What is the main battlefield of RWA? What is the underlying business logic of stock tokenization?

Authors: Sha Jun, Guo Fangxin

In June of this year, Robinhood announced that it would offer European users trading in tokenized US stocks and ETFs, providing users with a product service similar to OTC financial derivatives through the signing of contracts for difference.

In September of this year, Nasdaq officially submitted a proposal to the U.S. Securities and Exchange Commission, hoping that exchanges could publicly issue securities in the form of tokens, bringing the topic of tokenization of U.S. stocks officially to the table.

On October 29, Ondo Finance, known as the “BlackRock of Blockchain”, announced that its core product Ondo Global Markets (Ondo GM) has officially integrated with BNB Chain, marking the first large-scale introduction of tokenized stocks and ETFs into the BNB ecosystem, sparking a new wave of tokenization in the US stock market.

In the wave of RWA, why is stock tokenization a direction we must focus on? What does it mean for intermediaries, institutions, and ordinary investors to enter the US stock tokenization market? Does buying tokenized stocks equal buying the stocks themselves, and what is the core difference? What are the compliance boundaries for this type of product? …

Crypto Salad will systematically sort out some key issues regarding stock tokenization today and present its own views from the professional perspective of a Web3 lawyer.

Why tokenization of stocks is one of the most important branches in the current RWA narrative.

Everyone can sense that the crypto market has not been stable in recent months. After experiencing large-scale liquidations such as the 1011 incident, investors gradually realized that DeFi currently has a huge BUG: products are becoming increasingly complex, protocols are layered on top of each other, various lending, leverage, arbitrage, and contract structures are interdependent, and it seems like they want to push the limits. However, if any link encounters a problem, it will quickly transmit to every layer, leading to a chain liquidation. The tricky issue is that it is very difficult for the market to predict in advance which layer will start to spiral out of control, leaving no time to react. Once a crisis occurs, overall liquidity can be depleted in a very short period.

In this case, the funds originally in DeFi also began to look for some valuable assets that can smoothly traverse the cycles.

RWA, as a tokenized product based on real assets, naturally meets the above requirements. According to the latest data from rwa.xyz, as of today, on-chain RWA funds have exceeded $35.6 billion and are showing a trend of continuous growth. The Crypto Salad team has also been at the forefront of RWA practices and can intuitively sense the temperature of the market. However, so far, our view has always been: RWA has not yet reached its explosive moment.

Crypto salad believes that there are not many assets that can go on-chain and have yield value at this stage, due to multiple dimensions such as regulation, technology, non-standardization, and liquidity, many of which need to be solved from the top down. Therefore, major institutions generally prefer to tokenize and package ready-made financial securities products such as money market funds and bonds to test the waters, because they already have a clear rights and obligations structure and a clear legal definition under the framework of securities law and company law, and are already a highly standardized and compliant 'product'.

Stocks, on the other hand, are a type of financial product with relatively high risk and return, which not only satisfies investors' risk preferences but also makes it easier to be incorporated into on-chain applications such as collateral and lending in DeFi scenarios. In addition, a mature stock market has considerable liquidity, with intermediaries that are comprehensive and mature, capable of large-scale allocation and instant trading.

As for the US stock market, under the objective reality of dollar hegemony, it is undoubtedly the most core, mature, and liquid asset class globally. Especially the US stock giants represented by the “Seven Sisters of Wall Street”, whose fluctuations affect financial investments across the United States and even globally. Moreover, the United States is at the forefront of the cryptocurrency industry, and the enthusiasm for tokenization of US stocks is justified.

What can stock tokenization actually achieve? What forms does it take? How do various parties generate profit? Is it compliant?

Taking the US stock market as an example. If we precisely define tokenization of US stocks from the perspectives of anchoring logic, investor rights, and so on, it can be categorized into several mainstream models.

The narrowest definition of the tokenization of US stocks refers to Nasdaq submitting a proposal to the SEC, requesting approval to issue securities in the form of tokens on the main market. It is important to clarify that this does not mean the issuance of a new stock, but rather the hope to use two forms to issue the same stock, with the distinction being whether blockchain technology is used to represent ownership and conduct registration. The only difference is that the DTC (the Depository Trust Company) will determine whether to use a tokenized method for settlement and clearing based on the user's choice, and this process will not affect the speed of transactions.

This is the official definition of the tokenization of US stocks. Based on the content of this proposal, it's hard to say that it will really change anything, just like the same takeout being delivered by Blue Knight instead of Yellow Knight, same price, same merchant, same electric bike. For those who cannot download the app (investors without identity, address, funds, etc.), they still can't place an order and won't be able to enjoy this takeout.

Under this “market demand”, a number of broad-based tokenization platforms for US stocks have emerged:

For example, Robinhood offers users a tokenized form of Contracts For Difference (CFD). Users can choose to purchase Stock Tokens for US-listed stocks or ETFs on the platform, with each Token representing a corresponding share of the underlying stock or unit. With each contract signed, the platform will purchase the corresponding US stocks through the American economic agent Alpaca.

