Tokenized stocks explained: How Robinhood opened US markets

Robinhood (NASDAQ: HOOD) recently announced that it would launch tokenized stocks on its very own layer 2 blockchain to its customers in the European Union.

“European customers will have access to 200+ US stock and ETF tokens. Stock token holders will also receive dividend payments directly in their app… Stock tokens will initially be issued on Arbitrum. [But] In the future, tokenized stocks will be facilitated by our very own Robinhood Layer 2 blockchain, based on Arbitrum,” said Robinhood in its official announcement.

This move by Robinhood represents another instance of blockchain and digital asset products intertwining with the traditional financial system. But unlike some products, like stablecoins, where the road to adoption is murky at best, tokenized stocks have a clear, well-defined use case and an obvious appeal to retail consumers: the ability for individuals located outside the United States to easily get access and exposure to equities that trade on a U.S. stock exchange.

What is a tokenized stock?

A tokenized stock is basically a digital representation of a traditional equity. Instead of buying Apple (NASDAQ: AAPL) or Tesla (NASDAQ: TSLA) shares outright, you’re buying a crypto token that mirrors the price of that stock. The token moves up and down in lockstep with the underlying shares. In some cases, it’s backed 1:1 by an equivalent number of real shares held in reserve by a custodian, typically the brokerage offering the service.

To be clear, when you buy a tokenized stock, you’re not buying the actual stock itself. You are buying a synthetic version of the stock. For this reason, you typically won’t have shareholder voting rights or all the regulatory protections of owning the security directly. You’re buying a blockchain-issued digital representation, sometimes called a “digital twin” of the share.

Although this comes with the drawbacks you’d expect from owning a replica instead of the real thing, there are also numerous advantages, especially for individuals who would face obstacles going the traditional route to buying and holding equities via a U.S. brokerage.

Why tokenized stocks are gaining momentum

With tokenized stocks, that friction disappears. Investors can get exposure to companies listed on U.S. exchanges without navigating a complicated onboarding process or dealing with the middlemen in their countries, who might remove the obstacle of signing up but charge steep fees to access foreign markets. With tokenized stocks, all a person needs is an account on a platform that provides tokenized stocks—these platforms are usually region and country-specific to make them easily accessible—and an internet connection.

The big winners in tokenized stock trading

There are a few winners when it comes to tokenized stock trading.

This is obviously a win for anyone who wants exposure to U.S. equities but would otherwise have trouble accessing them. Tokenized stocks let them reap many of the same benefits as traditional equity trading without requiring them to jump through all the hoops to sign up. Of course, the trade-off is that they don’t enjoy the same rights and protections as direct shareholders.

But the bigger “winner” here is the companies offering tokenized stock trading, who are likely to see a significant increase in revenue thanks to their new tokenized stock offerings. Roughly 7.6 billion people live outside the U.S., and the World Bank estimates that about 5 billion are adults old enough to invest. Tokenized stocks have effectively allowed that entire audience to get exposure to U.S. equities. While investors benefit from the convenience, the platforms stand to gain even more from their patronage and the percentage of those 5 billion who join and spend money on their platform to tap into U.S. markets.

This could have a domino effect, as some tokenized stock providers, like Robinhood, back each tokenized stock 1:1 with the actual equity. This means that if there is a big influx of individuals joining these platforms and buying U.S. equities, the newfound demand for U.S. stocks could lead to share prices rising. I would expect this to take place if there really is a large volume of individuals trading tokenized stocks, and if that does happen, I would expect the price increases to happen around the “name-brand” companies that trade.

The third winner is the blockchain and crypto industry itself. Tokenizing stocks on-chain further proves that crypto-native products are embedding deeper into the traditional financial system. The growing receptiveness to these offerings is a sign that meaningful innovation is happening in the blockchain and digital asset industry and that both industries are maturing.

With the increasing popularity around stablecoins, and now, the early signs that tokenized stocks are a product brokerages are interested in offering, we are seeing a convergence between global demand for U.S. equities and the digital currency industry’s ability to financially engineer new products that solve real-world problems and are therefore being met with real demand, which is an overwhelmingly positive development in a sector whose primary use case for several years was speculation.

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