7x24 hour trading, fragmented ownership, and cryptocurrency exchanges are returning to the stock tokenization battlefield.
Written by: Jeffrey Gogo
Translated by: Tim, PANews
Key Points:
With $23.3 billion of real-world assets being issued on-chain, more and more crypto-native platforms are beginning to court traditional finance.
Several trading platforms, such as Kraken and Binance, have launched tokenized products for popular U.S. stocks like Apple and Tesla.
Some analysts believe that tokenized stocks have great potential in the cryptocurrency space, while others argue that only those focused on high-risk, highly volatile stocks will succeed.
Cryptocurrency exchange Kraken has announced the launch of xStocks, which includes tokenized versions of popular U.S. stocks like Apple, Nvidia, and Tesla. This innovation merges cryptocurrency with traditional finance in the ever-expanding realm of real-world assets on blockchain technology.
Now, as cryptocurrency exchanges increasingly align with traditional finance, can tokenized stocks succeed where others have failed? Can they attract "degen" traders known for chasing high-risk, high-volatility investments?
Ryan Lee, Chief Analyst at Bitget, told Cryptonews: "Tokenized stocks have great potential in the crypto space because they enable fractional ownership of assets, 24/7 trading, and enhanced liquidity through blockchain platforms."
Tokenized securities are digital versions of regular stocks that can be traded on the blockchain. In Kraken's case, the more than 50 tokens and ETFs it offers are issued on the Solana blockchain.
Each xStock token is pegged to the value of its corresponding underlying stock, which is held in custody by Backed Finance, the company partnering with Kraken to advance this project. For example, an Apple (AAPLx) token will track the price of AAPL stock on Nasdaq and can be redeemed for cash on a 1:1 basis.
Investors do not need to hold the stocks directly; they only need to hold tokens representing ownership of the securities. Kraken has stated that its tokens are not available for U.S. customers and will only be sold in specific markets outside the U.S.
U.S. cryptocurrency exchanges offering tokenized stock services are not pioneers in the industry. The Bybit platform recently announced similar products, while the world's largest cryptocurrency exchange, Binance, attempted such a business back in 2021 but quickly halted the project under pressure from Hong Kong regulators.
Is there a demand for stock tokenization in the crypto space?
Tokenized stocks have not yet gained widespread adoption in the crypto space, but supporters believe these products have the potential to fundamentally change how people participate in financial market investments. As Bitget analyst Lee pointed out:
"Products like tokenized stocks are increasingly popular in the market, primarily due to retail investors' demand for lower barriers to entry and more flexible traditional stock investment opportunities."
Sam MacPherson, co-founder and CEO of Phoenix Labs (the developer of the decentralized lending protocol Spark), stated that tokenized securities "transform static, closed market instruments into composable modules in the on-chain economy."
"This technology enables global access 24/7, real-time settlement, and gives rise to entirely new financial application scenarios," MacPherson told Cryptonews, adding:
These financial application scenarios can encompass various financial products, including collateralized lending and automated portfolio strategies, marking a new phase of integration between traditional finance and the DeFi market, ultimately forming a unified financial system.
However, not everyone shares the same enthusiasm, at least not initially. Georgii Verbitskii, founder of the DeFi service platform Tymio, is cautious about which assets cryptocurrency traders will favor.
In an interview with Cryptonews, Verbitskii stated that for tokenized stocks to succeed, their listing strategies must be tailored to the preferences of cryptocurrency investors, focusing on what he describes as "trend-driven or non-correlated assets."
"While the concept has promising prospects, actual demand will greatly depend on the specific types of assets listed by exchanges," Verbitskii pointed out, "On crypto asset trading platforms, high-volatility thematic stocks may be more favored by investors." He added:
Stocks like GameStop, rather than traditional blue-chip stocks like Nvidia or Microsoft. The latter often have lower volatility, making them less attractive to cryptocurrency traders, while high volatility tends to attract more interest.
In recent years, cryptocurrency investors have tended to choose assets built around meme culture narratives or those with speculative upside potential.
