U.S. stocks don the "Token" vest, is it a good or bad thing?

The financial industry seems to be looking for a way to abolish the information disclosure and trading rules of the stock market, making the stock market more like Crypto Assets, rather than making Crypto Assets more like a regulated stock market.

Written by: Matt Levine

Compiled by: BitpushNews

First, let me briefly summarize the history of the U.S. public stock market:

In earlier years, anyone could raise funds for a project by selling stocks to the public, and many did so, often accompanied by false promises.

This phenomenon peaked in the 1920s, with people rushing to buy stocks and borrowing money to leverage their speculation. Subsequently, the stock market crashed, leading to the Great Depression. To restore market confidence, Congress passed a series of laws (particularly the Securities Act of 1933 and the Securities Exchange Act of 1934) to regulate the public stock market. From then on, if a company wanted to offer stocks to the public, it had to disclose business details, publish audited financial statements, and announce significant events to ensure that investors were informed.

Of course, this only applies to publicly listed companies, and there are exceptions for companies that do not raise funds from the public. If your father-in-law gives you some startup capital to open a local hardware store, the federal government clearly will not require you to submit audited financial statements.

As time goes by, these exceptions become increasingly important. In the 1920s, the best way for companies to finance was to publicly issue stocks to thousands of retail investors; whereas in the 2020s, the best way to finance might be to directly call Masayoshi Son of SoftBank and ask him for $10 billion—he is very likely to agree, and you wouldn't have to disclose financial reports or face retail investors.

"The private equity market has become the new public market," I often express this way. In the past, the main advantage of going public was the ability to raise large amounts of capital, as funds in the public market were more abundant. Today, the private equity market boasts trillions of dollars, making going public no longer necessary. Star tech companies like SpaceX, OpenAI, and Stripe can raise billions at valuations in the hundreds of billions without going public.

They indeed did so because going public is quite troublesome: financial reports must be disclosed, business progress updated (and if the information is incorrect, they could be sued), and they may attract unwanted shareholders. Additionally, the public fluctuation of stock prices can also cause headaches for management. For popular private companies, this is actually convenient—they can raise funds while avoiding the complexities of going public.

But for the public, this may not be a good thing. Retail investors want to invest in companies like SpaceX but have no access, and can only purchase fragmented shares at high prices through gray channels. Over the past decade, a sentiment has gradually become popular: "Modern economic growth is largely driven by private enterprises, and the most exciting companies are private, yet ordinary investors cannot participate; this must change."

How to change? My previous discussion has indicated that this is very difficult. Many large private enterprises do not want to go public at all, because the public market is both annoying and expensive. The reason the private placement market can replace the public market lies in the fact that global capital has become highly concentrated in private equity funds, venture capital, family offices, and people like Masayoshi Son - they simply do not need retail investors' funds (at least SpaceX does not need it; perhaps some private enterprises do need retail investors, but they may not be high-quality targets).

Nevertheless, people still want to try. Conceptually, here are some ways to solve the problem:

Make going public easier. Cut down on costly disclosure regulations. Make it harder for shareholders to sue companies, harder for activists to win proxy fights, and harder for short sellers to criticize companies. Clearly, there are trade-offs here, but perhaps it’s worth it. If going public is no longer more troublesome or expensive than staying private, maybe SpaceX, Stripe, and OpenAI will shrug and say, "Sure, let’s go public." Historically, this is something people often say when discussing problem-solving.

Make it more difficult for private companies. Increase expensive information disclosure regulations for private companies. Through a law, stipulate that "if you have over X dollars in revenue, you must publish audited financial statements, and if any errors are found, anyone can sue you." You occasionally see efforts in this area; in 2022, the U.S. Securities and Exchange Commission (SEC) began "developing a plan to require more private companies to regularly disclose their financial and operational information."

Restructuring the economy and wealth distribution reduces the capital pools of large institutions, and the only way to gain significant capital is to sell shares to the public. This seems difficult.

But there is a more radical way: to directly abolish the rules for listed companies. Allow any company to offer shares to the public without disclosure or audit. The public judges the risks themselves - if the company refuses to provide financial reports, you can choose not to buy (but you can also buy!). Fraud remains illegal, but mandatory disclosure will become voluntary. If a company believes that disclosure helps with financing, it can still follow the current securities law; if it does not want to, it can sell shares directly to the public.

Few people openly support this proposal. After all, the overall U.S. securities regulation has been viewed as successful over the past hundred years - with deeper markets, more reasonable valuations, and less fraud, all due to the mandatory disclosure by public companies.

However, the Crypto Assets industry has discovered a "shortcut": raising funds by issuing "tokens" (a type of economic rights certificate similar to stocks) without having to comply with securities laws. This theoretical result is mixed, but it seems to be experiencing a resurgence in recent years.

