In recent months, there’s been a flood of good news for the blockchain, cryptocurrency, and digital asset industries. New laws supporting industry growth have been signed into effect, and government agencies are trying to provide clear rules and guidelines so companies can innovate without wondering if they’ll be prosecuted for it. Beyond the changes that have already taken place, even more pending legislation is making its way through the White House that could further accelerate growth.
But almost all of this news comes from inside the industry or its loudest supporters. What we haven’t been hearing much of, even though it’s out there, are the voices pushing back against digital currency and digital currency-financial products. However, this may be beginning to change.
Traditional finance pushes back
Citadel Securities, the hedge fund founded by Ken Griffin, recently sent a letter to the Securities and Exchange Commission’s (SEC) Crypto Task Force weighing in on tokenized equity securities. In that letter, Citadel went against the grain and said tokenized securities should be treated exactly like traditional stocks from a regulatory standpoint. In other words, they should be treated as securities and required to register with the SEC.
What is a tokenized security?
A tokenized stock is a digital representation of a traditional equity. Instead of buying Apple (NASDAQ: AAPL) or Tesla (NASDAQ: TSLA) shares outright, you buy a digital currency token that mirrors the stock’s price. That token rises and falls in lockstep with the real thing. Sometimes it’s backed 1:1 by actual shares held in reserve by a custodian, which is usually the brokerage offering the service.
When you buy a tokenized stock, you’re purchasing a synthetic version of the stock, not the stock itself. That means no shareholder voting rights and none of the full regulatory protections that come with direct ownership; instead, you get a blockchain-issued “digital twin” of a share.
In its letter, Citadel argued that tokenized securities are “look-a-like” products being marketed as alternatives to listed equities, and therefore should follow the same rules. That means brokers offering them should register as securities brokers, and the products should be regulated as securities.
Are tokenized securities legal?
Citadel’s position is that the SEC should scrutinize tokenized securities thoroughly before making any changes to existing laws. Their main argument is that the U.S. already has a well-tested system for regulating stocks; therefore, letting tokenized stock brokers circumvent those rules could harm investors and markets. They’re particularly concerned about the impact on liquidity, IPO incentives, company transparency, shareholder engagement, and broader market stability.
To be fair, Citadel’s concerns are warranted, especially in an era when the U.S. government is largely pro-crypto. The prevailing narrative tends to be that digital currency needs fewer regulations and could go further, faster if “outdated” rules got out of the way. However, as Citadel points out, nothing has really proven that the current laws should be bent for these blockchain-based offerings, especially since the financial products being offered are not something the world has ever seen before that warrants new rules.
To put it another way, tokenized stocks run the same software as publicly traded equities, but on a different operating system, blockchain, instead of U.S. stock exchanges. Citadel warns that what we see happening in the cryptocurrency industry might be “regulatory arbitrage — gaming the system — not true innovation.”
Will Wall Street compete with digital currency?
As more digital currency-financial products come to market and government agencies respond with new guidelines or amendments, we will most likely see more traditional finance institutions pushing back, or at the very least, voicing their concerns similar to how Citadel has done with the SEC’s Crypto Task Force. If the products are similar enough, as they are with tokenized stocks and publicly traded equities, traditional finance will compete head-to-head with crypto incumbents for market share.
When that’s the case, we can assume that one of two things will happen: either the traditional financial institutions will fight to slow digital currency’s momentum, or, if they can’t beat them, they’ll join them and enter the arena with their own digital currency-financial products as some traditional finance incumbents are already beginning to do.
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