Mankiw Research | US Stock Tokenization: A New Narrative or Old Wine in a New Bottle?

Every Thursday at 7:30 PM, the tavern opens on time! From investment jargon, entrepreneurial stories, project ups and downs, to hot topic rants, Airdrop traps, and track predictions... we chat about what you want to hear in an AMA format, gathering industry experts! The theme has no limits, let's easily chat about Web3! In the face of regulatory policy changes and sudden compliance trends - don’t panic! Senior lawyer Mankun will personally interpret hot regulatory events for you and help you gain insights into the trends! This issue of the Mankun Crypto Tavern focuses on the recent hot topic of tokenization in the US stock market. At the end of June, platforms such as Robinhood, Kraken, and Bybit successively launched tokenized products for US stocks, attracting widespread attention from both the crypto circle and the traditional financial industry. Is this phenomenon a new narrative or old wine in a new bottle? We invite three guests to discuss from different perspectives, covering technology, Compliance, investment opportunities, and risks. The tavern is open, please introduce yourselves, guests! CryptoMiao: Hello everyone, I am Miao Ge, a special contributor for Mankun, holding qualifications such as legal professional qualification, CPA, tax advisor, and accountant. I focus on the finance and tax field, have rich experience in Web2, and research DeFi arbitrage and token models in Web3, especially with in-depth experience in the Sui ecosystem. Feel free to DM me for inquiries about tax or Sui-related issues! Sam: I am Sam, nicknamed "Heavy Equipment Mage", which means "heavy gear", not anything else (laughs). I started with mining early on and participated in exchanges and projects from 0 to 1. I am currently the COO of Techub News, focusing on cryptocurrency media operations in Hong Kong. We are directly invested by Gaofeng Group and are the official partner media of Bitcoin Asia and Bitcoin Magazine. We hold Space sessions every Tuesday and Friday, focusing on trading and industry trends, and also organize offline summits in Hong Kong. Welcome to follow us! Crypto Hotshot Lawyer: Hello everyone, I'm Loren. I was inspired by American TV shows to become a lawyer. My undergraduate degree is not in law, but I later studied law in Hong Kong and worked in the courts. I now focus on criminal compliance defense. In terms of on-chain investments, I prefer Meme coins and have dabbled in everything from inscriptions to PumpFun and AI, so I consider myself a 'Dogecoin Warrior.' Dong Dong Robin: I am Dong Dong, a researcher at Mankun, working in the brand department, and co-hosting the Crypto Tavern with Meg. Every Thursday, we select a hot topic in Web3 and invite guests to have an easy chat. Everyone is welcome to join! Meg: I am Meg, transitioning from traditional finance to Web3, with experience in CEX, DEX, mining pools, payments, and law firms, making me somewhat of a "veteran" in Web3. I hope everyone enjoys our show! Now, let's get to the main topic, with Dongdong throwing out the first topic. Q1: Is the tokenization of US stocks a new narrative or old wine in new bottles? Dongdong Robin: The recent surge in the tokenization of US stocks has seen platforms like Robinhood, xStock, and Kraken almost simultaneously launch related products. Discussions across the internet are fervent, with reports from Twitter to Web2 news media. What are your thoughts on this trend? Where does it come from? Is it a new narrative or just old wine in a new bottle? Sam: As media professionals, we are highly sensitive to new tracks, and our access to information is faster than ordinary users. The tokenization of US stocks is essentially a branch of RWA (Real World Assets), similar to the continuation of STO (Security Token Offering). STO had explorations in 2017-2018, which were experimental in nature and in a gray area, such as the on-chain rights to gold mine profits. The narrative of RWA began to rise last year due to the gradual relaxation of regulations, as traditional enterprises hope to participate in the crypto capital appreciation through the blockchain. Licensed institutions like Robinhood, Bybit, and Kraken have driven this wave, but the underlying logic is Asset-Backed Securities (ABS), traceable to the MBS (Mortgage-Backed Securities) of the 2008 subprime mortgage crisis. During our early incubation, we designed ABT (Asset Tokenization) schemes for projects, and a similar logic already existed. Now, with more mature technology and regulation, Robinhood issues on Arbitrum L2, emphasizing