Global Exchanges Urge Crackdown on Tokenized Stocks Over Investor Risk

The World Federation of Exchanges has urged securities regulators to take action against tokenized stocks, citing concerns over market integrity and investor risks.

Mismatched Products and Regulatory Gap

The World Federation of Exchanges (WFE), which represents major stock exchanges globally, has called on securities regulators to crack down on tokenized stocks, arguing they pose a direct threat to market integrity and introduce significant new risks for investors. The WFE reportedly voiced its concerns in a letter sent to key regulatory bodies, including the U.S. Securities and Exchange Commission’s (SEC) Crypto Task Force, the European Securities and Markets Authority (ESMA), and the global securities watchdog IOSCO’s Fintech Task Force.

According to a Reuters report citing the letter, stock exchanges argue that tokenized stocks are mimicking equity stocks yet lacking commensurate rights or safeguards. In the letter, the exchanges express particular alarm at the growing number of brokers and platforms intending to offer tokenized versions of U.S. stocks.

“We are alarmed at the plethora of brokers and crypto-trading platforms offering or intending to offer so-called tokenised U.S. stocks. These products are marketed as stock tokens or the equivalent to stocks when they are not,” the WFE reportedly said in the letter.

In July, OpenAI clashed with the fintech firm Robinhood, which it accused of issuing tokenized assets bearing its name. The artificial intelligence (AI) company argued the OpenAI tokens had been issued without its involvement and it did not endorse them. However, Robinhood retorted, insisting that the tokenized OpenAI and that of 200 other public companies track the value of these listed companies on the open market.

Some experts argue that tokenized equities expose investors to “millions of investable assets, enabling bespoke portfolio construction tailored to an individual’s risk profile, yield preferences, geography and values.” Tokenized stocks are also seen as a solution that allows retail investors to access or get exposure to some of the hottest stocks before their initial public offering (IPO).

However, members of the WFE argue that companies whose stocks are being mimicked could suffer reputational damage should the tokenized stocks fail. To pre-empt this, the WFE urged regulators to apply securities rules to tokenized assets as well as clarify legal frameworks for ownership and custody. The organization also wants authorities to block them from being marketed as equivalent to stocks.