Industry insiders have indicated that trading tokenized stocks on anonymous platforms presents regulatory loopholes, potentially providing a breeding ground for insider trading and market manipulation.

Written by: Long Yue, Wall Street Insights

Blockchain technology is attempting to disrupt traditional stock markets, but reality is more complex than the ideal.

The launch of tokenized stocks has not gone smoothly. Currently, digital tokens designed to track popular stocks like Amazon and Apple have seen their prices diverge sharply from the underlying stocks since their introduction two weeks ago.

Robinhood Markets is facing scrutiny from European regulators after the company launched a token allowing investors to bet on OpenAI without obtaining permission from the AI startup. The Wall Street Journal reported that insiders are concerned that these "tokenized" stocks create opportunities for criminals to engage in insider trading and market manipulation, which are difficult to detect.

At the end of June, several cryptocurrency exchanges, including Robinhood, Kraken, Gemini, and Bybit, released blockchain-based versions of U.S. stocks and exchange-traded funds aimed at non-U.S. customers. Cryptocurrency executives claim this provides a way for global investors to invest in popular securities like Tesla, Nvidia, and the SPDR S&P 500 ETF, especially in countries where purchasing U.S. stocks through local brokers is challenging.

Severe Price Divergence Raises Questions

However, the price performance of tokenized stocks has been chaotic. According to data provider CoinGecko, on July 3, the token tracking Apple, AAPLX, surged to $236.72, a 12% premium over the stock's trading price at that time. Similarly, the token tracking Amazon soared to $891.58 on July 5, four times the previous day's closing price.

An even more extreme case occurred on the peer-to-peer cryptocurrency trading platform Jupiter. Blockchain data shows that earlier on July 3, an unidentified user attempted to purchase about $500 worth of the Amazon token AMZNX, briefly pushing its price up to $23,781.22, more than 100 times the previous day's closing price for Amazon.

These tokens, referred to as "xStocks," are issued by Backed Finance, a company based in Switzerland, which partnered with Kraken and Bybit to launch dozens of stock-tracking tokens on June 30.

However, due to low trading volumes of xStocks across multiple cryptocurrency exchanges, they are prone to severe price fluctuations when users buy and sell beyond the market's capacity. Such volatility may be exacerbated during nights and weekends when stock markets are closed. A Backed spokesperson stated, "We are actively monitoring any price discrepancies and working with exchanges to ensure they are addressing the issue."

Increased Regulatory Scrutiny

Robinhood launched tokenized stocks at a grand event in France on June 30. To promote this product, which is limited to European customers, the company offered free tokens linked to the performance of OpenAI and SpaceX, both of which are not publicly listed.

OpenAI denied these tokens, stating on Twitter, "We have not partnered with Robinhood, have not been involved in this matter, and do not endorse it." The Bank of Lithuania, which regulates Robinhood's European operations, has contacted Robinhood to request an explanation regarding these tokens and how they are marketed to customers.

A Robinhood spokesperson stated, "We are confident in our project and are in contact with regulators to resolve any issues."

Skeptics worry that tokenized stocks could become a means to evade regulation. In the U.S. stock market, exchanges monitor for manipulation and other abusive behaviors, and brokers must know their customers' identities, allowing regulators to investigate suspicious activities and identify the individuals behind them.

Backed stated that transactions on public blockchains are more transparent than traditional finance, making it possible to monitor and detect illegal activities.

However, other industry participants are concerned that trading tokenized stocks on anonymous platforms is the root of the problem. Carlos Domingo, CEO of tokenization startup Securitize, stated that such arrangements could foster abuses like insider trading: "This is Pandora's box; it will eventually explode because people will find ways to do illegal things with these tokens."

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