compliance and custody, and has obtained licenses such as MiCA. Compared to traditional US stocks, tokenized stocks support 7×24 hour trading, have lower entry barriers, and greater liquidity. Opening an account for traditional US stocks is complicated (such as with Tiger, Futu, and IBKR, which require tedious verification) and is subject to trading hours and holiday restrictions (for example, IBKR notifies via email that trading cannot occur on holidays). Tokenized stocks can be traded anytime, suitable for event-driven opportunities (such as sudden negative news), but excessive liquidity may lead to retail investors being manipulated. In professional terms, it can be called ABT, a blockchain variant of ABS, but one should still be cautious of manipulation risks. Crypto flamboyant lawyer: I completely disagree that it is merely "old wine in new bottles." The tokenization of US stocks is not a new concept; FTX and Binance tried it in the early years, but the regulatory environment was unclear at that time, and they failed to achieve scale. Now, with the new US president taking office and a change in the SEC chair, along with Hong Kong and Singapore softening their stance on crypto assets, the global regulatory environment is improving, driving the surge. Analogous to the internet, it had its embryonic form in the 1960s but only became globalized after 2000; advanced concepts need infrastructure and cognitive follow-up. Tokenization of US stocks is promoted first in Europe and Asia, as direct trading of US stocks is available domestically in the US, leading to less demand, while other regions face account opening and KYC barriers, making tokenization convenient. RWA is broader in scope, with the early form of securities network trading appearing in the 1970s (such as the popularization of online trading in the 1990s). Tokenization reduces intermediary costs (such as brokerage, law firm, and audit fees, which can account for 10% in traditional listings), especially for unlisted companies (like SpaceX and OpenAI) through direct tokenization in the form of Pre-IPO, marking a qualitative leap. CryptoMiao: The trend stems from market maturity and changes in user demand. In the past, STOs and IDOs were ways for exchanges to compete for traffic, but now the market has enough users, and tokenization is more of a reflection of product maturity. It lowers the trading threshold and supports all-day trading, but due to the lack of a complete arbitrage mechanism (such as minting and redemption channels), on-chain prices may deviate from off-chain stock prices. For example, the daily candlestick chart of tokenized stocks on Solana or Robinhood has low correlation with Nasdaq stock prices, and the absence of an arbitrage mechanism leads to price deviation, making investors wary of insufficient liquidity and slippage risk. Meg: From the perspective of the cryptocurrency industry, the market has shifted from competition for traffic to the development of mature products, evolving from STO to IDO and now to RWA. In the past, IDO was just a gimmick for exchanges to attract users, but now the market is more rational. Tokenization is a manifestation of product and market maturity. It is not only an intrinsic growth of Crypto but also an external force attracting the attention of traditional finance, connecting Web2 and Web3. Dongdong Robin: The tokenization of US stocks has both historical roots and, due to regulatory and technological advancements, has revitalized new opportunities, combining short-term sentiment with long-term potential. Next, let's move on to the next topic. Q2: What are the differences between holding tokenized stocks and traditional stocks? How can compliance be achieved? Crypto Hotshot: According to the official explanation from Robinhood, tokenized stocks are price certificates of on-chain smart contracts, not actual stocks. Users do not enjoy the shareholder rights associated with traditional stocks (such as voting rights or corporate governance rights), but only receive economic benefits (such as dividends). The method of dividend distribution varies by issuer: xStock automatically converts dividends into tokens, while Robinhood distributes dividends directly. The redemption mechanism is a key pain point. If it cannot be exchanged for real stocks, the economic logic is questionable, and redemption may involve additional fees with an opaque process. When discussing with other lawyers, they believe that if tokenized stocks cannot be redeemed, it is equivalent to "only entering and not exiting"; there is an issue with the economic logic. On the compliance side, issuers