Stock Exchange Group Calls for Tokenized Stocks Crackdown

An organization representing the world’s largest stock exchanges is calling for a regulatory crackdown on tokenized stocks.

The World Federation of Exchanges (WFE), a United Kingdom-based industry association for exchanges and clearinghouses, said blockchain-based tokens pose an additional risk to investors and could compromise the integrity of the market, Reuters reported Monday (Aug. 25), citing a letter from the group to regulators.

Tokenized equities are blockchain-based tokens designed to represent shares in companies. The tokens represent ownership of the securities, although investors are not shareholders in the underlying company, the report said.

Among the companies pushing into tokenized equities are cryptocurrency exchange Coinbase and broker Robinhood. Advocates say tokenized equities can lower trading costs, quicken settlement and allow for 24/7 trading, according to the report.

But the WFE is worried the tokens “mimic” equities without offering the same rights or trading safeguards, the report said. The organization made this argument in a letter sent to the U.S. Securities and Exchange Commission’s Crypto Task Force, the European Securities and Markets Authority and global securities watchdog IOSCO’s Fintech Task Force.

“We are alarmed at the plethora of brokers and crypto-trading platforms offering or intending to offer so-called tokenized U.S. stocks,” the WFE wrote, per the report. “These products are marketed as stock tokens or the equivalent to stocks when they are not.”

The WFE declined to name specific brokers and trading platforms but argued companies whose stock is being mimicked could face reputational harm if the tokens fail, the report said. The group is calling on regulators to apply securities rules to tokenized assets, clarify custody and ownership frameworks, and bar them from being marketed as equivalent to stocks.

PYMNTS explored the topic of tokenized stocks last month following new offerings from Robinhood, Coinbase and crypto exchange Kraken. For retail investors, particularly outside the United States, the practice offers fractional ownership of American blue-chip stocks without intermediaries or time zone constraints, the report said.

“For institutions, it hints at a future where securities can be programmed with smart contracts, auto-execute dividends and facilitate compliance in real time,” PYMNTS reported July 3.