Tokenised equities ‘mimicʼ stocks, invite regulatory arbitrage

Tokenised equities that “mimic” stocks undermine market integrity and invite regulatory arbitrage in Europe, according to a letter by the World Federation of Exchanges (WFE) published on August 26. The WFE, a trade body for regulated exchanges and clearing houses, argues that tokenised stocks are considered to be derivatives according to EU regulation, yet they are marketed as stocks.

The WFE explained in the letter: “We are alarmed at the plethora of brokers and crypto-trading platforms offering or intending to offer so-called tokenised US stocks. We refer to these products as ‘mimicsʼ because even though theyʼre marketed as stock tokens and may seem like stocks, they are not stocks.”

It called on the International Organization of Securities Commissions (IOSCO) to resolve legal uncertainties on these “mimic products” marketed as “stock tokens” with regard to “ownership, custody and enforceability in tokenised environments”.

“In the event of failure of the broker, it is unclear whether the token will still have value and who will own the underlying asset,” the WFE said, adding that regulators should prevent derivatives products being marketed as stock equivalents.

IOSCO did not response to our questions by the time of publication.

Equities, derivatives or securities?

On June 30, the fintech Robinhood Europe UAB launched its stock tokens on its EU application, allowing European investors to access shares of US-based public and private companies such as SpaceX and OpenAI. (However, OpenAI later posted on the social media platform X that it does not endorse the tokens or any transfer of equities.)

While the WEF letter says the legal status of these tokens across all jurisdictions is unclear, Robinhood notes on its website that its stock tokens are offered under the EU Markets in Financial Instruments Directive II (MiFID II) as “derivative contracts”.

On August 29, Compliance Corylated contacted the Bank of Lithuania (BoL), which regulates Robinhood Europe UAB. The BoL said it had “contacted the firm regarding financial products (OpenAI and SpaceX tokens) and the information provided to customers”, Robinhood had provided the answers and the BoL was “analysing” them.

“We would like to point out that such dialogue with licensed financial market participants is part of a standard supervisory procedure,” the BoL added.

The WEF letter cites the US Securities and Exchange Commission (SEC) view — given in a July statement by commissioner Hester Peirce — that tokenised securities are still securities, and so subject to federal securities laws.

The US regulator said: “As powerful as blockchain technology is, it does not have magical abilities to transform the nature of the underlying asset. While blockchain-based tokenisation is new, the process of issuing an instrument representing a security is not. The same legal requirements apply to on- and off-chain versions of these instruments.”

Regulatory arbitrage

With the current landscape, the WFE letter suggested that tokenised stocks could lead to regulatory arbitrage — whereby companies use loopholes or cherrypick jurisdictions — enabling them to operate outside of the traditional frameworks.

Regulatory loopholes could also undermine investor protection, it added, because token holders may not receive the same protection as traditional shareholders without realising it. Tokenised equities and similar instruments should be subject to the same disclosure, trading, clearing and settlement obligations as traditional securities.

Robinhoodʼs FAQs sheet states: “Stock tokens offer many of the same benefits as traditional stocks, but since you do not own the underlying stock, you will not have certain shareholder rights like voting.” The company adds that its stock tokens are not covered by “deposit or investor liabilities insurance schemes”.

US-based crypto exchange Coinbase also plans to roll out similar tokenised products based on “jurisdictional approvals”, according to a July 31 interview given by Coinbase vice president of product Max Branzburg.