Author: FinTax
This article is translated and organized from the Space AMA hosted by FinTax titled "Opportunities of Wealth and Risks of Compliance Considerations in Stock Tokenization," featuring the following speakers:
- William | FinTax’s COO
- Jeffrey | FinTax’s Head of North America
"Stock tokenization" is transitioning from a fringe topic in the crypto space to a focal point in global fintech—just days ago, the U.S. SEC, under its new chair, launched "Project Crypto," in conjunction with the Trump administration's proactive policies and stablecoin strategy, aimed at facilitating global capital flows into high-quality assets like U.S. stocks and solidifying the long-term leadership of U.S. capital markets. Meanwhile, the concept of on-chain capital markets is rapidly spreading worldwide, attracting not only the attention of the crypto-native community but also gradually gaining recognition from traditional financial institutions. Against this backdrop, we outline the multifaceted significance of stock tokenization for traditional finance and the crypto industry, explore whether it can become a new narrative driving industry prosperity, and analyze the compliance and uncertainty issues it faces.
1. What significance does stock tokenization hold for traditional finance and the crypto industry?
1.1 Changes in liquidity and settlement efficiency
Stock tokenization breaks the characteristic lag in settlement of traditional financial markets. For a long time, whether in U.S. stocks or other mainstream markets, most have adopted delayed trading systems, with "T+1" and "T+2" settlement cycles not only affecting market liquidity but also limiting the efficiency of capital usage. Stock tokenization is expected to achieve "atomic settlement," where payment and delivery can be completed almost instantaneously, and the exchange of assets and funds occurs as an indivisible whole simultaneously. This not only shortens the settlement cycle but also releases funds that were previously locked in the settlement process, significantly reducing counterparty risk. Coupled with the automatic execution capabilities of on-chain smart contracts, trade matching and settlement can operate almost around the clock in any global time zone, making 24/7 global trading a reality. This efficiency upgrade is significant not only for high-frequency trading and cross-border arbitrage but also greatly enhances the capital utilization for ordinary investors.
1.2 Reconstruction of the cross-border securities investment system
Traditional cross-border securities investment is limited by complex custody, agency networks, and compliance review processes, resulting in low efficiency and high costs. Stock tokenization, based on distributed ledgers and smart contracts, can directly embed compliance rules such as KYC, AML, and geographical restrictions into the assets themselves. On one hand, it reduces investors' reliance on multiple intermediaries, as everyone in the on-chain capital market can create their own wallet to directly hold and trade assets; on the other hand, programming compliance logic into token smart contracts allows for automated compliance checks, lowering the execution costs of cross-border investments. Although it is difficult for national laws and regulatory frameworks to be fully integrated in the short term, technological changes have laid a solid foundation for the reconstruction of the cross-border securities investment system.
1.3 A bridge connecting traditional capital and the on-chain world
In countries that clearly embrace stock tokenization, it is not only a technological innovation but also positioned as an important component of national financial strategy. It can digitize high-quality traditional assets, allowing global capital to more easily enter the domestic capital market. For traditional capital, this model retains familiar investment targets and regulatory frameworks while gaining advantages such as settlement efficiency, liquidity, and global trading hours brought by blockchain; for the crypto ecosystem, it introduces high-value, low-volatility quality assets as collateral and trading varieties, enriching the asset structure and financial tools on-chain, and bringing unprecedented incremental capital and new users to the crypto industry. Although it will take time to build a complete decentralized on-chain market, the parallel structure of traditional and on-chain capital markets will coexist and complement each other for a considerable time, with stock tokenization becoming one of the bridges connecting TradFi and DeFi.
2. Can stock tokenization become a new crypto narrative?
From a community culture perspective, native crypto users tend to prefer high-risk, high-volatility, and ultra-high-return speculative varieties—they are willing to hold large positions when Bitcoin is only a few hundred dollars or chase returns of several times or even dozens of times in Meme coins, DeFi, and other projects. In contrast, the stable returns of traditional assets like government bonds and gold have limited appeal to them, leading to a question: will this investment habit make it difficult for traditional assets to generate good liquidity on-chain?
In the short term, this cultural difference does exist, but stock tokenization remains one of the few RWA categories that may break this barrier. The key lies in its "dual characteristics"—on one hand, it retains the value support and stability of underlying quality assets; on the other hand, once tokenized, these stocks can be combined with derivatives such as leverage, futures, and options, creating sufficient volatility and strategic space to meet the speculative needs of crypto users. Traditional assets still have the opportunity to bring significant investment returns, thus becoming attractive in the eyes of crypto traders. Additionally, the changes in user investment structures brought about by the development of the crypto industry are equally important. As some early crypto participants complete their wealth accumulation, their risk appetite will naturally decrease, and they will begin to actively seek diversified asset allocation and stable returns. At this point, tokenized traditional assets may gradually enter their investment portfolios, with these users focusing not only on price volatility itself but also on the characteristics of investment products being "available on-chain" and "tradable at any time."
More importantly, the target audience for stock tokenization extends far beyond native crypto users to a large number of potential users and institutional investors. For institutions, tokenization can retain traditional rights such as dividend distribution and voting rights while providing 24/7 liquidity and lower cross-border settlement costs, which has potential appeal in areas such as private equity funds, family offices, and sovereign wealth funds. For ordinary investors, familiar investment targets and compliance frameworks can lower psychological barriers, making them more willing to allocate assets through on-chain channels. Therefore, stock tokenization is expected to become the "first step" for traditional capital to enter the DeFi world. This is not only an expansion of funding channels but also the construction of infrastructure for two-way capital flow—facilitating the smooth inflow of traditional capital into the on-chain market while also providing a convenient path for on-chain funds to enter high-quality assets in the real economy. Thus, the imaginative space of stock tokenization extends far beyond the internal capital flow of the crypto circle, but rather involves the value reshaping of the entire financial ecosystem.
