Hmmmm.

Click to find out what Frayer means, and read on to see what our old friends at Robinhood are cooking up….

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It’s no surprise that the GENIUS BILL enjoys widespread support in the crypto sector. Its eventual passage comes on the heels of a $100 million crypto industry lobbying effort. Corey Frayer says that “the purpose of the bill is to give them the veil of regulation."

There are few financial services companies that love a thin veil of regulation more than Robinhood. Behold, the newest attraction in their casino of financial products. 

On June 30th, Robinhood launched a new set of tokenized equities that it says will create wider global access to U.S. markets. To make its point, the electronic trading platform freely distributed freshly-minted SpaceX and OpenAI tokens to EU customers who signed up for its new tokenized stock trading platform. 

Nobody was more surprised by the news than SpaceX and OpenAI.

OpenAI responded to the tokenization by writing, “We did not partner with Robinhood, were not involved in this, and do not endorse it. Any transfer of OpenAI equity requires our approval—we did not approve any transfer.”

Based on the accuracy of the statement above, we assume it was not composed by ChatGPT. 

SpaceX CEO Elon Musk was equally supportive of Robinhood’s move. He simply tweeted, “your ‘equity’ is fake”.

Robinhood took the criticism in stride, promising to issue thousands of additional tokenized equities by the end of the year. And customers responded by lining up to pull the slot machine lever, sending shares on Robinhood up by 13% on the day of the announcement. 

Given the hazy legal status of this new financial product, it’s hard to see what Robinhood’s true motivation is here. 

Even at a time when the SEC is broadly supportive of the crypto industry, Robinhood’s novel tokenization has not gone unnoticed by regulators. SEC Commissioner Hester Peirce issued a statement shortly after Robinhood’s announcement aimed at bringing clarity to the matter. 

While Peirce acknowledged that the tokenization of securities is opening new pathways to investment and capital formation, she also cautions that the same basic market rules still apply.

In short, the Commissioner says that tokens are “enchanting, but not magical.”

Tokenization doesn’t transform the nature of underlying security, and it doesn’t create value where there is none to begin with.

To the point, if an issuer tokenizes their own security, the holder of that token enjoys a clear 1 to 1 ownership over this security. 

Totally. But what does it mean when a third party (like Robinhood, for example), issues those tokens. 

Commissioner Peirce explains that “an unaffiliated third party with custody of securities issued by another entity might, for instance, issue a new tokenized security tied to the securities it holds or may tokenize the “security entitlements” that investors hold against the custodian. Purchasers of these third-party tokens may face unique risks, such as counterparty risks.”

In other words, you don’t know what you’re buying or who you’re buying it from.

Paul Conn, President of Global Capital Markets at Computershare, observed in a recent LinkedIn post that “The issues regarding what is and what isn’t a US ‘security’ can be complex. The facts concerning who issued the token shouldn’t be.”

Robinhood’s actions threaten to compromise matters significantly, creating a bifurcated token marketplace, made up of those who own real issuer-tokenized equities and those who hold unauthorized third-party tokenized equities.

The former investors are custodians of tokenized shares. The latter are basically holding a betting slip for an invisible horse race. 

Naturally, this makes investors in unauthorized tokens extremely vulnerable to fraud. 

Commissioner Peirce urges investors to proceed with caution. She also welcomes would-be token issuers in search of guidance. “We stand ready to work with market participants to craft appropriate exemptions and modernize rules,” she concluded.

Most crypto industry advocates would agree that this is a step forward from the prior Commission’s approach to crypto regulation. A common grievance against the SEC under Chair Gensler was its preference for enforcement action over guidance. 

While the current regulatory environment leaves more than a few questions unanswered, there has been movement toward a more formal regulatory framework. We consider this, at the very least, a move in the right direction. 

But to be sure, we still have a long and winding road ahead before we achieve a framework that  is clear, fair, and consistent. But we’re here for it because, as the old saying goes…

For a deeper dive on the actual value of having a well-regulated, on-exchange tokenization trade, check out our recent chat with groundbreaking Green Impact Exchange (GIX).