokenised equities. The tokens are issued by a special purpose vehicle (SPV) based in Jersey and offered under a digital asset license in Bermuda. Kraken itself does not hold/custody the underlying stocks. Token holders receive a legal right to redeem the token for its cash value but no ownership rights of the underlying stock, voting or dividend rights. Redemption and withdrawal fees may also impact their attractiveness as an investment instrument.

The issuer of tokenised stocks like those offered by Kraken and Robinhood can only buy or sell the underlying stocks during normal market hours, but tokenised stocks can trade 24/7. According to one commentator, this could create pricing dislocations outside of market hours (particularly on weekends) when market makers are unable to hedge their positions. To manage this risk, spreads would be expected to grow significantly or providers may withdraw liquidity entirely. This could expose traders who buy during low-liquidity periods to sharp losses if the equity market opens lower and the token price rapidly re-aligns with the off-chain price. These risks are compounded by regulatory uncertainty and restrictions, particularly for US traders, as shown by Binance's decision to discontinue its stock tokens.

For the time being, Robinhood does not allow its users to self-custody their tokenised stocks, trade or collateralise them in DeFi. Kraken does allow self-custody which means that these instruments could start to be used in DeFi across a range of applications. Robinhood plans to launch on Arbitrum and move to its own layer 2 blockchain partly to reduce the gas fees incurred by traders.

Although the goal of tokenised stocks is to expand access and allow anyone to participate in the digital economy, some argue that they only really appeal to crypto-native traders and are poorly suited to a sophisticated, global equities market. Put another way, most stock purchasers can buy stocks using existing tradfi rails quite simply, and while tokenised stocks offer benefits such as 24/7 trading, enhanced market access, fractional ownership and faster settlement, they face regulatory and structural limitations that must be addressed to fully realise their potential, and must offer some benefits over the existing purchase experience. Until they can be used for loans in DeFi smart contracts, for example, much of the benefit of crypto and decentralisation is lost in the tokenisation journey.

Robinhood’s announcement is nevertheless an early bet on the future tokenisation of financial markets, and gives an insight in the global, composable nature of those markets and the potential consumer and systemic risks of that future.

First published at www.bitsofblocks.io and reproduced with permission.