need to obtain traditional financial licenses (such as EU MiCA, VASP), but outside of the United States, the SEC's regulatory power is limited, leading to uncertainty in compliance. Web3 is still developing, and compliance issues need to be continuously addressed. Sam: There are three main differences between tokenized stocks and traditional stocks: No shareholder identity: Tokenized stocks are held by custodians with real stocks, pegged 1:1, and users only hold on-chain certificates without shareholder rights. Traditional stockholders can control the company (such as holding more than 33%), but this is not possible with tokenized stocks. Price mapping attribute: Similar to derivatives, only tracking price, with no voting rights or governance rights. High liquidity and low thresholds: Supports 7×24 hour trading, more flexible than traditional stocks (which are limited by trading hours and holidays), suitable for event-driven trading (such as sudden negative news), but excessively high liquidity may lead to retail investors being manipulated. In terms of compliance, licensed brokers such as Robinhood issue through EU qualifications and must ensure transparent asset custody and comprehensive third-party audits. Regulatory focus areas include transparency, asset security, and proof of reserves. Traditional stocks have a mature registration system, while tokenized stocks fall under the custody of institutions, similar to financing and fundraising models. It is recommended that investors consult professional institutions (such as Mankiw) to assess the quality of custody and auditing. CryptoMiao: Tokenized stocks are similar to ETFs, packaging individual stocks with prices determined by market trading, not driven by oracle. Unlike the early oracle model of FTX (staking stablecoins or BTC, asset pool trading), current tokenized stocks require real stock collateral. However, the lack of an arbitrage mechanism (such as a redemption channel) leads to price deviation risks, such as Tesla stocks on Solana falling 1% while the Nasdaq drops 5%. Traditional exchanges are restricted by trading hours (e.g., 8:30 AM to 3:00 PM, with low pre-market and after-hours trading volume). Tokenized stocks support trading throughout the day, suitable for rapid pricing (e.g., driven by Musk's statements, wars, and other events), but lack liquidity (e.g., daily trading volume of Apple stock is only $90,000), amplifying slippage risk. Professional institutions can apply for redemption (e.g., Ondo Finance's US Treasury token USDY, with an annualized return of 4%+), but retail channels have not yet been opened. Meg: Tokenized stocks are similar to "paper gold"; users hold a price certificate rather than a physical asset. The on-chain price is formed through market transactions, similar to the pool model of GMX (Mint and Redeem) or the on-chain order book of Hyperliquid, rather than the oracle model of FTX. Event-driven trading opportunities (such as major negative news) may first manifest on-chain, leading the traditional market. However, the current trading depth is insufficient (for example, the daily trading volume of Apple stock on Bybit is only 90,000 USD), resulting in significant slippage, and exchanges may moderately control liquidity to avoid false trading volume. I am curious whether the price mechanism feeds traditional stock prices through oracles? Can Meow Brother answer this? CryptoMiao: Not an oracle model. The tokenized stock price is formed by market matching, based on real stock pledges, not the oracle asset pool model of FTX. The order book model requires matching between buyers and sellers (such as the long and short sides of perpetual contracts), rather than asset pool trading. Poor liquidity leads to price deviation, and it is necessary to improve the minting and redemption mechanism. Sam: Tokenized stocks do not require oracles, and their liquidity comes from the stocks anchored by custodians. On-chain prices can inversely affect the traditional market, as the traditional market has trading hour lags, while on-chain has nearly zero delay. Current trading is still dominated by centralized exchanges, not fully on-chain. Meg: On-chain prices lead traditional markets, especially during major events, which indeed presents trading opportunities. However, due to insufficient depth, retail investors should be cautious when placing orders to avoid becoming "slippage victims." Q3: What are the risks and opportunities of tokenizing unlisted stocks? Dongdong Robin: One of the most notable aspects of this tokenization craze is that it has extended to unlisted stocks, such as SpaceX and