For many years, cryptocurrency enthusiasts have predicted a mass tokenization of real-world assets, including stocks in publicly traded businesses. While gigantic moves toward tokenization have yet to materialize, online brokerage giant Robinhood (NASDAQ:HOOD) is making major moves to position itself at the cutting edge of a growing interest in tokenized assets. Will Robinhood win out as the leader in tokenization, and what challenges could it face along the way?
What Is Asset Tokenization
At its core, tokenization brings traditional, real-world assets and the digital economy of cryptocurrencies, tokens and smart contracts together. Simply put, tokenization involves the creation of a unique digital representation, or token, that corresponds to a real-world asset. These tokens can then be bought and sold, with ownership being recorded on blockchain ledgers similar to those that track cryptocurrencies like Bitcoin.
The possible advantages of tokenized securities are both numerous and significant. Tokenized securities can be bought and sold at any time, creating a 24/7 market for assets like stocks that are currently constrained by market hours. Blockchain systems also make near-instant settlements possible while also offering improved transaction records. Cumulatively, the tokenization of stocks and other assets could help to reduce market inefficiencies while also expanding market access. Of crucial note is the fact that tokens can be traded internationally, potentially increasing the availability of non-US stocks to American investors and vice versa.
Robinhood’s Potential Advantages
One of the most obvious advantages Robinhood has in the tokenization race is the fact that it’s one of the few large businesses that is going all-in on the model. CEO Vlad Tenev has been particularly optimistic about tokenization’s potential, suggesting that it could eventually engulf much of the financial system and fully combine traditional infrastructure with the world of cryptocurrencies.
Far more meaningful, however, could be Robinhood’s attempts to work with regulators to formalize frameworks for tokenized assets. In April, Robinhood reached out directly to the SEC to propose a comprehensive regulatory outline for the assets. This attempt to be on the cutting edge of creating such a framework could be crucial for Robinhood, as it would give tokenized assets formal legal standing and allow the business to work directly with regulators to determine how the next generation of financial infrastructure will be treated legally.
Robinhood may also have a bit of a natural advantage by virtue of its younger demographics. The average age of Robinhood users is about 31, giving the business access to a cohort of young customers who may be more enthusiastic about the promises of tokenization than older generations of investors. Robinhood’s users are also generally crypto-friendly, as evidenced by the more than 300 percent year-over-year increase in crypto revenue in Q3.
Right now, the largest rival on the horizon appears to be Coinbase, a crypto exchange that is making a similarly bold bet on tokenization. Although Coinbase appears to be winning in the race to be first to market with a broad tokenized trading offering, Robinhood’s attempts to get regulatory frameworks in place while building its infrastructure could pay off in the long run, especially when it comes to the US market.
Finally, Robinhood has already conducted what could be seen as a test by offering tokenized versions of over 200 US stocks to European investors. The tokens work very much like real shares, up to and including paying dividends to the investors’ accounts. To support its future token ambitions, Robinhood is also creating its own proprietary blockchain based on Arbitrum to handle tokenized stock transactions.
The Potential Downsides
Although Robinhood is clearly positioning itself as a leader in tokenization, the bet may not be as immediately lucrative as Tenev and other bulls envision. To begin with, tokenization creates an additional layer of separation between investors and the businesses they’re buying, as tokens don’t confer direct stock ownership. From the long-term investing perspective, this alone could present serious problems for investors who wish to buy pieces of businesses and hold them for years or even decades at a time.
Things become even dicier when it comes to another purported benefit of tokenization, namely the ability to trade tokens that attempt to track private businesses. Robinhood has already faced significant pushback in this arena. Earlier this year, OpenAI criticized Robinhood for offering a tokenized derivative of the AI startup’s equity to investors. As OpenAI itself noted, however, the token hadn’t received its endorsement and didn’t confer equity in OpenAI, which is a private business.
Tokenized securities could also still face very real regulatory challenges, especially in the US. Even Tenev has noted that America will likely be one of the slowest markets to fully adopt tokenized securities due to its entrenched financial infrastructure. Regulators, likewise, may prove to be more skeptical of tokenization than Robinhood hopes. For now, American regulators haven’t fully clarified the status of tokenized stocks, though the SEC has said that they are subject to the same regulations as all other securities.
So, Will Robinhood Win When it Comes to Tokenization?
At the end of the day, what does seem clear is that Robinhood is likely to be a significant player in the world of tokenized securities as it evolves. Though the benefits may not prove to be as large or as immediate as enthusiasts hope, Robinhood’s early position in the tokenized asset world seems to be very compelling. With a CEO who is clearly dedicated to the push toward modernizing financial infrastructure and a user base that will likely act as very willing customers, Robinhood appears to be in a good spot to benefit from tokenization.
As for the bigger question of how valuable and widespread tokenization will become, there are still probably too many unknowns to provide an accurate answer. Tokenization has significant potential upsides, especially when it comes to redefining market hours and increasing investor access. Like many new technologies, however, tokenization could be at risk of becoming overhyped and, by extension, overvalued in the minds of investors. This may, to some extent, already be showing up in Robinhood’s stock price, as shares of HOOD are already trading at the lofty multiples of 56.4 times earnings and over 130 times operating cash flow.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.