Nowadays, most companies still issue stocks instead of tokens. However, tokenization offers a new approach: renaming private company stocks as tokens and selling them to the public. You call it "stock tokenization" and move it onto the blockchain. Back in 2015, I wrote that "repeating the word 'blockchain' won't make the illegal legal," but this is no longer obvious today.

Tokenized stocks have other advantages: stocks on the blockchain may enable self-custody, high-leverage loans on DeFi platforms, 24-hour trading, and more. But the real temptation lies in the fact that as long as they are labeled as "tokenized," private company stocks can bypass U.S. disclosure rules to be sold to the public. This means that the securities law system established in the 1930s could be undermined.

Of course, the United States has not reached this point yet, but that is the goal. This week, Robinhood announced the launch of tokenized stocks (initially limited to non-U.S. users and primarily focused on U.S. stocks):

Robinhood Markets Inc. joins the wave of blockchain stock trading, offering tokenized US stocks for 150,000 users across 30 countries with 24/5 trading.

The structural details show that the underlying asset is custodied by a licensed U.S. institution (theoretically, tokenized assets could be sold short naked, but Robinhood's tokens are fully collateralized).

Notably, Robinhood is also giving away private company tokens as a promotion:

To celebrate the launch, Robinhood is giving EU users who registered before July 7 tokens worth €5 for OpenAI and SpaceX, distributing a total of $1 million in OpenAI tokens and $500,000 in SpaceX tokens.

Robinhood's crypto business general manager, John Coobriat, said: "We want to address historic investment inequality - now everyone can buy shares of these companies."

Although currently limited to Europe, the goal is clear: to allow the public to purchase OpenAI and SpaceX stocks through brokerage apps without requiring companies to disclose financial reports.

Robinhood CEO Vlad Tenev stated bluntly in a podcast:

"For private enterprises, the argument against allowing retail investors to invest is fundamentally untenable. People can buy depreciating goods on Amazon, can buy meme coins, but cannot buy OpenAI stocks? This is illogical."

This is true! The public can speculate in the stock market (zero-date options), the crypto market (meme coins), and the lottery (Robinhood once promoted Super Bowl bets). In contrast, SpaceX or OpenAI are actually higher quality targets. The distinction between public and private does not relate to the level of risk—there is garbage in the public market, and there are also gems in the private market.

But it must be recognized that the essence is: "The public should be able to invest in private enterprises" is itself a paradox.

The core characteristics of private enterprises are:

(1) Not open to the public,

(2) Not subject to the disclosure constraints of listed companies.

Therefore, "allowing the public to invest in private enterprises" is equivalent to "allowing companies to sell shares to the public without disclosing information." This is not necessarily absurd—perhaps you believe that disclosure rules are outdated and hinder innovation, but this is the essence of tokenization.

Tenev is not an isolated case. BlackRock CEO Larry Fink has also advocated for tokenization and has explicitly stated that the goal is to circumvent disclosure rules. In his letter to shareholders this year, he wrote:

"Tokenization democratizes investment... High-return investments are often limited to large institutions, primarily due to legal and operational friction. Tokenization can eliminate barriers, allowing more people to access high returns."

Here, "legal friction" refers to some companies being private because they do not want to comply with securities disclosure rules, and the tokenization solution allows them to sell shares to the public without adhering to these rules.

Once again, this solution has not yet worked in the United States. You still cannot directly sell "tokens" of private company stocks (or private credit loans, private equity funds, etc.) to the American public without disclosure. However, many big players in the finance industry are advocating for this, and the regulatory environment seems quite receptive, which you can understand. The public wants to purchase private investments, intermediaries want to sell, but the disclosure rules hinder all of this. Saying "we should abolish the disclosure rules" sounds bad, outdated, and greedy. On the other hand, saying "tokenization" sounds good, modern, and cool.

A bit more of the old-fashioned history.

Around 2020, crypto projects crazily raised funds from the public through false promises. People leveraged their speculation, and then the bubble burst, ushering in the "crypto winter." By the end of 2022, you might have imagined various possible outcomes, including:

1. encryption permanent silence;

The Congress might regulate Crypto Assets like the stock market in the 1930s, possibly establishing new rules to restore confidence in the Crypto Assets market, requiring the disclosure of information, regulating conflicts of interest, and imposing capital requirements. (We have indeed seen some situations in this regard; the "Genius Act" imposed capital requirements on stablecoins.)

But the reality is that a third way (which I personally did not foresee) seems to be emerging, where the financial industry is looking for a way to abolish the information disclosure and trading rules of the stock market, making the stock market more like Crypto Assets, rather than making Crypto Assets resemble a regulated stock market.