OpenAI, sparking heated discussions. What are the risks of investing in tokenized unlisted stocks? What are the opportunities? Sam: There are three major risks associated with the tokenization of unlisted stocks: Legal Compliance and Governance Conflicts: OpenAI and SpaceX may not recognize tokenized stocks, leading to unclear legal status. Information Asymmetry: The tokens may represent fund LP shares, with specific information being opaque and circulation restricted. Pricing Opacity: Insufficient liquidity and imperfect pricing mechanisms make it difficult to protect investors' rights. Current tokenization is similar to the gray experimentation of early STOs and should be approached with caution. The traditional stock market has a history of 400 years, with mature compliance and rights protection, while tokenized stocks are still in the experimental stage. CryptoMiao: The biggest risk is the inability to verify authenticity. OpenAI publicly denies that the tokens issued by Robinhood are its stocks, making it difficult for investors to verify the authenticity and quantity of the staked assets. There is no guarantee for dividends and voting rights, and it is challenging to protect rights. For example, xStock withdrew liquidity from Uniswap (involving about $330,000 in liquidity), renamed itself "Demo Token One," suspended trading, and investors have no recourse for rights protection, as the SEC and SpaceX in the U.S. do not intervene in overseas issuance. If the company cooperates (such as early founders pledging 30% of their shares and notarizing), tokenization can provide pre-IPO pricing and cash flow recovery opportunities for startups, similar to the market-based pricing of venture capital, reducing the risk of insufficient R&D funding. This is a significant opportunity for early-stage projects. Crypto Hotshot Lawyer: The attempt to tokenize unlisted stocks allows ordinary people to participate in high-quality assets' Pre-IPO, but it often ends in failure. High-quality companies (like OpenAI) do not need to attract retail investors through tokenization; information asymmetry and lack of regulation amplify the risks. Tavern listener asked: Is it feasible to tokenize SPAC (Special Purpose Acquisition Company) to avoid risks? For example, establish a SPAC to acquire equity in OpenAI and then STO the SPAC equity. Crypto flashy lawyer: Theoretically feasible, SPAC can act as an intermediary to isolate risks, but company authorization is needed. Quality companies lack motivation, and small to medium-sized enterprises are more likely to try. Domestic companies have already consulted similar operations, but implementation is difficult and requires company recognition and disclosure. Meg McG: Tokenization of unlisted stocks is similar to "buying a drum and turning it into a dog"; retail investors need to be aware of the risks. The xStock withdrawal incident is an example; I intended to buy SpaceX, but it ended up being a "mud dog". The Mankiw legal team can provide overseas structures and Compliance services for companies going abroad, feel free to consult. Dongdong Robin: The risks are indeed very high. I saw someone on Twitter optimistic about SpaceX and OpenAI, thinking that tokenization is an opportunity to invest in high-quality companies that were previously inaccessible for value investment. As a result, the pool was withdrawn, and there was no way to claim rights. Next, let's talk about the choice of issuance chains. Q4: What considerations are there for issuing public chains with regard to tokenization of US stocks? Dong Dong Robin: Different companies have different choices when it comes to the selection of the token issuance chain. Robinhood chose Arbitrum L2, while xStock chose Solana. What considerations are there in choosing the issuance chain? Let me explain first. Crypto Miao: Solana has become the first choice due to its large user base, fast transaction speed, and mature DeFi ecosystem (rich in pools and exchange protocols), making it suitable for chasing trends such as Meme coins and tokenization of US stocks. Arbitrum may be related to Robinhood's long-term plans (such as building its own L2), with low gas fees and strong contract customization. The Sui ecosystem has great potential, but its user base is weak, making it difficult to become a mainstream issuance chain in the short term. Choose a style related to corporate governance and investment direction. Solana has a steady strategy similar to Coinbase, while Arbitrum is related to Robinhood's heavy investment in ARB and technical collaboration. There are also teams on Sui planning to issue tokenized