Original Article Title: "Piloting Is Greater Than Demand, the Future Path of Stock Tokenization in the US"

Original Article Author: Kokii Kokii

Why Stock Tokenization Faces Challenges

To understand the dilemma of stock tokenization, we must first examine the key to the successful on-chainization of RWAs/off-chain assets. Whether it is the on-chainization of government bonds, funds, stocks, private credit, or even intellectual property, the essence only requires holding physical assets offline and issuing a set of tokens on the chain, similar to issuing memecoins, without any technical barriers.

However, all project parties need to address the core four questions: Why issue? How to issue? How to sell? How to use? Without solving the above questions, RWAs can only end up like most memecoins, lacking practical demand and liquidity.

Using the most successful category of RWA products currently, tokenizing US Treasury bonds / money market funds as an example, the tokenization of government bonds, as a standardized debt tool with a simple right and predictable cash flow, has experienced three core steps in finding real demand, establishing a compliant issuance framework, and building token utility:

· Why Issue: Institutional investors [Crypto VC/Fund] have a lot of idle stablecoins on-chain and need a risk-free interest-bearing scenario

· How to Issue: Fund - Fund manager architecture, where the token legally represents fund shares, the fund is responsible for issuing tokens and holding assets, the fund manager is responsible for making investment decisions, both the fund and the fund manager need to be compliant and licensed, and institutional-level services such as custodians, audits, and transparency reports are also required.

· How to Sell: Only qualified investors after KYC/AML can buy, 24/7

· How to Use: Token derivative utility, mainstream DeFi already supports it, it can be used to collateralize and borrow stablecoins, and some centralized exchanges are starting to support it as collateral

Stocks, on the other hand, as a complex ownership certificate (including governance rights) with uncertain cash flows, must overcome a series of operational and compliance obstacles for tokenization.

Why Issue

Early RWA attempts often remained ambiguous about why they were issuing, focusing on alternative assets such as private loans, private equity funds, real estate, etc., hoping that the blockchain's efficient settlement would increase liquidity. However, the liquidity of these assets is limited not by a technical issue, but by deeper-rooted problems such as information asymmetry, lack of fungibility, pricing challenges, and issuers' resistance to secondary market liquidity, which are inherent off-chain issues that cannot be easily solved by simply going on-chain.

The benefits of on-chain physical asset representation have become a cliché, briefly summarized as:

· Permissionless Accessibility: including [Capital] reduced investment threshold, [Product] elimination of geographical and financial barriers, such as bank accounts, compliance, forex controls, and [Time] 24/7/365 trading, instant settlement and clearance; as well as the regulatory arbitrage brought by permissionlessness, crypto-native platforms including wallets and exchanges can expand into traditional businesses without licensing

· DeFi Composability: leveraging DeFi protocols like trading, lending, and derivatives to apply DeFi's transparency and composability to traditional assets, capturing additional yield opportunities

· Unified Account: as the circulation of stablecoins increases in the future, with the majority of economic activities settled on-chain, on-chain physical asset representation can allow for a unified account to manage various assets held by different brokers, enabling cross-collateralization

The key is how to find the target user group. The story of financial empowerment is compelling, but we cannot expect an African brother without a bank account to buy US Treasuries or stocks. A well-functioning market requires a sufficient number of participants, which can come from political tasks given from the top, experienced high-net-worth retail investors, or institutional investors that have already started exploring blockchain.

The target users of most likely RWA projects are genuinely investing high-net-worth retail investors and institutional investors, so the subsequent questions are how to issue and sell, and how to avoid the regulatory crackdown.

Investors need to clearly know the legal nature of the tokens they are buying, issuer, risk control mechanism, anchoring mechanism, whether it is backed, redeemable, and has legal effect. Previously, DeFi projects like Mirror Protocol, Synthetix, and CeFi platforms like Binance, FTX have attempted tokenization of US stocks but have failed/closed due to regulatory pressure or awkward product design.

Recently, Robinhood and xStocks have designed off-chain fully 1:1 mapped, centralized securities registration, fully compliant and legal tokens under existing relatively friendly regulations.

