Authors: Zheng Hongde, Xu Xiaohui

Every Thursday night at 7:30, the tavern opens on time! From investment jargon, entrepreneurial stories, project ups and downs, to hot topics, airdrop routines, track predictions... We use the AMA method to talk about what you want to hear, and big names gather! There is no limit to the topic, and you can easily talk about Web3! In the face of changes in regulatory policies and sudden compliance trends - don't panic! Mankiw's senior lawyers will personally interpret hot regulatory events for you and help you understand the trends!

This episode of Mankiw’s Crypto Tavern focuses on the recent hot topic of U.S. stock tokenization.

At the end of June, Robinhood, Kraken, Bybit and other platforms launched U.S. stock tokenization products, which attracted widespread attention from the Crypto community and the traditional financial industry. Is this phenomenon a new narrative or new wine in old bottles? We invited three guests to discuss from different perspectives, covering technology, compliance, investment opportunities and risks.

The pub is open, please introduce yourselves, guests!

CryptoMiao: Hello everyone, I am Miaoge, a guest author of Mankiw. I hold legal professional qualifications, CPA, tax agent, accountant and other qualifications. I focus on the field of finance and taxation. I have rich experience in Web2 and research DeFi arbitrage and token models in Web3, especially in Sui ecology. Welcome to DM for tax or Sui-related questions!

Sam: I’m Sam, nicknamed “Heavy Equipment Mage”, which means “heavy equipment”, nothing else (laughs). I was engaged in mining in the early days, and participated in exchanges and projects from 0 to 1. I am currently the COO of Techub News, focusing on the operation of Hong Kong crypto media. We are directly invested by Gaofeng Group and are the official partner media of Bitcoin Asia and Bitcoin Magazine. We hold Space every Tuesday and Friday, focusing on transactions and industry trends, and also organize offline summits in Hong Kong. Welcome to follow!

CryptoBetter Call Saul: Hi everyone, I’m Loren. I became a lawyer because of an American TV series. I didn’t major in law in college, but later studied law in Hong Kong. I worked in court and now focus on criminal compliance defense. I prefer Meme coins for on-chain investment, and I have dabbled in everything from inscriptions to PumpFun and AI. I can be considered a “dog warrior”.

Dongdong Robin: I’m Dongdong, a Mankiw Fellow working in the brand department, and co-hosting the Crypto Tavern with Meg. Every Thursday we will select a hot topic in Web3 and invite guests to chat freely. Everyone is welcome to participate!

Meg: I am Meg. I have crossed over from traditional finance to Web3. I have worked in CEX, DEX, mining pools, payment and law firms. I am considered a Web3 "veteran". I hope you like our show! Let's get to the point, and Dongdong will bring up the first topic.

Q1: Is the tokenization of U.S. stocks a new narrative or new wine in old bottles?

Dongdong Robin: The tokenization of US stocks has been very popular recently, with platforms such as Robinhood, xStock, and Kraken launching related products almost at the same time. The whole network is discussing it enthusiastically, with reports from Twitter to Web2 news media. What do you think of this trend? Where does it come from? Is it a brand new narrative or new wine in old bottles?

Sam: As a media person, we are highly sensitive to new tracks and acquire information faster than ordinary users. The tokenization of US stocks is essentially a branch of RWA (real world assets), similar to the continuation of STO (security token issuance). STO was explored in 2017-2018. At that time, it was experimental and in a gray area, such as the chaining of gold mine income rights. The RWA narrative began to rise last year. Due to the gradual relaxation of supervision, traditional enterprises hope to participate in the capital appreciation of the cryptocurrency circle through the chain.

Robinhood, Bybit, Kraken and other licensed institutions have driven this wave of enthusiasm, but the underlying logic is asset securitization (ABS), which can be traced back to MBS (mortgage-backed securities) during the 2008 subprime mortgage crisis. When we were incubating in the early days, we designed an ABT (asset tokenization) solution for the project, and similar logic already existed. Today, technology and regulation are more mature, such as Robinhood's issuance on Arbitrum L2, emphasizing compliance and custody, and obtaining licenses such as MiCA.

Compared with traditional US stocks, tokenized stocks support 24/7 trading, have a low entry threshold and stronger liquidity. Traditional US stock account opening is complicated (such as Tiger, Futu, and IBKR require cumbersome authentication), and are subject to trading hours and holidays (such as IBKR email notification that holidays are not available for trading). Tokenized stocks can be traded at any time and are suitable for event-driven opportunities (such as sudden negative news), but excessive liquidity may cause retail investors to be manipulated. In professional terms, it can be called ABT, which is an on-chain variant of ABS, but you still need to be wary of manipulation risks.

