Tokenizing Stocks & The Billion-Dollar Battle for Your Dashboard

John (0:00)

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Hanna Horvath (0:31)

Japan is getting older fast and America may be next.

Dylan Lewis (0:34)

And the future will be tokenized.

Hanna Horvath (0:36)

For Friday, September 25th, it's Brew Markets Daily. I'm Hanna Horvath.

Dylan Lewis (0:40)

And I'm Dylan Lewis. Let's get moving and grooving.

Hanna Horvath (0:50)

It's Friday, so we are rounding up some of the stories we wanted to spend a little bit more time with this week. Later in the show, John is going under the hood to talk about car subscriptions. But first, let's kick it off with Dylan, who has a story about the latest trend on Wall Street.

Dylan Lewis (1:03)

That's right. I was interested in the story. It's been developing over the last two weeks or so. And it's that Robinhood has plans to tokenize stocks, whether companies want them to or not. I'm going to warn our listeners early. It is going to get wonky up in here. But I think it's a really interesting development and a sign of where markets could be heading. Maybe to kind of set the table for this, Hanna, we can lay down a baseline explanation of what tokenization is.

Hanna Horvath (1:27)

Yes, okay, walk with me here, people. It is basically creating a digital version of an asset that can live and trade on a blockchain. The important caveat is that the token itself does not automatically mean you legally own the thing underneath it. So you can tokenize a stock, a bond, a piece of real estate, theoretically almost anything. But for something like a stock, you still need a system connecting that digital token to the actual legally recognized share. Otherwise, you have essentially created a digital receipt that says, I own this, without necessarily having the ownership rights underneath it.

Dylan Lewis (1:57)

Okay, so with that context, Robinhood is promising that any tokenization they do would be done on a one-to-one basis, meaning that every security is backed by an actual share in a company.

As you noted though, Hanna, that is not a given. There's a layer between the digital world and other systems of ownership that exist, and that is something that could theoretically be exploited when it comes to tokenization. Even in Robinhood's case, with that one-to-one, the tokens are technically debt securities, which are backed by the underlying shares held by Robinhood. And right now, what I think is so curious about this is they are offering tokens, but the token holders would not be able to vote the shares the way that a shareholder would, which is odd to me.

Hanna Horvath (2:36)

Clearly, not everybody loves this plan. The CEO of AMC sounded off on Twitter. He said, and I quote, I find this practice to be contemptible, outrageous, disgusting, detestable, inexcusable, vile. How can it possibly be legal? We have no connection to this at all and do not condone it in any way. Those are fighting words.

And from AMC's perspective, you now have people trading something with the company's name on it, tied to its share price, without them actually participating in it, or those investors necessarily having the same relationship with the company that a normal shareholder would. And I think that kind of gets at the larger philosophical fight here. Once your company is public, how much control should you have over the financial products that people are building around your stock?

Dylan Lewis (3:19)

Well, for his part, Robinhood CEO Vlad Tenev has a take on that. He told CNBC, quote, The issuers should have control and do have control over the rights and obligations of the stock that they issue, but that doesn't mean they control everything about it. He went on to say, In particular, they don't control other companies issuing their own securities that reference those shares, which is basically Vlad saying, I hear you, but I don't care.

Hanna Horvath (3:42)

Yeah, and as a finance walk, it's kind of an interesting argument. And Vlad is right, this does happen sometimes. The best example here actually might be ADRs, which is short for American Depository Receipts. They are a type of security issued by a bank or brokerage. And typically the way that they will work is that a bank buys shares in a foreign company, and then the bank then issues ADRs in that company on a one-to-one basis to investors in the US. And that is essentially how American investors can easily get exposure to companies like Taiwan Semiconductor or Toyota without opening a foreign brokerage account and trading directly overseas. So adding a financial wrapper around an existing stock is not some brand new crypto invention here.