Written by: Corgi Kokii
Why is stock tokenization facing difficulties?
To understand the dilemma of stock tokenization, one must first recognize the key to the successful on-chain transition of RWA/off-chain assets. Whether it is Treasury bonds, funds, stocks, private credit, or even intellectual property on-chain, it fundamentally requires physical assets to be held offline, and then issuing a set of Tokens on-chain, with no technical barriers similar to issuing memecoins.
However, all project teams must return to the core four questions: Why issue? How to issue? How to sell? How to use? Without addressing these issues, RWA can only end up like most memecoins, lacking real demand and liquidity.
Taking the currently most successful RWA product category, tokenized U.S. Treasury bonds/money market funds, as an example, Treasury bonds, as a standardized debt instrument with simple rights and predictable cash flows, have a core tokenization process that involves identifying real demand, establishing a compliant issuance framework, and building token utility in three steps.
Why issue: Institutional investors [Crypto VC/Fund] have a lot of idle stablecoins on-chain and need risk-free yield scenarios.
How to issue: Fund - Fund manager structure, the token legally represents fund shares, the fund is responsible for issuing tokens and holding assets, the fund manager is responsible for making investment decisions, both the fund and fund manager must comply with licensing, and also require institutional-level services such as custodians, audits, and transparency reports.
How to sell: Only qualified investors after KYC/AML can purchase, available 7*24.
How to use: Token derivative utility, supported by mainstream DeFi, can be used as collateral to borrow stablecoins, and some centralized exchanges are beginning to support it as collateral.
Stocks, as a form of ownership certificate with complex rights (including governance rights) and uncertain cash flows, must overcome a series of significant operational and compliance hurdles for tokenization.
Why issue?
Early RWA attempts often lack clarity on why to issue, focusing on alternative assets like private loans, private equity funds, and real estate, hoping that blockchain's efficient settlement will improve liquidity. However, the liquidity of these assets is limited not due to technical issues but because of deeper problems such as information asymmetry, lack of substitutability, pricing challenges, and issuers resisting liquidity in secondary markets; these issues are off-chain and cannot be solved simply by going on-chain.
The benefits of putting physical assets on-chain have become cliché, summarized simply as follows:
Permissionless Accessibility: This includes [Capital] reducing investment thresholds, [Product] eliminating geographical and financial barriers, such as bank accounts, compliance, foreign exchange controls, and [Time] 7*24*365 trading, instant clearing and settlement; as well as regulatory arbitrage brought about by permissionlessness, crypto-native platforms including wallets and exchanges can expand to traditional businesses without a license.
DeFi Composability: Utilizing DeFi protocols for trading, lending, and derivatives, applying the transparency and composability of DeFi to traditional assets to gain additional yield opportunities.
Unified Account: If the circulation of stablecoins increases in the future, and the vast majority of economic activities are settled on-chain, physical assets on-chain can allow a single account to manage various assets held by different brokers, facilitating cross-collateralization.
The key is how to find the target user group. The story of financial equity is told beautifully, but we cannot expect brothers in Africa without bank accounts to buy U.S. Treasury bonds and stocks. A well-functioning market requires a sufficient number of participants; this demand can come from political tasks assigned by higher authorities, experienced high-net-worth retail investors, or institutional investors who have started exploring blockchain.
The target users of RWA projects are likely high-net-worth retail and institutional investors genuinely looking to invest, thus the ensuing questions are how to issue and how to sell, and how to avoid the regulatory iron fist coming down.
Investors need to clearly understand the legal nature of the tokens they are buying, the issuing entity, risk control mechanisms, anchoring mechanisms, whether there is backing, redeemability, and whether they have legal validity. Previous DeFi attempts like Mirror Protocol, Synthetix, and CeFi platforms like Binance and FTX have tried stock tokenization but failed or shut down due to regulatory pressure or poorly designed products that could not find a market.
Recently, Robinhood and xStocks have designed tokens under the existing relatively friendly legislation, with a completely off-chain 1:1 mapping, centralized securities registration, and full compliance.
Current Solutions
a.Robinhood
How to issue: The legal core is to issue a financial derivative contract by its licensed entity Robinhood Europe UAB under the EU MiFID II framework. The tokens held by users are merely digital certificates of this contract, with Robinhood itself as the counterparty. The real stocks are held by Robinhood's U.S. affiliated broker as a hedge position.