3. What compliance risks does stock tokenization bring?
3.1 Inescapable risks
While stock tokenization and on-chain capital markets bring improvements in efficiency and liquidity, they also introduce new systemic risks and compliance challenges, of which we will analyze a few:
(1) Lack of rules and investor protection issues: Currently, there are no clear and comprehensive regulatory and trading rules in related fields, and the market may devolve into a disordered "open playground," breeding uncontrollable risk events. In this case, allowing investors to flood in without thresholds may trigger a series of market fluctuations, which, while having limited impact on AI or institutional investors, could be very unfriendly to retail investors. For the government, it is essential to ensure that risk management and compliance mechanisms keep pace with innovation to avoid rule gaps becoming market hazards.
(2) Regulatory and compliance issues: The decentralized nature of on-chain markets makes it difficult to comprehensively track the sources and flows of transactions, involving not only domestic users but also participants from different regions globally, increasing regulatory complexity. However, these risks are not unique to stock tokenization; many issues already exist in the current crypto market. For example, money laundering and illegal trading behaviors have long occurred on-chain and will not significantly worsen due to stock tokenization. From a corporate perspective, for the tokenization of publicly traded companies, traditional brokers and large financial institutions will continue to play the role of "gatekeepers," responsible for KYC, tax reporting, and other key processes, thereby buffering regulatory pressure to some extent; as for the tokenization of private company equity, due to its limited scale, the impact on the overall market is not significant.
(3) Tax collection and management issues: On one hand, decentralized on-chain trading increases the difficulty of tracking transactions; due to the lack of a unified intermediary, it is challenging to collect transaction data and execute withholding taxes as in traditional markets through brokers. On the other hand, cross-border tax collection and management are complex, with investors distributed across different jurisdictions, involving various tax laws and information exchange mechanisms, leading to high coordination costs, which poses higher demands on tax authorities and industry participants in various countries. However, these challenges are similar to current cryptocurrency tax issues and are not unique to stock tokenization. In the short term, governments can continue existing strategies to manage taxes through centralized participants, while in the long term, a dual-track market of traditional and on-chain may form, seeking a balance between efficiency and regulatory control.
3.2 Recommendations for individual investors
(1) Choose regulated and reputable platforms: Although stock tokenization sounds like a new hotspot in the blockchain world, the primary risk investors face remains platform risk. Especially for novice or less market-savvy investors, it is advisable to prioritize platforms that have passed strict regulatory scrutiny, are fully qualified, and have a good reputation to ensure the safety of their funds and legal rights. For example, tokenized stocks issued in cooperation with traditional brokers, banks, or large financial institutions will have more robust compliance processes, KYC/AML mechanisms, and customer fund segregation systems.
(2) Diversify investments and control positions: The volatility in the crypto market and traditional market differs significantly, and stock tokenization sits at the intersection of both, meaning there is potential for both dual returns and dual risks. Therefore, investors should avoid blindly concentrating their positions in a single asset or on one platform, and instead diversify their allocations across different asset classes and platforms to reduce investment risks.
(3) Invest in familiar assets: Tokenized stocks are essentially another representation of existing assets; in the new market environment, investors should prioritize companies, products, or industries they are familiar with, ensuring that investment decisions are based on familiar industry logic and avoiding market sentiment from influencing rational choices.
(4) Clarify product structure and rights and obligations: The underlying design of tokenized stocks varies significantly; they may represent real holding-type stocks (with shareholder rights to the underlying assets) or price contract-type stocks (only tracking price without shareholder rights). Before investing, it is essential to clarify which structure is being purchased and understand the structural differences in terms of dividend distribution, voting rights, liquidity, exit mechanisms, etc., to assess the corresponding risks and avoid investment misjudgments.
(5) Comply with tax obligations: Tokenized stocks do not fall into a "tax gray area"; regardless of how transaction forms change, investors' tax obligations still exist. Therefore, it is recommended that investors retain transaction records, fund flows, and cost information throughout the trading process to ensure accurate calculation of capital gains or dividend income during reporting. Additionally, pay attention to the tax classification of tokenized stocks in the relevant jurisdiction, as different tax classifications may have varying rates and reporting methods. Proactively fulfilling tax obligations not only helps avoid legal risks but also maintains compliance qualifications in the future when regulations tighten, preventing retrospective issues due to historical problems.
4. Conclusion
In summary, stock tokenization is at the intersection of technological transformation and institutional restructuring; it is both an important part of the digital transformation of global capital markets and a key link connecting TradFi and DeFi. In the short term, it may manifest more in optimizing liquidity, settlement efficiency, and trading hours, but in the long term, its true potential lies in reconstructing the issuance, circulation, and management of global assets, forming a wealth ecosystem that circulates between on-chain and the real economy.
However, opportunities and challenges have always coexisted. Issues such as the lack of rules and investor protection determine that the path to maturity for this market will inevitably involve institutional adaptation and regulatory games. For industry participants, seizing the policy window and actively promoting the integration of technology and compliance will be key to gaining an advantage; for investors, rationally choosing platforms, diversifying allocations, and complying with tax obligations will be the survival rules in this emerging market.
It is foreseeable that with the improvement of on-chain infrastructure and the deep integration of traditional finance and the crypto ecosystem, stock tokenization is expected to become a common language for the next stage of the crypto industry and global capital markets, giving rise to new investment logic and wealth opportunities. In this process, those participants who can balance innovative vitality with robust compliance will occupy important positions in the future financial landscape.
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