stocks, but promotion will take time. Sam: The choice of blockchain is more based on commercial interests rather than technical merits. Robinhood has collaborated with Arbitrum for some time (such as Robinhood Wallet), and choosing Arbitrum may help boost the ARB price (last year ARB rose by 20%) or control L2 revenue (such as revenue from self-built L2's gas fees). Solana attracts xStock due to its high performance and low gas fees, similar to the selection logic of Optimism. Technical considerations are secondary; the core is manipulation and interest games, with the blockchain merely being a utilized role. Arbitrum may be more "obedient," providing customized solutions for Robinhood. Crypto Hotshot Lawyer: Solana's daily active users, capital volume, and DeFi infrastructure lead the way, making it suitable for tokenized products like Meme coins and the ecological advantages of PumpFun. Arbitrum may be chosen due to contract customization and KYC/AML Compliance requirements, but specific considerations will depend on capital operation strategies. I know little about Arbitrum, but Solana's ecological advantages are undeniable. Dongdong Robin: The choice of issuance chain indeed involves both technical and commercial considerations. Q5: What is the long-term value of tokenized US stocks? How do you view perpetual contracts for US stocks? Dongdong Robin: Let's talk again, what do you all think about the long-term value of tokenization in the US stock market? There is also a question, perpetual contracts are a unique financial instrument in the crypto market, what is your view on US stock perpetual contracts? Will they bring new impacts? Personally, I am very interested and feel that US stock perpetual contracts may be more interesting than tokenization. CryptoMiao: Tokenization of US stocks has long-term value, similar to the transformation of stocks from offline to the internet (the rise of online trading in the 1990s). The decentralization and transparency of Web3 reduce trust costs, supporting 24/7 trading and rapid pricing (driven by events like Musk's statements, wars, etc.). Perpetual contracts are easier to implement, requiring no physical stock collateral; FTX had already attempted stock perpetual contracts in 2020 (for 30 types of stocks). I serve as a Types ambassador on the Sui chain and have communicated with the development team. They are trying perpetual contracts, but due to the small number of traders and large capital, the order book model has a large price spread (for example, 100 units on the sell side and 50 units on the buy side). Therefore, they are using an asset pool and oracle pricing. However, the reliability of the oracle for stock prices is a bottleneck, requiring closer market linkage; otherwise, the price spread or manipulation risk is high. Sam: The tokenization of US stocks such RWA is superior to ABS from the 2008 subprime mortgage crisis, based on four aspects of progress: High transparency: Public chain records are verifiable, and the information symmetry is better than traditional finance (the opacity of assets during the subprime mortgage crisis). Improved regulation: Compliance requirements (such as custody and auditing) are stricter than in previous years. Risk control: The selection of quality assets and the automation of smart contracts reduce human risks, avoiding the complex structures of layered nesting seen in the subprime mortgage crisis. Technological advancement: Blockchain infrastructure surpasses traditional systems. However, there is currently a lot of speculation, similar to the "consensus is value" of Meme coins, and one must be wary of the risks of artificial manipulation; it is still in the experimental stage. Perpetual contracts have great potential as they do not require physical assets and have high market acceptance. Crypto’s flamboyant lawyer: The grand narrative is attractive, but retail participation is low (for example, daily trading of Apple stock tokens only reached $90,000), and issues related to slippage and liquidity are significant. On-chain 24/7 trading has the advantage of "pre-market matching," but the depth is insufficient, and retail trading in small amounts can easily drive up prices. Perpetual contracts have higher market acceptance and greater potential because they do not require physical asset collateral. The long-term development of blockchain is promising, but short-term observation is needed. Real question: Has anyone here purchased tokenized stocks? CryptoMiao: I have bought on Solana, the slippage is very high, the trading volume is small, and a slightly larger transaction will raise it