How to sell: Adopting a B2C model, Robinhood Europe acts as the sole issuer and seller, directly targeting European retail users within its app. Liquidity is completely provided internally on the platform, creating a closed loop.
How to use: The token’s smart contract includes strict whitelist mechanisms, preventing free circulation and lacking any external DeFi composability.
b.xStocks
How to issue: The legal core is to hold real stocks through an SPV established in Liechtenstein under the Swiss DLT Act. The tokens held by users are legally a 1:1 asset-backed priority guaranteed debt (tracking certificate), with the trust mechanism built on independent third-party custody and real-time verifiable Chainlink proof of reserve (PoR).
How to sell: Adopting a B2B2C model, with the issuer Backed Finance serving institutional-level primary market subscriptions, and then licensed exchanges like Kraken and Bybit as distributors for secondary market users. Liquidity is jointly provided by professional market makers from centralized exchanges and liquidity pools in decentralized protocols (like Jupiter and Kamino on Solana).
How to use: Freely transferable and fully DeFi composable, can be used as collateral for borrowing.
Legally, tokens only track prices and do not directly represent equity on-chain. The treatment of other rights associated with stocks (voting rights, dividend rights), as well as corporate actions (such as splits, mergers, delistings, liquidations) remain unresolved. Meanwhile, the additional utility brought about by tokenization has yet to materialize: Robinhood's Token can only circulate within the ecosystem, and while xStocks can be combined with DeFi protocols, current liquidity is very poor, essentially negligible.
These two solutions resemble regulatory arbitrage for crypto-native platforms under the current more lenient regulatory conditions, aimed at attracting market attention to demand better pricing in the capital markets. Regardless of the paradigm, stock tokenization at this stage faces several structural obstacles that are difficult to resolve in the short term.
Ambiguous Demand: For its targeted non-U.S. users, there are already numerous mature, low-cost, and highly liquid U.S. stock trading channels in the market (such as online brokers like IBKR, CFDs, etc.), and stock tokenization does not show significant advantages in user experience and fees.
Liquidity Dilemma: Off-chain is the price discovery center. On-chain liquidity is too small compared to traditional markets and is severely fragmented, leading to excessive slippage for large trades.
Market Making Risk: During the off-hours of the underlying stock market (e.g., weekends), market makers are unable to hedge risks and must widen spreads or withdraw liquidity, resulting in low reliability and cost-effectiveness for 24/7 trading.
Incomplete Rights: Both current models have made significant compromises on core shareholder rights. Holders only receive the economic benefits of the stocks, while voting and other corporate governance rights are withheld and processed by the issuer (SPV or Robinhood), limiting functionality compared to mature tools like ADRs.
The Future Path
Although reality is harsh, the true significance of this 'pilot' lies in exploring future possibilities. The future of tokenized stocks depends on their ultimate positioning within the entire financial ecosystem.
Path A: Mainstreaming and Infrastructure. If the global mainstream regulatory framework matures and clarifies, stablecoins will flow into households, and major financial institutions will place a certain amount of assets on-chain, with custodians gradually evolving into traditional financial giants like JPMorgan and BNY Mellon. At that time, stock tokens will become a more powerful 'composable super ADR.' Blockchain will become a unified settlement layer for equity markets worldwide, integrated into various DeFi protocols, and companies will go public directly through STO issuance on-chain.
Path B: Offshoring and Emerging Asset Platforms. If mainstream regulations continue to tighten, the crypto world may evolve into an efficient offshore innovation center. At that time, tokenization will no longer pursue competing with Apple stocks traded on the NYSE, but will shift towards becoming a 'launch platform' for new or illiquid assets, such as private equity of Pre-IPO companies, fractional transfers of VC fund shares, and even the securitization of future income streams like intellectual property.
The various immaturities of current stock tokenization are not signs of failure but rather a necessary early stage of infrastructure development. The measure of its success should not be whether it can provide a better Apple stock trading experience today, but rather what new markets and financial behaviors it creates for tomorrow. For all market participants, understanding this is key to seizing opportunities in the impending financial revolution.