As cryptocurrencies become more intertwined with the traditional financial system, industry heavyweights are racing towards a long-sought goal of turning real-world assets into digital tokens, a process known as tokenization. “Tokenization is going to open the door to a massive trading revolution,” declared Vlad Tenev, the CEO of the trading platform Robinhood, at a recent James Bond-themed tokenization launch event in the south of France. Advocates for tokenization argue that it represents the next leap forward in crypto and can help break down barriers that have historically advantaged the wealthy, making trading cheaper, more transparent, and more accessible for everyday investors. However, critics warn that tokenization threatens to undermine a century’s worth of securities law and investor protections that have made the U.S. financial system the envy of the world. Robinhood’s push into tokenizing shares of private companies quickly faced pushback from one of the world’s most popular startups, indicating the legal and regulatory complexities and challenges.

The basic idea behind tokenization is simple yet revolutionary: it involves using blockchain technology, which powers cryptocurrencies, to create digital tokens that serve as stand-ins for real-world assets. These assets can be diverse, ranging from bonds and real estate to even fractional ownership of a piece of art. These tokens can then be traded like crypto, virtually by anyone, anywhere, at any time. The massive growth of stablecoins – a type of cryptocurrency typically bought and sold for $1, designed to maintain a stable value – has helped fuel the appetite to tokenize other financial assets. Katie Haun, a crypto venture capitalist, noted on a recent podcast that tokenization will upend investing in ways similar to how streaming services radically changed how people watch television. According to her, “You used to have to sit there on a Thursday night and watch Seinfeld. You tune in at a specific time, you don’t get to choose your program, you couldn’t be watching a program like Squid Games from Korea. Netflix was market-expanding. In the same way, I think the tokenization of real-world assets will be market expanding.”

Growing Momentum and the Presence of Heavy Players: BlackRock, Robinhood, and Coinbase

The push for tokenization comes at a heady time in crypto – an industry that has seen enormous growth since the creation and early development of Bitcoin more than 15 years ago by libertarian-leaning computer enthusiasts, to its increasing acceptance in mainstream finance. Bitcoin, the world’s most popular cryptocurrency, is regularly setting all-time highs – surpassing $123,000 on Monday – while other forms of crypto like stablecoins are exploding in use. The Trump administration has even pledged to usher in what has been called the “golden age” for digital assets, signing a new law regulating stablecoins last Friday.

Momentum around tokenization is growing. Robinhood began offering tokenized stock trading of major U.S. public companies to its European customers earlier this month and even gave away tokens to some customers intended to represent shares in OpenAI and SpaceX, two highly valued private companies. Several other firms are diving into the space: crypto exchange Kraken also allows customers outside the U.S. to trade tokenized stocks, while Coinbase has petitioned regulators to open the market to its U.S. customers. Wall Street giants like BlackRock and Franklin Templeton currently offer tokenized money market funds. The consulting firm McKinsey projects that tokenized assets could reach $2 trillion by 2030, indicating immense potential for this revolution. Lee Reiners, a lecturing fellow at Duke University, suggested that the biggest winners in the push for tokenization could be a small handful of exchanges like Robinhood that see their trading volumes and influence spike, which he ironically noted given crypto’s origins in bypassing intermediaries.

Legal and Regulatory Challenges: A New Frontier for Securities Law

One of the most pressing questions surrounding tokenization is its legality and implications for securities law. Defining what constitutes a “security” can be a hotly debated question, particularly in the crypto world. The crypto exchange Binance, for example, pulled back offerings of tokenized securities in 2021 after German regulators raised questions about potential violations of that country’s securities law. The evolving regulatory landscape and its impact on the future of tokenization is a key factor. Under the Trump administration, the Securities and Exchange Commission (SEC) has taken a less expansive view than the previous administration, and has dropped or paused litigation against crypto companies that the agency had previously accused of violating securities law. Hilary Allen, a professor at the American University Washington College of Law, noted that crypto companies have been emboldened by Trump’s victory to be more aggressive in pushing what they can offer. “The most pressing risk is (tokenization) being used as a regulatory arbitrage play as a way of getting around the rules,” she stated.

However, the SEC has also struck a cautionary tone when it comes to tokens. Shortly after Robinhood’s announcement, SEC Commissioner Hester Peirce, a vocal crypto supporter, issued a statement saying companies issuing tokenized stock should consider “their disclosure obligations” under federal law. “As powerful as blockchain technology is, it does not have magical abilities to transform the nature of the underlying asset,” Peirce stated. One of the most closely watched areas of tokenization involves private companies, which are not subject to strict financial reporting requirements like publicly traded ones. Many hot startups are not going public as often as they used to and are instead increasingly relying on wealthy and institutional investors to raise large sums of money and stay private. “That’s unfair to the little guy,” say advocates of tokenization. Johann Kerbrat, a Robinhood executive, noted that “these are massive wealth generators for a very small group of rich, well-connected insiders who get access to these deals early. Crypto has the power to solve this inequality.”

Hidden Risks and Repeating History: “Please Be Careful”

Despite promises of equality, Robinhood’s giveaway of tokens meant to represent an investment in OpenAI immediately drew pushback from OpenAI itself, which stated it was not involved in Robinhood’s plan and did not endorse it. “Any transfer of OpenAI equity requires our approval—we did not approve any transfer,” OpenAI said on social media, adding: “Please be careful.” Public companies have strict public reporting requirements regarding their financial health that private companies do not have to produce. Such reporting requirements have helped protect investors and lend legitimacy to the U.S. financial system. Hilary Allen, a professor at American University Washington College of Law, said the push for tokenized sales of shares in private companies is “eerily familiar” to how things played out before the creation of the SEC nearly a century ago. “Where we’re headed is where we were in the 1920s,” she said. “Door-to-door salesmen offering stocks and bonds, half of it had nothing behind it, people losing their life savings betting on stuff they didn’t understand.”

In conclusion, the world of asset tokenization stands at the cusp of a huge opportunity to revolutionize financial markets, increase accessibility and transparency, and serve as a significant growth engine for the crypto industry. However, this rapid development also brings significant legal and regulatory risks, demanding great caution from both regulators and investors. The success of tokenization depends on finding a balance between innovation and investor protection, while developing clear regulatory frameworks that ensure the stability and reliability of the new system.