Blockchain technology is attempting to disrupt the traditional stock market, but reality is more complex than idealism.
The tokenization of stocks has not gotten off to a smooth start. Currently, digital tokens designed to track popular stocks like Amazon and Apple have experienced significant price deviations from their underlying stocks since their launch two weeks ago.
Robinhood Markets is facing scrutiny from European regulators after launching a token allowing investors to bet on OpenAI without the artificial intelligence startup's permission. The Wall Street Journal reported that industry insiders are concerned that such "tokenization" of stocks creates opportunities for insider trading and market manipulation that are difficult to detect.
At the end of June, multiple cryptocurrency exchanges, including Robinhood, Kraken, Gemini, and Bybit, released blockchain-based versions of US stocks and exchange-traded funds for non-US customers. Cryptocurrency executives claim this is a way for global investors to invest in popular securities like Tesla, NVIDIA, and SPDR S&P 500 ETF, especially in countries where purchasing US stocks through local brokers is challenging.
Price Deviations Raise Doubts
However, the performance of tokenized stocks has been chaotic. According to data provider CoinGecko, on July 3, the Apple-tracking token AAPLX briefly surged to $236.72, a 12% premium over the stock's trading price. A similar Amazon-tracking token rose to $891.58 on July 5, four times its previous trading day's closing price.
Even more extreme situations occurred on the peer-to-peer cryptocurrency trading platform Jupiter. Blockchain data shows that on the morning of July 3, an unidentified user attempting to purchase about $500 of Amazon token AMZNX momentarily pushed its price to $23,781.22, over 100 times Amazon's previous day's closing price.
These tokens, called "xStocks", were issued by Switzerland-based Backed Finance, which collaborated with Kraken and Bybit to launch dozens of stock-tracking tokens on June 30.
However, due to thin trading on multiple cryptocurrency exchanges, these xStocks are prone to significant price volatility when users buy and sell beyond market capacity. This volatility can be exacerbated during nighttime and weekend hours when stock markets are closed. A Backed spokesperson stated: "We are actively tracking any price misalignments and working with exchanges to ensure they are addressing this issue."
Regulatory Scrutiny Intensifies
Robinhood launched tokenized stocks at a grand event in France on June 30. To promote this product, which is limited to European customers, the company freely distributed tokens linked to OpenAI and SpaceX, neither of which are publicly listed companies.
OpenAI denied these tokens, stating on Twitter: "We have not collaborated with Robinhood, have not been involved, and do not endorse this." The Lithuanian Central Bank, which regulates Robinhood's European operations, has contacted Robinhood requesting an explanation of these tokens and their marketing approach.
A Robinhood spokesperson said: "We are confident in our project and are engaging with regulators to address any issues."
Skeptics worry that tokenized stocks could become a means of circumventing regulation. In US stock markets, exchanges monitor manipulation and other abuses, and brokers must know their customers' identities, enabling regulators to investigate suspicious activities and identify individuals involved.
Backed argues that transactions on public blockchains are more transparent than traditional finance, making monitoring and detecting illegal activities possible.
However, other industry participants are concerned that tokenized stocks traded on anonymous platforms are a potential source of trouble. Carlos Domingo, CEO of tokenization startup Securitize, suggests this arrangement could facilitate abuses like insider trading: "This is a Pandora's box that will eventually explode because people will find ways to do illegal things with these tokens."
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