Focus: Crypto Firms’ Race to Tokenize Stocks Raises Investor Protection Concerns

A rush by crypto firms to sell tokens linked to company shares has alarmed traditional financial institutions and regulatory experts, who warn that these fast-growing new products could pose risks to both investors and market stability.

Buoyed by President Donald Trump’s pro-crypto stance and his administration’s push for favorable regulations, the crypto industry is racing to capitalize on the renewed global enthusiasm for digital assets.

Platforms such as Robinhood, Gemini, and Kraken have launched tokenized stocks in Europe, while Coinbase, Robinhood, and startup Dinari are seeking approval to roll out similar products in the United States. Last month, Nasdaq became the first major exchange to propose offering tokenized equities.

Industry leaders argue that tokenized stocks — blockchain-based instruments tracking traditional equities — could revolutionize the stock market by enabling 24/7 trading and instant settlement, boosting liquidity and cutting transaction costs. According to tokenization tracker RWA.xyz, the combined value of tokenized public shares available to retail investors rose to $412 million as of September, up from just a few million dollars a year earlier.

However, many of these products, though marketed as shares, rarely provide the same rights, disclosures, or safeguards as traditional equities.
A Reuters review of several offerings — and interviews with more than a dozen industry officials and legal experts — found that many resemble high-risk derivatives rather than genuine ownership of stock. Critics warn this could expose investors to significant dangers, erode market integrity, and fragment liquidity if left unchecked.

“You’re essentially creating a synthetic instrument to gain exposure to those shares,” said Diego Ballon Ossio, partner at London law firm Clifford Chance. “A lot of the burden falls on investors to understand what exactly they’re buying.”

Some firms issue experimental stock tokens directly on blockchain networks — digital ledgers that record transactions — but most tokenized shares are linked to publicly listed companies and issued by third parties such as Ondo Global Markets and Dinari. In some cases, the tokens are backed 1:1 by the underlying stock; in others, they simply mirror its price through derivative exposure.

The rules governing these stock tokens vary widely, and investor rights differ across jurisdictions. Often, the products do not confer ownership, voting rights, or traditional dividends, while exposing investors to counterparty risk from the issuer.

For instance, multiple tokens are linked to Nvidia and Tesla, each with differing structures and terms.

“The fact that different tokenized offerings carry different rights and disclosures is a major concern,” said Gabriel Otte, CEO of Dinari, which offers fully collateralized tokens.

Robinhood began offering trades in tokens tied to public companies in June and plans to expand to private firms. To promote its launch, it distributed tokens linked to OpenAI — derivative contracts backed by fund units in a special-purpose vehicle holding OpenAI convertible notes. OpenAI objected, saying the offering had not been authorized, prompting a regulatory review by Robinhood’s European overseer.

Johan Kerbrat, general manager of Robinhood Crypto, said the firm clearly labels its tokens as derivatives.

“The ability to eliminate multi-day settlement delays is just one step forward,” he added.

A spokesperson said Robinhood issues public company tokens on blockchain but has not yet enabled on-chain settlement. Gemini declined to comment.

Key Investor Protection Issues

In Europe, Robinhood, Kraken, and others operate under MiFID derivative regulations, though some legal experts argue the existing framework is inadequate to oversee these emerging products. In the U.S., Trump-appointed SEC Chair Paul Atkins, known for his crypto-friendly stance, has signaled that the agency may grant exemptions from securities rules for future issuers.

That idea faces pushback from major Wall Street players such as Citadel Securities and the Securities Industry and Financial Markets Association (SIFMA), who insist such sweeping changes must go through a formal rulemaking process.

“Just because a security is represented on a blockchain doesn’t mean the core investor protections and other provisions cease to apply,” said Peter Ryan, head of international capital markets at SIFMA.

In a July letter to the SEC, Citadel Securities warned that tokenization could drain liquidity from public markets.

The European Securities and Markets Authority (ESMA), which oversees MiFID, said it is aware of tokenization’s potential risks and is closely monitoring developments.

The World Federation of Exchanges (WFE) recently urged regulators to tighten oversight, citing weak investor protection and liquidity fragmentation — though it told Reuters it supports Nasdaq’s proposal, which would treat tokenized stocks as traditional shares.

A source familiar with discussions said Coinbase is also in talks with the SEC to launch tokenized securities that would grant investors the same legal rights and benefits as conventional stocks.

Other issuers maintain they comply fully with existing securities, anti–money laundering, and bankruptcy protection laws.

Mark Greenberg, Kraken’s global head of consumer products, said the company follows a “gold standard” approach, offering full collateralization and investor disclosures while dismissing derivative-based tokens as mere “IOUs.”

“When done correctly,” added Ian de Bode, chief strategy officer at Ondo Finance, “tokenization enhances investor protection — it doesn’t diminish it.”