Are "tokenized assets" a new kind of scam?

[legiteum]

So tokenized assets, mostly in the form of stocks traded on the NYSE or NASDAQ are being lauded as the "next big thing" in the last few years by the Bitcoin and crypto communities.

I am here to ask... why. Can somebody explain why you would buy a stock or some other asset through a trader that happens to store your trade in a blockchain (versus some other data storage mechanism)? Why not just buy the stock or other instrument the same way it's been done forever--and the same way the token needs to ultimately buy the asset for its backing?

Is this just another scam riding on Bitcoin's coattails, or am I missing something?

I know millions of people get ripped off because they believe, "it's absolutely safe if it's on the blockchain". Would they be using this misinformation to lure amateur investors?

[Charles-Tim]

Tokenized stocks are not scam. Just make sure you go for the legit ones.

I do not know, but it is possible that not all countries can access United States stocks which are the common ones that I have seen tokenized. Also some people from other countries may not know how to access the stocks but know about crypto very well.

But also iif it is not United States stocks, there are possibilities that people in other countries may not be able to access it. They can prefer going for tokenized stocks.

Anither good one is why are people buying bitcoin ETFs when they can just buy bitcoin.

[Mrbluntzy]

I am here to ask... why. Can somebody explain why you would buy a stock or some other asset through a trader that happens to store your trade in a blockchain (versus some other data storage mechanism)? Why not just buy the stock or other instrument the same way it's been done forever--and the same way the token needs to ultimately buy the asset for its backing?

Is this just another scam riding on Bitcoin's coattails, or am I missing something?

Tokenized stock is not a new kind of scam but that doesn't mean that scammers will not be able to cease the opportunity to create tokens with a false claim of the assets it represent. If a scammer creates a token that he calls TSLA and the scammer claims that each token represents one Tesla share meanwhile the scammer does not have the corresponding share of that asset, a newbie that doesn't know his way around could buy the token because they see the claim that the token is backed by Tesla not knowing that the claim is false, they can get scammed like that.

I have compared traditional brokerage stocks to tokenized stocks and what I can say is that such comparison doesn't have a winner because they both serve different needs to different kinds of investors, by structure, they have different properties that suits different investors and if you want to understand why, you have to look at there advantages and one of the advantage of Tokenized stock is that investors can trade it all days of the week at any time while the brokerage stocks have closing hours and days. So, different investors knows the one that is suitable for their profile and they will go for it.

Another advantage of Tokenized stocks is easy access to some investors, in a jurisdiction where they can't easily access the right brokerage to invest on that asset, they could buy the Tokenized stock in an exchange that have it listed. Lastly, remember we have different kinds of investors with different preference.

[Ambatman]

The biggest issue if I'm not mistaken is accessibility
Take for example MSTR shares are not really easy to subscribe by some countries example mine
So people that would want access to the price would have to option for a tokenized form of it.
Yes lacks the same old traditional touch
It can be seen as an opportunity to have access to shares the barrier to entry are quite strong.
Imo it would be relatively safer if the token is issued by asset itself.

[Jostle]

Real World Assets (RWA) Tokenization and Tokenized Stocks are slightly different things. I guess they both belong to the class of "Tokenized Assets".

As for RWA, it just makes it easier for people to own smaller units of some real world assets, say, a multi-million property. By owning some tokenized units of it, it represents the share of the underlying assets, from which they could also get some rental income from. When properly done, it does have its advantages, such as being able to own units of overseas properties. More often than not, these are likely scams, since you do not travel overseas to validate the legitimacy.

For Tokenized stocks, my view is that there is no better way to own the underlying stock, than to buy the stocks itself. Tokenizing it is just a wrapper around the underlying. It does not convey any right of the owner of the token to dividends, etc.  And subjected to counter-party risks (in addition to the risks of the underlying). If the entire objective is to participate in future price appreciation, this is no different from perpetuals (for crypto). The risks are high, and the returns don't justify the risks.

In summary, I personally will stay clear of tokenized assets (until if there's further changes to how it works).

[o48o]

So tokenized assets, mostly in the form of stocks traded on the NYSE or NASDAQ are being lauded as the "next big thing" in the last few years by the Bitcoin and crypto communities.

I am here to ask... why. Can somebody explain why you would buy a stock or some other asset through a trader that happens to store your trade in a blockchain (versus some other data storage mechanism)? Why not just buy the stock or other instrument the same way it's been done forever--and the same way the token needs to ultimately buy the asset for its backing?

Is this just another scam riding on Bitcoin's coattails, or am I missing something?

I know millions of people get ripped off because they believe, "it's absolutely safe if it's on the blockchain". Would they be using this misinformation to lure amateur investors?

Depends on your definition of scam.

