Good morning, advisors! It's Thursday!

In the “Ask an Expert” section, Leo Mindyuk ( ML Tech ) will answer: What do customers actually own when they purchase tokenized stocks?

Wish you a pleasant reading.

CLARITY The bill failed, but regulatory clarity has still been achieved.

Regulatory authorities provided what Congress failed to offer, bringing a short-term boost but also laying down long-term risks.

On September 15th, the U.S. Senate had the opportunity to take an important step towards establishing rules for digital assets and the digital economy we are entering as a result.

But it doesn't.

The CLARITY legislation has not been advanced, which means that a comprehensive legislative framework regarding digital assets—including tokenized currencies, stocks, bonds, deeds, and other assets, as well as exchanges, brokers, issuers, and intermediaries that trade these assets—will have to wait further.

CLARITY could have strengthened America's leadership position and benefited American consumers. Moreover, as I mentioned not long ago in CoinDesk, it would have provided a clear path for banks and other traditional enterprises to invest, build, compete, and perhaps even win the future of the financial services industry.

There is nothing more powerful than the concept that “the time is right.” At least for now, that time has not yet arrived. But while Congress closes one door, regulatory agencies open another window.

SEC and CFTC both act at an astonishing speed. Just two days after the failure of CLARITY, SEC issued an "Innovation Exemption" that allows certain venues to trade tokenized U.S. listed stocks on the chain through automated market makers and liquidity pools. Chairman Paul Atkins referred to it as a "bridge" towards sustainable rule-making.

CFTC is also removing practical obstacles, providing relief for certain software providers, and updating guidelines regarding tokenized investments and blockchain-based record-keeping.

The congress refused to build the bridge, so regulators like Atkins began to lay the planks themselves.

The question now is whether regulatory clarity can replace legislative clarity, and if so, for how long can this continue?

Perhaps regulators have realized something that Congress has not yet fully accepted: the genie is out of the bottle.

For new technologies to be adopted on a large scale, three things are usually required: available technology, products that the market desires, and a regulatory environment that allows companies to build upon. The crypto industry is increasingly meeting the first two criteria. Regulatory authorities are now trying to provide the third element as well.

Technology is ready to take center stage. For example, Solana is capable of handling a trading volume equivalent to the combined total of the stock, fixed-income, and foreign exchange markets. Platforms like Hyperliquid, which offer real-time trading in almost any market 24 hours a day, seven days a week, are beginning to erode the traditional commodity futures markets.

The alignment between products and markets is also clear. Stablecoins were the first “killer app” in the crypto industry, but they won’t be the last. Once the world has adopted digital currencies, what people will seek next is a way to save, earn returns, and invest using these currencies. Tokenized stocks and bonds, as well as convenient and easily accessible on-chain markets, will take on this role, and we haven’t even begun to discuss the explosive potential of smart contract-driven businesses involving digital assets.

What is truly lacking to unleash this potential is clear regulatory guidance.

CLARITY Should Have Been a Watershed: Crypto Companies, Banks, and Other Institutions Could Compete on an Even Field, with Clear Rules Known to All.

Can regulatory agencies fill this gap?

Perhaps, at least for now, it is possible.

However, there is an important distinction between regulatory permission and legislative certainty. Regulators can tell companies what they are allowed to do today; legislation, on the other hand, is better at preventing future governments from changing their policies tomorrow.

This distinction is particularly important for banks, exchanges, or asset management companies, as they may need to invest billions of dollars in building infrastructure, which could take a decade to pay off.

However, the future is not for predicting, but for realizing.

The key question is, how much work can be completed in the next two years.

This is an opportunity for the industry to create reality: products that consumers can truly use, infrastructure on which financial institutions rely, enterprises that employ staff and invest capital, as well as a market that is clearly superior to the old model.

The more deeply blockchain is integrated into the productive economy, the harder it will be for any future government—whether Democratic or Republican—to justify reversing that progress.

But this opportunity could also be wasted. If the crypto industry continues to pursue short-term gains from past cycles during this window of time, or if it continues to politicize technology and alienate those with differing opinions, then a historic economic opportunity could be lost.

Stripe, Circle, Robinhood and other innovators are unlikely to wait. Traditional financial institutions face a more difficult choice: whether to wait for Congress to provide them with the certainty they prefer, or to proceed with what regulation can currently offer.

Waiting may seem more cautious, but in the end, it could pose a higher risk.

CLARITY has not been implemented yet. However, in a certain sense, clarity is beginning to emerge.

The window is already open. The industry should do its utmost to facilitate useful innovations and products to pass through this door.

– Alex Tapscott, CMCC Global Capital Markets Chief Executives

Ask an Expert

Question: What has the five-year “innovation exemption” for SEC changed since the pause of CLARITY?

Answer:SEC has established a pathway that allows qualified tokenized U.S. listed stocks to be traded on-chain through automated liquidity pools. Qualified entities do not need to register as exchanges, and certain liquidity providers may be exempt from broker registration for the covered activities. Trading is limited to verified participants only. This directive was issued two days after the procedural Senate vote on CLARITY failed. Its scope is narrower than proposed legislation, which also involves tokenized securities. It permits the development of a specific market model under the existing SEC permissions.

This is also a deliberately restricted test. The upper limit for transaction volume is only a small portion of the normal trading volume for each stock, and margin trading is not allowed. This exemption is valid for a period of five years, but SEC may modify its terms or duration.

Advisors should regard it as a limited market test and seek evidence to prove that a certain product can improve access or execution at the actual trading scale of clients.

Question: If customers purchase “tokenized stocks,” what do they actually own?

Answer:Some products touted as “tokenized stocks” merely provide synthetic exposures linked to stock returns and do not grant shareholders any rights. Payments similar to dividends do not imply that the holders are shareholders. The new exemption for SEC sets a useful test. To trade on such platforms, tokens must carry the same rights as the underlying stocks: the same dividends, the same voting rights, and the same claims to the company’s assets in the event of liquidation. Synthetic exposures do not meet these requirements. If a third party tokenizes the stocks of a company without the company’s participation, it must provide the holders with proxy materials. The company will also receive notice 30 days in advance and has the option to prevent trading on such platforms.

Advisors should read the documents that clarify the rights of clients. It is necessary to check how dividends and voting rights are actually transferred to the clients. Determine whether the tokens represent direct ownership, indirect interests in the managed stocks, or contractual claims linked to stock returns. Most importantly, it is essential to understand what rights clients can claim if the tokenization provider fails. Are clients registered as shareholders under the name of the transfer agent, or do they hold claims against the custodian or a special purpose vehicle?

Question: After verifying the rights, what else should an advisor test before configuration?

Answer:I will compare tokenized shares with traditional shares under the actual trading scale of customers, including fees and price impacts. I will also examine the deviation in prices compared to traditional shares under stressful conditions. In the liquidity pool, the displayed price is just a starting point: orders can drive price changes by altering the balance of assets within the pool. Who is providing this liquidity? Can they continue to provide it during periods of volatility?

Next, it is necessary to review the hosting and transfer restrictions, as well as the written exit procedures in case a certain venue closes or the tokenization arrangement comes to an end. Evidence of specific benefits is required to be provided. For example, better accessibility, lower total transaction costs, or settlement that allows funds to be available more quickly. These benefits should be sufficient to justify the additional operational risks and should align with the clients' investment objectives.

– Leo Mindyuk, ML Tech Chief Executives

Continue reading

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