Current Scenario

a. Robinhood

· How to Issue: The legal backbone is under the EU MiFID II framework, issued by its licensed entity Robinhood Europe UAB in Lithuania as a financial derivative contract. The tokens held by users are merely digital vouchers of this contract, with Robinhood itself being the counterparty. The actual stocks are held by Robinhood's US affiliated broker as a hedge position

· How to Sell: Adopting a B2C model, with Robinhood Europe as the sole issuer and seller, directly targeting its European retail users within the app. Liquidity is fully provided within the platform, creating a closed-loop system

· How to Use: The token's smart contract embeds a strict whitelist mechanism, making it unable to freely circulate and lacking any external DeFi composability

b.xStocks

· How to Issue: The legal core is established under the Swiss DLT legal framework, through a bankruptcy-remote SPV based in Liechtenstein to hold the real stocks. The tokens held by users are legally a 1:1 asset-backed senior secured debt (tracking warrant). Its trust mechanism is built on independent third-party custody and a Chainlink Proof of Reserve (PoR) that is available for real-time verification by anyone

· How to Sell: Adopting a B2B2C model, with the issuer Backed Finance serving institutional-level primary market subscriptions and redemptions, then distributed to secondary market users by licensed trading platforms like Kraken, Bybit, etc. Liquidity is jointly provided by professional market makers on centralized exchanges and liquidity pools on decentralized protocols (such as Jupiter, Kamino on Solana)

· How to Use: Can be freely transferred and has full DeFi composability, can be used as collateral for lending

The tokens are legally only tracking the price and do not represent direct on-chain equity. The treatment of other stock rights (voting rights, dividend rights) and corporate actions (such as splits, mergers, delistings, liquidations) remains unresolved. Meanwhile, additional utility from tokenization has yet to materialize: Robinhood's Token can only circulate within its ecosystem, and xStocks, although able to interact with DeFi protocols, currently has very poor liquidity and can essentially be considered nonexistent.

These two approaches are more like regulatory arbitrage of the current looser regulatory conditions for native crypto platforms, used to attract market attention to demand better pricing of capital markets. Regardless of the paradigm, stock tokenization at the current stage faces several structural barriers that are difficult to resolve in the short term:

· Blurred Demand: For its main target of non-U.S. users, there already exist numerous mature, low-cost, and highly liquid channels for trading U.S. stocks (such as online brokers like IBKR, CFDs, etc.), where stock tokenization does not offer a significant advantage in user experience and fees

· Liquidity Challenge: Off-chain is the center of price discovery. On-chain liquidity is small in scale and severely fragmented compared to traditional markets, resulting in excessively high slippage for large trades

· Market-Making Risk: During periods when the underlying stock market is closed (such as weekends), market makers are unable to hedge risks, leading to either widening spreads or liquidity withdrawal. This situation results in low reliability and cost efficiency for 24/7 trading

· Rights Incompleteness: Both current models have made significant compromises to the core shareholder rights. Holders only receive the economic benefits of the stock, while rights such as voting and other corporate governance rights are withheld by the issuer (SPV or Robinhood) and managed on their behalf. This results in limited functionality compared to mature tools like ADRs

The Road Ahead

Despite the harsh reality, the true significance of this "pilot" is to explore the possibilities of the future. The future of tokenized stocks depends on their ultimate position within the entire financial ecosystem.

· Path A: Mainstreaming and Infrastructure Development. If the global mainstream regulatory framework matures and becomes clear, stablecoins are adopted widely, and major financial institutions hold a portion of their assets on-chain, the issuer of custody will gradually evolve into traditional financial giants such as JPMorgan Chase, The Bank of New York Mellon, etc. At that point, stock tokens will become a more powerful form of "composable super ADR." Blockchain will become a unified settlement layer for equity markets worldwide, integrated into various DeFi protocols, and companies will directly list through STO issuance on-chain

· Path B: Offshoring and Emerging Asset Platforms. If mainstream regulations continue to tighten, the crypto world may evolve into an efficient offshore innovation hub. In that case, tokenization will no longer seek to compete on NYSE trading Apple stocks but will instead focus on becoming a "debut platform" for new or illiquid assets, such as private equity of Pre-IPO companies, fractionalized transfers of VC fund stakes, or even the securitization of future revenue streams such as intellectual property

The immaturity of current tokenized stocks is not a sign of its failure but rather a necessary early stage in infrastructure development. The yardstick for its success should not be whether it can provide a better trading experience for Apple stock today but rather the creation of new markets and financial behaviors for tomorrow. For all market participants, understanding this point is key to seizing the opportunity in this upcoming financial revolution.

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