I have talked about this a lot. They were and definitely are just snake oil, while hinting that they are more then that. But when you look at them closely, they aren't technically lying about what they are. They were just misleading and overselling the hype in hopes of investors and money flow.

By misleading i mean that they were hinting that because revenue of traditional stock markets were so huge, this would somehow be a huge piece of it. Even though all they ever were talking about was synthetics, not real assets.

If by some miracle someone at some point will defeat all the regulatory hurdles for real decentralized ownership of real products, that crypto project will still have to justify how it's better then traditional stock market in the first place. It most likely will be either too centralized, bulky or expensive to use. It has the stain of countless decentralized projects being hacked before them. So people will just be waiting when the exploits are found by hackers.

[TastyChillySauce00]

Safe or not depends entirely on the issuer which is the company behind the tokenized stock, these stocks are SPVs. I believe if it's issued by reputable company like Robinhood hard to call it a scam, but it has several distinguished disadvantage compared to the old way of buying stock like depegging, and other problems.

I believe the reason tokenized asset become a thing is because it allows for 24/7 trading, low fee for small trades through AMM pool, and borderless distribution, even if you lived in the most remote country you can still buy it by using stablecoin. Which is a great benefit to bring more volume to the stock.

[legiteum]

Another good one is why are people buying bitcoin ETFs when they can just buy bitcoin.

The main problem with buying a tokenized stock is the same problem buying a stock after-hours: you are buying into a small liquidity pool, not the full market. The problem is that you aren't looking at the real market price. (I suppose you could make your token only tradable during market hours though).

The Bitcoin ETF, on the other hand, doesn't have that problem since it's the opposite: the Bitcoin market up 24 hours.

I have talked about this a lot. They were and definitely are just snake oil, while hinting that they are more then that. But when you look at them closely, they aren't technically lying about what they are. They were just misleading and overselling the hype in hopes of investors and money flow.

Totally fair. "Snake oil" is a better shorthand, definitely.

Real World Assets (RWA) Tokenization and Tokenized Stocks are slightly different things. I guess they both belong to the class of "Tokenized Assets".

Yes, but there's a big difference, too: with stocks you are creating a market on top of a market so to speak: there is already an exchange for your stock, and this adds a layer on top of that. Presumably RWA tokens would be the only market for the given RWA. That's has a lot few problems.

For Tokenized stocks, my view is that there is no better way to own the underlying stock, than to buy the stocks itself. Tokenizing it is just a wrapper around the underlying. It does not convey any right of the owner of the token to dividends, etc.  And subjected to counter-party risks (in addition to the risks of the underlying). If the entire objective is to participate in future price appreciation, this is no different from perpetuals (for crypto). The risks are high, and the returns don't justify the risks.

In researching this I was apprised to the liquidity problem: by definition the token needs to buy and sell chunks of the stock on the actual market (i.e. NYSE or NASDAQ etc.) and/or buy/sell futures on that market in order to fulfill demand for the token. That gets really tricky and could lead to big losses in certain cases. (Again, this has been compared to "after hours trading" which has the same problems).

Safe or not depends entirely on the issuer which is the company behind the tokenized stock, these stocks are SPVs. I believe if it's issued by reputable company like Robinhood hard to call it a scam, but it has several distinguished disadvantage compared to the old way of buying stock like depegging, and other problems.

Um..... no. 

Just because it's on Robinhood doesn't mean it's safe. Robinhood doesn't vouch for the safety of any of their securities. In fact they go to great lengths to make sure they aren't at fault for anything they allow users to trade.

I believe the reason tokenized asset become a thing is because it allows for 24/7 trading, low fee for small trades through AMM pool, and borderless distribution, even if you lived in the most remote country you can still buy it by using stablecoin. Which is a great benefit to bring more volume to the stock.

Certainly the cross border thing is an advantage, which others here have mentioned.

In talking through this, I think the right way to do it would be a real-time pass-through, tradable only at market hours. So when you trade into that token, it instantly buys the stock on the open market, and when you trade out of it, it instantly sells.

This would normally violate about 47 different securities laws (because people have tried this kind of thing before and have caused all kinds of problems), but hey, it's "decentralized" so it's above the law, right? 

[Questat]

So tokenized assets, mostly in the form of stocks traded on the NYSE or NASDAQ are being lauded as the "next big thing" in the last few years by the Bitcoin and crypto communities.

Most probably since its the trend now and government are backing it.

I am here to ask... why. Can somebody explain why you would buy a stock or some other asset through a trader that happens to store your trade in a blockchain (versus some other data storage mechanism)? Why not just buy the stock or other instrument the same way it's been done forever--and the same way the token needs to ultimately buy the asset for its backing?

Is this just another scam riding on Bitcoin's coattails, or am I missing something?

I know millions of people get ripped off because they believe, "it's absolutely safe if it's on the blockchain". Would they be using this misinformation to lure amateur investors?

