Tokenized stocks, explained

Back in September, the U.S. Securities and Exchange Commission cleared the way for the trading of tokenized stocks.

The so-called Innovation Exemption lifts some regulations, for a five-year period, to allow for the issuance of digital tokens. Those tokens represent shares in a corporation or organization. In other words, it’s another way for investors to trade.

And now, there’s a growing list of companies, including Goldman Sachs and Microsoft, that have objected to the tokenized versions of their stocks.

This can all be a little weedy. So, to help break it down, “Marketplace Morning Report” host Kimberly Adams spoke with Christy Goldsmith Romero, a distinguished visitor from practice at Georgetown Law.

Kimberly Adams: Let's start with the basics. What exactly are tokenized stocks?

Christy Goldsmith Romero: So, tokenized stocks are a digital form of stock in a public company, but the ownership records are kept on a blockchain like cryptocurrency. So, the basic form would be a public company issues a tokenized version of its own stock, but the second type of token could be issued by a third party who holds the stock. The SEC is allowing that to be traded, as well.

Adams: What conditions or requirements are there for people to actually start using these tokens?

Goldsmith Romero: Well, there's two major conditions. The first is that the tokenized stock has to carry the same rights, privileges, and protections of regular stock. The second condition is that the public company has the right to object to some third party coming in and issuing a token on their stock. And that's also really important because this is new and it isn't clear whether these third-party tokenized stocks could negatively impact trading or the price of the regular stock, and I think that's why you're seeing 50 of the big public companies have already objected.

Adams: For the companies that are embracing this kind of trading, including by third parties, what do they see as the benefit?

Goldsmith Romero: Well, right now we haven't seen any public companies, let me say, not object. But proponents of tokenized stock really say the benefits are consumer choice and modernizing market infrastructure. So, for consumer choice, what we're seeing is SEC officials have been talking about bringing into the stock market either young investors, who are used to trading in cryptocurrency. Additionally, the token might not be one share; it might be half a share or some other fraction — which could make it more affordable for younger people or first-time investors. And in terms of modernization, some see this as the next iteration after moving from paper stock certificates to electronic trading and could help facilitate having the markets being kept open longer.

Adams: Let's talk a little bit more about that. This change could potentially allow for extended trading. What would that look like, and what would be the positives and negatives of a market that's moving at all hours?

Goldsmith Romero: Yeah, so international traders, for example, in Asia and Europe, they don't want to wait until the U.S. stock exchanges open, and so to accommodate these different time zones, the New York Stock Exchange and Nasdaq are moving to 23/5 — these extended hours. But they're not moving to 24/7 because they recognize that sometimes it's helpful for markets to be closed, particularly when something volatile happens, for it to kind of settle out before the markets open again. But the cryptocurrency markets operate 24/7 around the clock, and so some investors want that for the benefit of the equity markets, which is the stock market.