Crypto Better Call Saul: I disagree that it is completely "new wine in old bottles". The tokenization of US stocks is not a new concept. FTX and Binance tried it in the early years, but the regulatory environment was unclear at the time and it failed to form a scale. Now, with the new US president taking office and the replacement of the SEC chairman, Hong Kong and Singapore have softened their attitudes towards crypto assets, and the global regulatory environment has improved, boosting the craze. Analogous to the Internet, it had its prototype in the 1960s, but it was not globalized until after 2000. The concept is advanced and needs infrastructure and cognition to follow up.

The tokenization of US stocks was first promoted in Europe, America and Asia, because US stocks can be traded directly in the United States, and the demand is relatively low. In other regions, there are account opening and KYC thresholds, and tokenization provides convenience. RWA is more general, and the prototype of securities network trading has existed in the 1970s (such as the popularization of online trading in the 1990s). Tokenization reduces intermediary costs (such as brokerage, law firm, and audit fees, which may account for 10% of traditional listings), especially for unlisted companies (such as SpaceX and OpenAI) directly tokenized in the form of Pre-IPO, which is a qualitative leap.

CryptoMiao: The craze stems from the maturity of the market and changes in user demand. In the past, STO and IDO were exchanges competing for traffic, but now there are sufficient market users, and tokenization is more like a reflection of product maturity. It lowers the trading threshold and supports all-day trading, but due to the lack of a complete arbitrage mechanism (such as minting and redemption channels), the on-chain price may be out of touch with the off-chain stock price. For example, the daily K-line of tokenized stocks on Solana or Robinhood has a low correlation with the Nasdaq stock price. The lack of arbitrage mechanism leads to price deviation. Investors need to be wary of insufficient liquidity and slippage risks.

Meg: From the perspective of the currency circle, from STO to IDO and then to RWA, the market has shifted from competing for traffic to developing mature products. Back then, IDO was a gimmick used by exchanges to grab users. Today, the market is more rational, and tokenization is a reflection of the maturity of products and markets. It is not only the endogenous growth of Crypto, but also an external force that attracts the attention of traditional finance, connecting Web2 and Web3.

Dongdong Robin: The tokenization of US stocks has both historical roots and new opportunities due to regulatory and technological progress, with both short-term sentiment and long-term potential. Let's move on to the next topic.

Q2: What is the difference between holding tokenized stocks and traditional stocks? How to implement compliance?

Crypto Better Call Saul: According to Robinhood’s official explanation, tokenized stocks are price certificates of on-chain smart contracts, not real stocks. Users cannot enjoy the shareholder rights of traditional stocks (such as voting rights and corporate governance rights), and can only obtain economic benefits (such as dividends). The dividend distribution method varies from issuer to issuer: xStock automatically converts dividends into tokens, while Robinhood distributes dividends directly.

The redemption mechanism is a key pain point. If it cannot be exchanged for real stocks, the economic logic is questionable, and redemption may involve additional fees and the process is not transparent. When discussing with other lawyers, they believe that if tokenized stocks cannot be redeemed, it is equivalent to "only in but not out", and the economic logic is problematic. In terms of compliance, issuers need to obtain traditional financial licenses (such as EU MiCA, VASP), but outside the United States, the SEC's regulatory efforts are limited and compliance is uncertain. Web3 is still developing, and compliance issues need to be continuously addressed.

Sam: There are three main differences between tokenized stocks and traditional stocks:

• No shareholder identity: Tokenized stocks are held by custodians, with a 1:1 anchoring. Users only hold on-chain certificates and have no shareholder rights. Traditional stock holders can control the company (such as holding more than 33%), but tokenized stocks do not have this possibility.

• Price mapping properties: similar to derivatives, only tracking prices, no voting rights or governance rights.

• High liquidity and low threshold: It supports 24/7 trading, is more flexible than traditional stocks (restricted by trading hours and holidays), and is suitable for event-driven transactions (such as sudden negative news). However, excessive liquidity may lead to retail investors being manipulated.

In terms of compliance, licensed brokers such as Robinhood are issued through EU qualifications and need to ensure transparent asset custody and perfect third-party audits. Regulatory concerns include transparency, asset security and proof of reserves. Traditional stocks have a mature registration system, while tokenized stocks are under the name of custodians, similar to the financing and fundraising model. Investors are advised to consult professional institutions (such as Mankiw) to evaluate the quality of custody and auditing.