Well, i guess the best answer to that is convenience and access of course.

With tokenized stocks they can trade 24/7 unlike traditional stocks that has a limited market hours.

[FinneysTrueVision]

The main problem with buying a tokenized stock is the same problem buying a stock after-hours: you are buying into a small liquidity pool, not the full market. The problem is that you aren't looking at the real market price. (I suppose you could make your token only tradable during market hours though).

It’s still the real price because secondary markets where stocks trade during off hours are still real markets. Market makers usually do a good job of keeping the price of tokenized stocks aligned with their value on those markets so you aren’t getting a bad quote. Despite volume being significantly lower, prices remain relatively stable for tokenized assets when markets are closed, at least for the higher cap stock and ETF tokens. There was a few meme stocks that got pumped much higher.

It’s still early days, so not everything is going to always run smooth. There is clearly demand for these products. There hasn’t been any widespread scamming because they are being issued by regulated companies like Robinhood, Coinbase, and Binance. That’s not to say these companies are entirely trustworthy, but there is a lot of confidence in them not being quick exit scams. With all the ways one can get scammed on-chain, this is seemingly one of the lowest risk investments.  

In talking through this, I think the right way to do it would be a real-time pass-through, tradable only at market hours. So when you trade into that token, it instantly buys the stock on the open market, and when you trade out of it, it instantly sells.

This would normally violate about 47 different securities laws (because people have tried this kind of thing before and have caused all kinds of problems), but hey, it's "decentralized" so it's above the law, right?  

Token issuers aren’t going to take any legal risk by allowing that. The closest thing to that is shares that are directly minted on-chain and aren’t just tokenized exposure to shares, but it is strictly limited to qualified whitelisted investors.

[legiteum]

With tokenized stocks they can trade 24/7 unlike traditional stocks that has a limited market hours.

If 99% of the market is trading in market hours, then you are dealing with a tiny portion of the liquidity pool, which can drastically distort the price and lead to other problems (you basically have to wait until the morning before your trade is "real").

The world's major stock exchanges could easily go 24/7 if they wanted to, but... traders don't want to. So I'm not sure how big of an advantage 24/7 trading really is.

The main problem with buying a tokenized stock is the same problem buying a stock after-hours: you are buying into a small liquidity pool, not the full market. The problem is that you aren't looking at the real market price. (I suppose you could make your token only tradable during market hours though).

It’s still the real price because secondary markets where stocks trade during off hours are still real markets.

Real markets of... what? You would be trading in a market that would be 1/100th the size of the market in the daytime, which means you won't get the same price you get in the day.

Here's an explainer of some of the problems of after-hours trading:

https://www.investopedia.com/ask/answers/05/saleafterhours.asp

Except that this doesn't really cover what an unlimited token would do, which would demand an order be filled no matter what, which means it would have to start doing futures contracts for when the market opened.

The more I look at this, the more I see that any realistic token would need to follow market hours (which means it wouldn't fully act like a normal blockchain token).

You still get the advantage of trades from people who can't access the stock market (although the markets have all kinds of rules about preventing phantom buys and sells, which keeps the market fair, so I'm not sure how they would reconcile that).

[Questat]

With tokenized stocks they can trade 24/7 unlike traditional stocks that has a limited market hours.

If 99% of the market is trading in market hours, then you are dealing with a tiny portion of the liquidity pool, which can drastically distort the price and lead to other problems (you basically have to wait until the morning before your trade is "real").

The world's major stock exchanges could easily go 24/7 if they wanted to, but... traders don't want to. So I'm not sure how big of an advantage 24/7 trading really is.

you are right that liquidity matters but it doesn't mean that 24/7 trading has no value.

What I see as the value here is the convenience that tokenized assets have and with that 24/7 availability in trading, a trader can easily react to the market when there is sudden news or an announcement, and that's where the real advantage is.

[FinneysTrueVision]

Except that this doesn't really cover what an unlimited token would do, which would demand an order be filled no matter what, which means it would have to start doing futures contracts for when the market opened.

They aren’t minting unbacked tokens. Minting and redeeming is only available during certain hours. Outside of that, the only way to buy stock tokens is from secondary markets where the already circulating supply is being traded.

The more I look at this, the more I see that any realistic token would need to follow market hours (which means it wouldn't fully act like a normal blockchain token).

You still get the advantage of trades from people who can't access the stock market (although the markets have all kinds of rules about preventing phantom buys and sells, which keeps the market fair, so I'm not sure how they would reconcile that).

Stock tokens don’t fully function like normal ERC-20 tokens. They are very centralized and the issuer has much broader control over them.

[_act_]

Real World Assets (RWA) Tokenization and Tokenized Stocks are slightly different things. I guess they both belong to the class of "Tokenized Assets".