For example, the recently popular MSX due to the points season plan also relies on payment for order flow (PFOF), which routes users' on-chain orders to off-chain market makers for bundled sale, achieving the goal of purchasing US stocks at real-time synchronized prices. The aim is that as long as you hold the tokens, you can receive corresponding stock dividends. Both Robinhood and MSX are essentially a form of financial derivatives, rather than real stocks.

Although most users are aware, crypto salad must also make it clear again that purchasing tokens on these platforms does not grant actual shareholder rights. Nevertheless, investors are still flocking to experience the ups and downs of the US stock market, wanting to get a piece of the enticing market.

The issues with the broad concept of tokenization in the US stock market.

However, these broad-based tokenizations of US stocks have long faced several persistent and difficult-to-solve issues. For example, due to a lack of participants and the KYC threshold, the buy and sell orders on-chain are not deep enough, leading to insufficient liquidity in this market. As a result, when investors buy and sell tokens, price slippage may occur, meaning they cannot sell at the expected price. Meanwhile, the conversion from stocks to tokenized assets involves multiple intermediary processes and even several participants, resulting in high fees and significant friction costs for minting and redeeming, which decreases arbitrage efficiency, easily creating a vicious cycle. Such issues have formed the typical pain points of early US stock tokenization.

Recently, Ondo Finance seems to have proposed a solution for this.

First of all, in addressing the liquidity issue, Ondo's approach is to first purchase a batch of real stocks from traditional markets and store them with licensed brokers or custodial banks. This way, after users place their orders, an equivalent portion can be allocated from the inventory of real stocks, generating a corresponding token for the user on-chain, achieving the goal of “instant”. The link between the token market and the US stock market is shortened, allowing arbitrageurs to enter with low trading costs, and the price fluctuations of the tokens are also lighter, effectively solving part of the liquidity problem.

Crypto Salad believes that the core compliance challenges of tokenization in the US stock market are concentrated in two areas:

When a trading platform pools investors' funds to purchase underlying stocks and distributes profits or dividends in the form of tokens, it may essentially create a type of collective investment tool, which needs to be registered or exempted within the securities regulatory framework.

In addition, if the tokens can be freely bought and sold on-chain and are matched by the platform, the platform may be classified as an “Alternative Trading System (ATS)” and must comply with corresponding brokerage, clearing, disclosure, and other regulatory requirements.

These two regulatory determinations almost decide whether tokenized stocks can “legally exist” within the existing legal framework, and they are also the parts that various platforms need to weigh cautiously when designing their commercial and technical architectures. So how does Ondo Finance achieve compliance?

• First, Ondo Finance acquired Oasis Pro, directly obtaining licenses including the SEC-registered Broker-Dealer license, ATS (Alternative Trading System) license, and Transfer Agent license, which means it can legally hold real stocks, conduct clearing, provide custody, perform tokenization, and manage transfer registration, having sufficient compliance basis.
• Second, Ondo Finance is backed by large institutional funds and a top financial background team. People often say that Ondo Finance is the BlackRock of blockchain because Ondo plays a similar role on-chain as BlackRock does in traditional finance, and their scale and funding background are also quite similar.
• BlackRock is the world's largest asset management company, and one of its core values is to issue safe, transparent, and large-scale funds and fixed-income products, such as U.S. Treasury bond ETFs and money market funds. Ondo Finance has been working to move treasury and cash products onto the blockchain through tokenization, including USDY (a yield-bearing “on-chain dollar” backed by short-term U.S. Treasury bonds and cash equivalents such as bank deposits) and OUSG (a tokenized short-term treasury bond fund backed by the short-term U.S. Treasury bond ETF managed by BlackRock and a small amount of institutional bonds).

Therefore, Ondo Finance has ample strength and reason to elevate the tokenization of U.S. stocks to a new level. The emergence of U.S. stock tokenization is an important signal of the gradual integration of crypto finance with traditional capital markets. It is not only a technological innovation but also a testing ground for regulatory and financial infrastructure reconstruction. In the short term, tokenized stocks are still in the exploratory stage, with compliance pathways and market mechanisms constantly evolving; however, in the long run, those who can find a balance between compliance and efficiency will have the opportunity to occupy a high ground in the next wave of asset tokenization.

In the view of Crypto Salad, the traditional financial system generally has a resistant attitude towards stock tokenization. This resistance is not hard to understand: the new model is too “disruptive” and causes too much impact on the existing financial order, while the regulatory framework is currently unable to keep up; once problems arise, who will be responsible? However, from another perspective, stock tokenization does address certain pain points. From technological innovation to market feedback, it clearly responds to the real demands of the present, so we believe that the future of stock tokenization is indeed worth looking forward to.