Gensler: Stock Tokens Fall Under SEC’s ‘Securities Regime’
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Gensler: Stock Tokens Fall Under SEC’s ‘Securities Regime’

Recent remarks from the SEC chairman suggest tokenized stocks could become a focus for the regulator.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Within a broader initiative to regulate non-fiat markets and lower their risk, SEC Chair Gary Gensler aims to bring transparency to the digital asset markets. His most recent comments suggest a focus on stock tokens—from both centralized and decentralized entities—would need to ‘work within [the SEC’s] securities regime’.

Benefits to Tokenized Stocks

As you may infer from their name, tokenized stocks are synthetic mirrors of real stocks, the latter of which are offered by brokerages and equity trading platforms like NYSE and NASDAQ. By becoming tokenized, such stocks gain properties similar to digital assets:

  • You can buy fractions of them that otherwise wouldn’t be available. This is especially applicable to highly-priced blue-chip stocks – Tesla (TSLA), Amazon (AMZN), Alphabet (GOOGL), etc. For example, as of press time, GOOGL stock is priced at $2,533 per share. Instead of splurging that amount of money on a single share, you could get .001 ($2.5) of a share – the minimum requirement – while still potentially earning a return on investment.
  • Fractional shares do exist with most popular stock brokerages, but they are limited and largely unavailable outside the U.S. equities market. In contrast, blockchains host tokenized stocks equally, regardless of national borders.
  • There is no limited trading time as it exists in the stock markets, from 9:30AM to 4:00PM. Whereas, tokenized stocks can be accessed for trade 24/7.

It is easy to see why tokenized stocks represent the next step in financial evolution. Traditional stocks may already be viewed as a form of a digital asset since the removal of paper stocks, but tokenized stocks still eliminate the last vestiges of limitations. However, there are some issues with these novel financial products.

Downsides to Tokenized Stocks

The first among them is the collateral behind tokenized stocks. Some exchanges may have collateralized them, while others haven’t. Another potential issue is the disparity between actual and tokenized share prices, due to the stock markets’ trading time window.

Then, there is the issue of liquidity on crypto exchanges. Lastly, the question of owning tokenized stocks is in the grey zone. On Binance, holding stock tokens (which were recently halted) doesn’t give you shareholder rights you would otherwise obtain. Likewise, each platform decides whether to impart stock dividends as a part of the synthetic package.

Clearly, there is some space for standardization to be ironed out. And by the looks of it, the current SEC Chair Gary Gensler is ready to bring tokenized stocks under the agency’s supervision.

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U.S. SEC to Bring Greater Scrutiny to Stock Tokens

The core mission of the Securities and Exchange Commission (SEC) is to make the markets trustworthy for all types of investors, as stated on the SEC’s official page:

“The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public’s trust.”

Although DeFi by definition relies on smart contracts to fulfill such a mission, exchanges offering stock tokens are centralized – Binance, Bittrex, FTX and others. Therefore, bringing clear standards and rules of engagement should, in theory, only fortify trust and accelerate the adoption of tokenized stocks as new financial products.

With that said, the power of regulation tends to attract the same forces it aims to regulate. Published in the Georgetown Law Journal under the title “Revolving Elites: The Unexplored Risk of Capturing the SEC”. Cox and Thomas argued that the post-1990s period led to a sharp increase in senior leadership getting selected from the private sector.

While Gary Gensler fits that trend as a former investment banker, he also adapts to the shifting technological winds, as demonstrated by his MIT course on Blockchain and Money. Here is what he had to say about stablecoins and stock tokens at the American Bar Association on July 21:

“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”

Meaning, this would apply to both decentralized and centralized synth platforms. The latter are represented by Synthetix and Mirror Protocol and the former by Binance. Since last summer, Synthetix accrued $7.89 billion in total trading volume, reaching new ATH trading volume this month.

Image credit: synthetix.io

However, Binance scrapped their stock tokens last week, after Hong Kong’s SEC equivalent issued a warning that they are not licensed securities. It seems that the more a synth platform is decentralized, the more resistant it is to the SEC’s demands. Additionally, Synthetix is based in Australia, outside its jurisdiction.

Otherwise, developers of synth protocol risk fines, as it happened on July 13, 2020 with California-based Abra. If such platforms were to be included within the SEC’s “securities regime”, they would not only have to adhere to the broad range of regulations but pay the nominal SEC fee at “1% of one eight-hundredth of the dollar value of the equities sold.”

Do you think the future of finance leads to the entire stock market hosted within the blockchain ecosystem? Let us know in the comments below.

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