The person that created the topic is not asking about RWA tokens in general, he is asking about tokenized stocks. Also your explanation is somehow unless you let us know the RWA tokens class that you are referring to. Tokenized stocks are considered to be part of RWA tokens. Only what I noticed that may not be considered as part of RWA tokens are coins that are backed by fiat.

[asriloni]

Honestly, the tokenization gives more utilitize to the stock. I don't think it's different to buy token from the crypto broker such as Robinhood or the stock market directly because both are using same underlying.

The problem is that only buying stock directly through stock market is not giving you ability to get greater yield like doing LP when your target is holding it for long term. When we can shoot two birds with one stone, then why we miss it?

Stock tokens don’t fully function like normal ERC-20 tokens. They are very centralized and the issuer has much broader control over them.

Disgareed, stock tokenization used ERC20 format. So it's basically working same as normal ERC20 token. The only different is that it's backed by stock as its underlying to determine its price.

[RGBTC]

I know millions of people get ripped off because they believe, "it's absolutely safe if it's on the blockchain". Would they be using this misinformation to lure amateur investors?

Conventional capital markets are relatively secure and free from the kind of security issues often seen in the crypto space, so that is not the reason. Instead, I would point to accessibility and legal factors.

While some of the benefits associated with traditional securities might be lost in RWA versions (such as voting rights), I believe that some speculators dislike the extreme volatility of crypto; tokenized stocks offer an alternative that allows them to maintain exposure to the crypto industry. Most people do prefer managing their assets through a single interface and under a single set of ToS.

[Jostle]

For tokenized stocks, what if during the off-market hours, the tokenized stocks get a huge surge in demand and the price of the tokenized stocks soared, but the underlying stock's price has not moved.

What would happen when market re-opens?

[FinneysTrueVision]

Disgareed, stock tokenization used ERC20 format. So it's basically working same as normal ERC20 token. The only different is that it's backed by stock as its underlying to determine its price.

ERC-20 is a catch-all for many different kinds of tokens. Tokenized securities are more akin to USDT than Dai. If you want to invest in stock tokens issued on Robinhood Chain, you are supposed to read more than 100 pages of legal documents and agree to the possibility of tokens being frozen or seized.

[RGBTC]

For tokenized stocks, what if during the off-market hours, the tokenized stocks get a huge surge in demand and the price of the tokenized stocks soared, but the underlying stock's price has not moved.

What would happen when market re-opens?

I am unsure whether the issuer's smart contract includes a mechanism to limit the token supply, whether due to regulatory requirements or specific risk considerations. Assuming there is no such limit, the impact depends on the total supply of equity tokens traded while the stock market is closed. For instance, if the traded token supply reaches 30% of the company's total shares, this could influence the share price in the secondary market once trading resumes.

[legiteum]

you are right that liquidity matters but it doesn't mean that 24/7 trading has no value.

I'm not saying it has "no value", I'm saying:

1. It is very problematic if the thing you are trading doesn't itself trade 24/7 for its primary market.

2. The world's stock exchanges could go 24/7 any time they want, but they don't, which is probably because there isn't enough demand for this functionality.

What I see as the value here is the convenience that tokenized assets have and with that 24/7 availability in trading, a trader can easily react to the market when there is sudden news or an announcement, and that's where the real advantage is.

In a smaller liquidity pool, the reaction to the news is libel to be much more extreme, meaning the effect of the news will be greatly attenuated once the real market opens, meaning you'll lose money. I'm not saying its impossible to make money with after-hours trading, and there are probably people out there who are experts at this, but it is very, very tricky and not for average casual investors--especially somebody who sees some news and just trades on an impulse without knowing what they are doing.

The more I look at this, the more I see that any realistic token would need to follow market hours (which means it wouldn't fully act like a normal blockchain token).

You still get the advantage of trades from people who can't access the stock market (although the markets have all kinds of rules about preventing phantom buys and sells, which keeps the market fair, so I'm not sure how they would reconcile that).

Stock tokens don’t fully function like normal ERC-20 tokens. They are very centralized and the issuer has much broader control over them.

Exactly. The way to make it work would be to create a blockchain-compatible layer on top of a normal stock exchange, wherein the exchange's rules would convey directly to the token.

For tokenized stocks, what if during the off-market hours, the tokenized stocks get a huge surge in demand and the price of the tokenized stocks soared, but the underlying stock's price has not moved.

What would happen when market re-opens?

That's the problem with after-hours trading. You are basically trading in two different markets, a small one and a big one. Maybe they will act the same, or maybe they won't. Maybe the small pool will predict the price correctly, or maybe it will be totally different.

I have no doubt that there are extremely smart and experienced traders who know how to play this game well, but it's not for a casual investor, that's for sure. It's probably the very opposite of the profile of somebody who just wants to use their crypto wallet to make some stock trades.