by several points. It is suitable for fractional stock arbitrage, but not for large investments. Crypto flamboyant lawyer: I see that many in the community are also watching from the sidelines, retail investors' participation enthusiasm is not high, and the grand narrative has not been realized. Meg: The tokenization of US stocks is not only an internal growth within the crypto space (such as the wealth effect of Meme coins), but also an external force attracting the attention of traditional finance, connecting Web2 and Web3. Similar to how Payoneer integrates Web3 funds into real-world consumption, the long-term potential is enormous, but it requires market and regulatory maturity. The slippage issue mentioned by Brother Meow is very real, and retail investors need to be cautious when placing orders. Q6: Tokenization of US stocks is a type of RWA; what other tokenization directions are worth paying attention to? CryptoMiao: I believe that copyright-related assets have the most potential, such as music, film, books, and website advertising revenue sharing. YouTubers (like Mr. Beast) can tokenize video copyrights to quickly recoup a million-dollar investment, allowing holders to enjoy long-term dividends (like advertising fees and viewership revenue), similar to stock dividends. Compared to traditional financing, it is transparent and efficient, suitable for content creators. For example, website advertising revenue sharing and Apple Music copyright fees can be directly distributed through tokens, with on-chain records ensuring transparency. There have also been attempts at tokenizing book publishing revenue. Sam: RWA is superior to ABS in terms of transparency and automation, but human operation is a trust pain point. Copyright and real estate tokenization require strong regulation and legal constraints; otherwise, long-term dividends are hard to guarantee. As an old miner, I have reservations about human factors. The original intention of blockchain is to eliminate trust, but humans remain the biggest variable. It is necessary to meet the three elements of relational contracts, high value, and long-term effectiveness. "Leek consensus" can also drive up value; as long as the funding is sufficient, even bad projects can take off, but this does not constitute investment advice. Crypto flamboyant lawyer: Domestic companies (such as Yunnan Tea Mountain, Shenzhen real estate developers) are consulting on RWA financing, similar to ABS transferring future income, such as tea leaves from the tea mountain and undeveloped land on-chain collection. However, the costs are higher than traditional financing, mostly for market value management. RWA tokens issued in Hong Kong mostly do not circulate in the secondary market and are limited to subscription by investors. In practice, there are regulatory and liquidity challenges. Tavern listener asks: Will tokenized stocks in the future enjoy shareholder rights just like traditional stocks? CryptoMiao: Similar to ETFs, it requires redemption for real stocks through issuers (like Robinhood), but the channels are not smooth. In the future, if the stock market goes on-chain as a whole (like exchanges going on-chain), tokens can be directly issued to grant shareholder rights, which is difficult to achieve in the short term and may take 10-20 years. Meg: If traditional finance fully goes on-chain (lending, supply chain finance, etc.), shareholder rights may be realized, but in the short term, it is still dominated by institutions, and retail investors find it difficult to beat inflation. Dongdong Robin: How can tokenized stocks incorporate shareholder rights? This requires a sufficiently mature market, with increased trading volume and participation, before issuers will open up rights. For example, the New York Stock Exchange and the Singapore Exchange are trying around-the-clock trading, and on-chain may be a possible path to achieve this. Tokenization of US stocks, as a branch of RWA, connects Web2 and Web3, lowering trading thresholds and costs, supporting round-the-clock trading and rapid pricing. Its advantages lie in high transparency, regulatory progress, and mature technology, but it faces challenges such as insufficient liquidity, price deviation, lack of redemption mechanisms, and compliance uncertainty, with even higher risks for tokenizing unlisted stocks. In the long term, RWA is expected to reshape the finance and content industries, requiring the simultaneous maturity of technology, regulation, and the market. Thank you to all the guests, this session of the tavern ends here!

/END. Original authors: Zheng Hongde, Xu Xiaohui