CryptoMiao: Tokenized stocks are similar to ETFs, encapsulating a single stock, and the price is matched by market transactions, not driven by oracles. Unlike FTX's early oracle model (staking stablecoins or BTC, asset pool trading), current tokenized stocks require real stock pledges. However, the lack of arbitrage mechanisms (such as redemption channels) leads to price deviation risks, such as Tesla's stock falling 1% on Solana while Nasdaq fell 5%.

Traditional exchanges are limited by trading hours (e.g. 8:30 a.m. to 3:00 p.m., with low pre-market and post-market trading volumes). Tokenized stocks support all-day trading and are suitable for rapid pricing (e.g. driven by events such as Musk's remarks and wars), but insufficient liquidity (e.g. Apple's daily trading volume is only $90,000) amplifies the risk of slippage. Professional institutions can apply for redemption (e.g. Ondo Finance's US Treasury token USDY, with an annualized rate of 4%+), but the retail channel has not yet been opened.

Meg: Tokenized stocks are similar to "paper gold", where users hold price certificates rather than physical assets. On-chain prices are formed through market transactions, similar to GMX's pool model (Mint and Redeem) or Hyperliquid's on-chain order book, rather than FTX's oracle model. Event-driven trading opportunities (such as major negatives) may be reflected on the chain first, ahead of traditional markets. However, the current trading depth is insufficient (for example, Apple's stock daily trading volume on Bybit is only US$90,000), and slippage is significant. Exchanges may moderately control liquidity to avoid false trading volume.

I am curious whether the price mechanism feeds traditional stock prices through oracles? Can you explain it to me?

CryptoMiao: It is not an oracle model. The tokenized stock price is formed by market matching, based on real stock pledge, not FTX's oracle asset pool model. The order book model requires buyers and sellers to match (such as the long and short sides of perpetual contracts), not asset pool transactions. Poor liquidity leads to price deviation, and the minting and redemption mechanism needs to be improved.

Sam: Tokenized stocks do not require oracles, and their liquidity comes from the stock anchors provided by custodians. On-chain prices can reversely affect traditional markets, because traditional markets have trading hours lag, while on-chain has almost zero latency. Currently, transactions are still mainly centralized exchanges, not completely on-chain.

Meg: On-chain prices are ahead of traditional markets, especially during major events, and are indeed trading opportunities. However, due to the lack of depth, retail investors need to place orders with caution to avoid becoming “slippage victims”.

Q3: What are the risks and opportunities of tokenizing unlisted stocks?

Dongdong Robin: The most eye-catching point of this tokenization craze may be that tokenization has expanded to unlisted stocks, such as SpaceX and OpenAI, which has sparked heated discussions. What are the risks of investing in unlisted stock tokens? What are the opportunities?

Sam: There are three major risks in tokenizing unlisted stocks:

• Legal compliance and governance conflicts: OpenAI and SpaceX may not recognize tokenized stocks, resulting in unclear legal status.

• Information asymmetry: The tokens may be backed by fund LP shares, the specific information is not transparent, and the circulation is restricted.

• Opaque pricing: Insufficient liquidity, imperfect pricing mechanism, and difficulty in protecting investor rights.

The current tokenization is similar to the gray experiment of early STO and needs to be treated with caution. The traditional stock market has a 400-year history, with mature compliance and rights protection, while tokenized stocks are still in the experimental stage.

CryptoMiao: The biggest risk is that authenticity cannot be verified. OpenAI publicly denied that the tokens issued by Robinhood are its stocks, and it is difficult for investors to verify the authenticity and quantity of the pledged assets. Dividends and voting rights cannot be guaranteed, and it is difficult to protect rights. For example, xStock withdrew from the Uniswap pool (involving about $330,000 in liquidity), changed its name to "Demo Token One", and suspended trading. Investors have no way to protect their rights because the US SEC and SpaceX do not intervene in overseas issuance.

If the company cooperates (for example, early founders pledge 30% of their shares and notarize it), tokenization can provide startups with Pre-IPO pricing and cash flow recovery opportunities, similar to market-based pricing for venture capital, and reduce the risk of insufficient R&D funds. This is a major opportunity for early-stage projects.

Crypto Better Call Saul: Unlisted stock tokenization attempts to allow ordinary people to participate in the Pre-IPO of high-quality assets, but most of them end in failure. High-quality companies (such as OpenAI) do not need to attract retail investors through tokenization, and information asymmetry and lack of supervision amplify risks.

A listener in the pub asked: Is it feasible to avoid risks through SPAC (special purpose acquisition company) tokenization? For example, setting up a SPAC to acquire OpenAI shares, and then STOing the SPAC shares.

