Why WFE called tokenized stocks ‘mimics’ that risk market integrity

Key Takeaways

Stock exchanges have warned that tokenized stocks are ‘copycats’ with no rights and protections as traditional shareholders. Will crypto lobby fight back?

Stock exchanges have urged regulators to crack down on ‘tokenized stocks’, calling them ‘mimics’ and ‘copycats’ that operate in grey areas. 

Under their global association, World Federation of Exchanges (WFE), the group said that the ‘mimics’ are not stocks and would undermine market integrity if not reined in. 

“The emergence of unregulated platforms offering so-called tokenised equities raises serious concerns. These offerings often bypass established safeguards, creating risks for investors, undermining market integrity, and enabling regulatory arbitrage.”

On-chain stocks or ‘tokenized stocks’ have recently gained market interest after Robinhood debuted them for its European users to have access to the U.S equity market. 

Additionally, Backed Finance unveiled a similar offering (xStocks) in collaboration with Kraken and other Solana[SOL]-based platforms, including Jupiter.

Coinbase has also sought to list similar products. 

Will regulators heed WFE recommendations?

According to WFE, ‘tokenized stocks’ are derivatives with no retail protections whatsoever for buyers. 

In a letter to regulators, stock exchanges warned that the trend would lead to ‘fragmented liquidity’ and drive users away from exchanges. 

“Tokenised equities traded outside established and regulated venues may divert order flow from exchanges and other regulated venues, ultimately working against the interest of investors, especially retail.”

WFE CEO Nandini Sukumar emphasized that while the organization supports innovation, it expects tokenized stock issuers to meet the same rigorous oversight standards as traditional exchanges.

“These mimicked products do not meet the high standards which investors are used to.”

She further added,

“What we are seeing is a blatant attempt to circumvent regulation, with some firms seeking “no action” relief from regulators or deliberately operating through legal grey areas.”

She added that retail investors will be misled into thinking that they hold the same rights as traditional shareholders, yet they don’t, and urged regulators to ensure innovation doesn’t expose retail investors to risk at the expense of tokenized stock issuers. 

“Investor protection must remain paramount, and regulation must evolve to ensure that new technologies are not used as a mask for risk and opacity.”

This is the second crypto innovation that’s facing pushback from TradFi players. 

Recently, a U.S. banking group, including the American Bankers Association and the Bank Policy Institute, called for the GENIUS Act amendment to seal a loophole that allows exchanges to pay interest on stablecoins. 

According to Alexander Grieve, VP of government affairs at Paradigm, the pushback signaled that TradFi firms were out to secure their turf, and the crypto lobby should prepare to fight back.