What challenges does stock tokenization still face?

Author: Blockchain Knight; Source: X, @BlocKnight21

After the rise of Robinhood Chain, stock tokenization has once again been brought to the forefront.

But the question facing the industry now is: after tokenization, how will the original securities rules be integrated, how will the clearing system be built, and most importantly, what exactly will investors be buying?

First, let's look at the regulations. In January of this year, the U.S. SEC clearly stated that the tokenization of securities will not change their securities attributes. Whether securities are directly tokenized by the issuer or by a third party issuing tokens linked to stocks, they may fall under the existing securities regulatory framework.

For example, with Robinhood's current Stock Tokens, investors gain economic exposure to the underlying stock, not the stock itself, and do not have corresponding shareholder voting rights. This is not the same as directly holding shares. Secondly, there's clearing. The traditional stock market appears to be simply buying and selling stocks, but it's actually connected to brokerages, custodians, and clearinghouses. Blockchain can put some recording and settlement on-chain, but these legal and financial functions don't automatically disappear. DTCC's current approach is more cautious; its tokenization pilot starts with a selection of securities, and it plans to record tokenized rights within the existing securities infrastructure framework, rather than completely rebuilding the entire system. Another often overlooked issue is liquidity. The market often touts 24/7 trading and global investor participation as advantages of tokenized stocks, but longer trading hours do not equate to increased liquidity. Stock market liquidity comes from market makers, institutional investors, financing mechanisms, and mature order books. If the same stock appears on different chains and platforms, each with its own liquidity pool, it could fragment the market. Even after the US stock market closes, on-chain stock tokens can still be traded. Without continuous quotes from traditional exchanges, who provides the price? Perhaps this will be resolved once the stock market becomes 24/7. Of course, the market demand itself has not yet been fully validated. Data shows that the current on-chain size of tokenized stocks exceeds $2 billion, but this is still very small compared to the global stock market. The truly attractive aspect is that stocks, once on the blockchain, can be directly combined with stablecoins, lending, derivatives, and other on-chain assets. Stocks can serve as collateral, stablecoins can facilitate direct settlement, and transactions can continue even after traditional markets close. This is where tokenization has the potential to truly transform financial markets. However, at the same time, risks will also be brought onto the blockchain. After all, the tokenization of financial assets can lead to issues such as liquidity mismatch, increased leverage, and risk transmission. Therefore, the current challenge for stock tokenization is not whether the technology can achieve it, but rather a series of more practical problems. This is why what truly deserves attention now is not which blockchain has the highest transaction volume, but how regulators will set rules to ensure the genuine flow of assets. If these attempts ultimately succeed, the significance of stock tokenization will no longer be just adding another asset class; it will be a major upgrade to the methods of securities issuance, trading, and settlement. Until then, we still have a long way to go.