For example, meme stock KOL Keith Gill (known as Roaring Kitty on Twitter and YouTube, and DeepFxxingValue on Reddit's WallStreetBets forum) gained fame for his bullish bets on GameStop, igniting trading enthusiasm among retail investors, including cryptocurrency investors.
In January 2021, GameStop's stock price surged 1600% due to Gill's social media posts, causing significant losses for hedge funds that had shorted the Texas-based video game retailer.
This frenzy also extended to meme stocks like AMC Entertainment and continued to spread into the crypto market. Cryptocurrency traders have spawned new meme tokens inspired by companies like GameStop and AMC.
Tokenized stocks target a $250 billion market: facing regulatory challenges
Verbitskii believes that tokenized commodities like gold or silver are more likely to "generate strong interest" compared to tokenized stocks in the crypto space.
He stated, "These assets attract investors seeking to diversify risk or hedge, and there are precedents to follow," referring to the cryptocurrency exchange FTX, which launched perpetual gold futures products before its spectacular collapse in 2022.
Experts point out that Kraken's entry into the tokenized securities space is a new initiative to bridge cryptocurrency and traditional finance, but the key to its success lies in meeting regulatory requirements in the regions where it offers xStocks services.
The main reason for Binance's failure to launch tokenized stock products in 2021 was compliance issues, as it did not obtain a securities trading license. Hong Kong regulators had also inquired about the exchange's stock token custody arrangements.
Analysts note that in the absence of public trust, tokenized stocks could evolve into a regulatory time bomb. Kraken's collaboration with the regulated tokenization platform Backed Finance is aimed at proactively alleviating such concerns.
"xStocks were designed from the ground up to address these regulatory challenges," Backed co-founder Adam Levi stated in an email response to Cryptonews inquiries.
"They are fully collateralized on a 1:1 basis by the underlying stocks, issued in accordance with EU prospectus requirements compliant with MiFID II (EU Markets in Financial Instruments Directive), including complete investor disclosure terms, and are subject to a clear legal and regulatory framework. This gives the tokenized form institutional-grade standards."
Levi added that the xStocks products provided by Kraken are fully compliant with regulatory requirements in Jersey, Switzerland, and the EU.
He believes that the demand for tokenized stocks "will grow significantly over time." Levi predicts that this niche will follow the trajectory of stablecoins, with the market size expected to expand to $250 billion in the coming years. He stated:
The infrastructure is already in place, market demand is surging, and the momentum for transformation is unstoppable.
Democratization of real-world assets
The crypto industry once viewed regulation as a counterproductive move against Bitcoin, but now the new product jointly launched by Kraken and Backed is testing the innovative capabilities of crypto companies within a regulatory framework. Several companies have already begun offering tokenized stock services.
Dubai's tokenized securities exchange Allo has completed tokenization of $2.2 billion in real-world assets, covering 11,000 U.S. stocks and exchange-traded funds. Users can purchase on-chain stocks of companies like MicroStrategy, Tesla, and Google through the platform.
Kingsley Advani, CEO of Allo, stated that the company has achieved tokenization for over a thousand companies planning to go public through IPOs, including Musk's SpaceX, OpenAI, and Anthropic.
"Investors can access these assets faster and with a lower barrier to entry, making physical asset investment more democratized," Advani pointed out, noting that tokenization has increased liquidity on their platform, broadened investment channels for small investors, and accelerated settlement speeds.
He noted that tokenization has increased liquidity on their platform, broadened investment channels for small investors, and accelerated settlement speeds.
For example, stock fragmentation, which is the process of splitting stocks into smaller, tradable tokens. This model lowers the capital requirement for investment, attracting more investors to participate, Advani stated.
Now, international investment banks can complete trade settlements in "seconds or minutes," while the old brokerage business model required at least two business days. "This reduces counterparty risk and improves capital efficiency," the CEO of Allo stated.
Advani did not specify whether Allo has faced obstacles from U.S. or EU regulators, only mentioning that the company has a "proud compliance team" with regulatory experience in the U.S. market.
According to data from the RWA website, the total amount of RWA issued on-chain currently stands at $23.3 billion. The data shows that this scale has grown nearly 6% in the past 30 days.
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