Crypto Saul: It is theoretically feasible. SPAC can be used as an intermediary to isolate risks, but it needs the company's authorization. High-quality companies lack motivation, and small and medium-sized enterprises are more likely to try. Domestic companies have consulted on similar operations, but it is difficult to implement and requires company approval and publicity.

Meg: The tokenization of unlisted stocks is like "buying a drum and getting a dog", and retail investors need to be alert to the risks. The xStock pool withdrawal incident is an example. I wanted to buy SpaceX, but ended up with a "dog hitting the ground". Mankiw's legal team can provide overseas architecture and compliance services for overseas companies. Welcome to consult.

Dongdong Robin: It is indeed very risky. I saw some people on Twitter who were optimistic about SpaceX and OpenAI, and thought that tokenization was an opportunity for value investment in high-quality companies that were previously unavailable. As a result, the pool was withdrawn and there was no way to defend their rights. Next, let’s talk about the choice of issuance chain.

Q4: What are the considerations for issuing public chains when tokenizing U.S. stocks?

Dongdong Robin: Each company has different choices in the choice of token issuance chain. Robinhood chose Arbitrum L2, and xStock chose Solana. What are the considerations for the choice of issuance chain? Let me talk about it first.

Crypto Miao: Solana is the first choice due to its large user base, fast transaction speed, and mature DeFi ecosystem (such as rich pools and exchange protocols). It is suitable for chasing hot spots, such as Meme coins and US stock tokenization. Arbitrum may be related to Robinhood's long-term planning (such as self-built L2), with low gas fees and strong contract customization. Sui has great ecological potential, but a weak user base, and it is difficult to become a mainstream issuance chain in the short term.

The choice is related to corporate governance style and investment direction. Solana is similar to Coinbase's steady and cautious strategy, while Arbitrum is related to Robinhood's ARB heavy position and technical cooperation. There are also teams on Sui that plan to issue tokenized stocks, but promotion will take time.

Sam: Chain selection is more based on commercial interests rather than technical advantages. Robinhood has cooperated with Arbitrum for a long time (such as Robinhood Wallet). Choosing Arbitrum may be to boost the price of ARB (ARB rose 20% last year) or control the income of L2 (such as the gas fee income of self-built L2). Solana attracted xStock due to its high performance and low gas fee, which is similar to the selection logic of Optimism. Technical considerations are second, and trading and profit games are the core, and the chain is just a role to be used. Arbitrum may be more "obedient" and provide customized solutions for Robinhood.

Crypto Better Call Saul: Solana leads in daily activity, capital volume, and DeFi infrastructure, and is suitable for tokenized products, such as Meme Coin and PumpFun's ecological advantages. Arbitrum may be selected due to contract customization and KYC/AML compliance requirements, and the specific considerations depend on the capital operation strategy. I don't know much about Arbitrum, but Solana's ecological advantages are beyond reproach.

Dongdong Robin: The choice of distribution chain does involve both technical and commercial considerations.

Q5: What is the long-term value of U.S. stock tokenization? What do you think of perpetual contracts for U.S. stocks?

Dongdong Robin: Let's talk about what you think about the long-term value of US stock tokenization? Another question is that perpetual contracts are financial instruments unique to the crypto market. What do you think of US stock perpetual contracts? Will it bring new shocks? I am personally very interested and think that US stock perpetual contracts may be more interesting than tokenization.

CryptoMiao: The tokenization of U.S. stocks has long-term value, similar to the transformation of stocks from offline to Internet (the rise of online transactions in the 1990s). The decentralization and transparency of Web3 reduce the cost of trust, support all-day trading and fast pricing (such as events driven by Musk's remarks, wars, etc.). Perpetual contracts are simpler to implement and do not require physical stock pledges. FTX has tried stock perpetual contracts (30 stocks) in 2020.

I am the Types Ambassador on Sui Chain and have communicated with the development team. They tried perpetual contracts, but due to the small number of traders, large amount of funds, and large price spreads in the order book model (such as 100 yuan for a sell order and 50 yuan for a buy order), they used asset pools and oracle pricing. However, the reliability of the oracle for stock prices is a bottleneck, and a closer market linkage is needed, otherwise the risk of price spreads or manipulation will be high.

Sam: RWA such as US stock tokenization is better than ABS in the 2008 subprime mortgage crisis, based on four aspects of progress:

• High transparency: Public chain records are verifiable, and information symmetry is better than traditional finance (subprime crisis assets are opaque).

• Improved supervision: Compliance requirements (such as custody and auditing) are stricter than in the early years.

• Risk control: High-quality asset selection and smart contract automation reduce human risks and avoid the complex structure of the subprime mortgage crisis.

