Tokenisation of Stocks: Can Equities Be Traded 24x7?

Robinhood recently made headlines for announcing they would be allowing tokenised offerings for yet private companies such as OpenAI and SpaceX. However, OpenAI issued public statements denying any involvement and advising investors to exercise caution. Robinhood did not simply stop here. They launched tokenised versions of more than 200+ US S&P 500 company stocks in Europe. So investors in Europe can now buy tokenised AAPL and TSLA shares and even trade them 24/5, meaning these tokenised stocks can be traded outside of US Stock Exchange trading hours!

What is a Tokenised Stock?

A Tokenised Stock is a representation of digital company shares that exist on a public blockchain instead of a traditional stock exchange and mirrors the price of the original stock. There are 3 ways to tokenise stocks 

• Direct On-Chain Issuance: This is when the company’s equity is directly issued on-chain without an intermediate step of listing on a traditional stock exchange. In this case there is only 1 version of the stock, i.e. the on-chain token.
• Wrapped Issuance: This is when a licensed or regulated custodian owns the underlying shares, locks it and issues 1:1 tokens against them. These custodians usually publish a public proof of reserve, always ensuring transparency that the underlying traditional stock assets have not been sold. This is the most common way of issuing and trading tokenised stocks
• Synthetic tokens: These are tokens that simply mirror the price of the original asset without being backed by the actual stock. These are risky and least popular. 

Robinhood’s Recent Tokenised Updates

Robinhood is launching 200+ tokenised US stocks and ETFs. These will also include private companies such as OpenAI and SpaceX. Robinhood wrote a letter to the SEC on their beliefs on tokenisation of RWAs and their strategy on the same. 

Robinhood chose the Arbitrum blockchain (low gas fees + popular L2) for issuing tokenised equity. 

How it works

• For every physical share that Robinhood custodies and wishes to tokenise, it will mint an ERC-20 token that users can trade 24/5. Expanding to 24/7 is definitely in the roadmap.
• When a seller sells and wishes to cash out, Robinhood will liquidate the shares and burn the token.
• Settlement of these stocks will happen in seconds rather than the current T+1

Advantages of Tokenised Stocks

• 24x7 Trading

  Unlike traditional markets restricted by opening and closing hours, tokenised stocks can be traded around the clock. This offers flexibility to investors across time zones and allows them to react instantly to global news and events.

• Fractional Ownership

  Tokenisation makes it possible to buy a fraction of a share rather than an entire unit. This lowers the entry barrier for high-priced stocks and opens the door for more inclusive participation. For example, 0.1 TSLA can be bought for 34$ instead of 340$ for 1 TSLA

• DeFi

  Since tokenised stocks live on a blockchain, they can be integrated into DeFi ecosystems. Investors can use them as collateral for loans, stake them in liquidity pools, or trade them on decentralised exchanges.

• Global Accessibility

  Anyone with an internet connection and a compatible wallet can access tokenised stocks, bypassing many of the geographic and regulatory barriers that limit traditional stock investing.

Risks of Tokenising Stocks

While the concept looks gives wings to their regular digital counterparts, tokenised stocks come with their own set of risks

• Liquidity Risk

  Since the concept is still in its early stages, the trading volume for tokenised stocks is low, making it difficult to buy or sell large quantities without impacting the price.

• Custodian Failure Risk

  In wrapped issuance models, the custodian holds the underlying assets. Any operational failure, insolvency, or fraud at the custodian level can jeopardise the value of the tokenised stock.

Why Tokenising Stocks and other RWAs benefits the US Dollar

Tokenising Stocks and other RWAs such as US Treasury Bills and Stablecoins helps the US Dollar a lot. Outside the USA these assets are mostly bought using USDC or USDT, boosting demand for the dollar globally. This way the US is able to export its dollar and hence its stance in crypto is quite pro unlike India, which does not have much to win.