Coinbase, Kraken Lead Crypto Exchange Push Into Tokenized Stocks

Key Takeaways

• Kraken recently announced plans to launch a tokenized stock trading platform for non-U.S. users.
• Coinbase is also exploring tokenized equities and has asked the SEC to green light its plans.
• Several crypto exchanges tried to offer tokenized stocks in the past, but they couldn’t overcome regulatory challenges.

Coinbase and Kraken both plan to launch tokenized stock offerings on their respective exchanges.

While platforms such as Robinhood and eToro pioneered the multi-asset exchange model, the looming rise of tokenized stocks represents a new level of integration between the crypto sphere and traditional finance.

Tokenized Stocks

The idea of issuing digital representations of company shares on a blockchain has been around since at least 2019, when the Estonia-based DXExchange started offering tokenized versions of U.S. stocks like Apple, Tesla and Facebook.

The platform held real shares through a securities custodian and issued equivalent ERC-20 tokens on Ethereum one-for-one. However, it shut down in 2020 due to regulatory and funding issues.

Between 2020 and 2022, Binance, FTX and Bittrex all experimented with tokenized stocks.

Facing significant regulatory hurdles, none of these initiatives lasted, and after the collapse of FTX, crypto exchanges left the idea alone, until now.

Kraken and Coinbase Plan To List Stocks

On May 22, Kraken announced that it would soon launch xStocks, “an exciting new tokenized equities brand developed by Backed,” to clients in select non-U.S. markets.

Similar to previous iterations of the idea, each token will be backed one-for-one by the underlying asset, held by 3rd-party licensed custodians.

Without specifying, Kraken said xStocks will offer a range of U.S.-listed stocks and ETFs, issued as SPL tokens on the Solana blockchain.

With Kraken taking the lead, Coinbase is reportedly seeking permission from the Securities and Exchange Commission (SEC) to launch its own tokenized equities offering in the U.S.

In comments to Reuters, Chief Legal Officer Paul Grewal said tokenized stocks were a “huge priority” for Coinbase, which is seeking reassurance that the SEC won’t pursue enforcement action if the company moves forward.

Tokenized Stocks and Securities Law

With assurance from the regulator in the form of a “no-action letter,” Grewal said:

“An issuer of a tokenized equity or a platform that wishes to offer secondary trading in those equities can have some confidence, some comfort, that the SEC has adopted its view of why this product is compliant.”

Such a scenario would represent a complete reversal from the SEC’s position under its previous leadership, when it sued Coinbase for operating an unregistered securities exchange.

Where exactly tokenized stocks fall in U.S. securities law isn’t exactly clear, as the SEC’s position is currently evolving.

Under the custodial model, there is no way for token-holders to exercise voting rights, but in theory, platforms could pay out share dividends.

Ultimately, how tokenized stock offerings are set up will dictate what kind of registration and oversight platform operators require, as well as the kind of information they will need to collect from investors.