• Technological advancement: Blockchain infrastructure is superior to traditional systems.

However, there is a lot of hype at present, similar to the "consensus is value" of Meme coins, and we need to be wary of the risk of human manipulation, and it is still in the experimental stage. Perpetual contracts have great potential because they do not require physical assets and are highly accepted by the market.

Crypto Better Call Saul: The grand narrative is attractive, but retail investors have low participation (e.g. Apple stock tokens only trade $90,000 a day), and slippage and liquidity issues are significant. 7×24-hour trading on the chain has the advantage of "pre-market matching", but the depth is insufficient, and retail investors can drive up prices with small transactions. Perpetual contracts do not require physical assets to pledge, so they are more accepted by the market and have greater potential. The long-term development of blockchain is promising, but we need to wait and see in the short term. Realistic question: Has anyone here ever bought tokenized stocks?

CryptoMiao: I have bought on Solana. The slippage is very large and the transaction volume is small. A slightly larger transaction will push the price up by a few points. It is suitable for fractional share arbitrage but not for large investments.

Crypto Better Call Saul: I see that most people in the community are on the sidelines, retail investors are not very enthusiastic about participating, and the grand narrative has not yet been implemented.

Meg: The tokenization of US stocks is not only the endogenous growth of the currency circle (such as the wealth-creating effect of Meme coins), but also an external force that attracts the attention of traditional finance, connecting Web2 and Web3. Similar to Payoneer connecting Web3 funds to real consumption, it has huge long-term potential, but the market and supervision need to mature. The slippage problem mentioned by Brother Miao is very real, and retail investors need to be cautious when placing orders.

Q6: Tokenization of U.S. stocks is a type of RWA. What other tokenization directions are worth paying attention to?

CryptoMiao: I think copyright assets have the most potential, such as music, film, television, books, and website advertising revenue. YouTubers (such as Mr. Beast) can tokenize video copyrights and quickly recover their million-dollar investments, and holders can enjoy long-term dividends (such as advertising fees and playback revenue), similar to stock dividends. Compared with traditional financing, it is transparent and efficient, suitable for content creators. For example, website advertising revenue and Apple Music copyright fees can be directly distributed through tokens, and on-chain records ensure transparency. There have also been attempts to tokenize book publishing revenue projects.

Sam: RWA is better than ABS in terms of transparency and automation, but human operation is a pain point in trust. Copyright and real estate tokenization require strong supervision and legal constraints, otherwise it is difficult to guarantee long-term dividends. As an old miner, I am skeptical about human factors. The original intention of blockchain is to eliminate trust, but people are still the biggest variable. The three elements of relational contract, high value and long-term timeliness must be met. "Leek consensus" can also push up value. As long as there is enough money, bad projects can take off, but it does not constitute investment advice.

Crypto Lawyer: Domestic enterprises (such as Yunnan tea mountains and Shenzhen real estate developers) consult RWA financing, which is similar to ABS transfer of future income, such as tea from tea mountains and undeveloped land on the chain. However, the cost is higher than traditional financing, and most of them are market value management. Most of the RWA tokens issued in Hong Kong are not circulated in the secondary market and are only available to investors. In practice, they face regulatory and liquidity difficulties.

A listener in the pub asked: In the future, will tokenized stocks have the same shareholder rights as traditional stocks?

CryptoMiao: Similar to ETF, you need to apply to the issuer (such as Robinhood) to redeem it for real stocks, but the channel is not smooth. In the future, if the stock market as a whole is on the chain (such as the exchange on the chain), tokens can be directly issued to grant shareholders rights, which is difficult to achieve in the short term and will take 10-20 years.

Meg: If traditional finance is fully put on the chain (lending, supply chain finance, etc.), shareholder rights may be realized, but in the short term it will still be dominated by institutions and it will be difficult for retail investors to outperform inflation.

Dongdong Robin: How can tokenized stocks have both shareholder rights and interests? This requires the market to be mature enough, and the trading volume and participation to increase, so that issuers will open up rights and interests. For example, the New York Stock Exchange and the Singapore Exchange are trying to trade around the clock, and the chain may be a way to achieve this.

As a branch of RWA, the tokenization of US stocks connects Web2 and Web3, reduces transaction thresholds and costs, and supports all-day transactions and fast pricing. The advantages are high transparency, regulatory progress, and mature technology, but it faces challenges such as insufficient liquidity, price deviation, lack of redemption mechanism, and compliance uncertainty. The tokenization of unlisted stocks has higher risks. In the long run, RWA is expected to reshape the financial and content industries, which requires the maturity of technology, regulation, and market.

Thank you all guests, this episode of the tavern ends here!