Web3 Lawyer Explains: Controversy Arising from Robinhood Stock Tokens

Recently, an American online brokerage announced the launch of “stock tokens” linked to equity in top private companies for European users, once again sparking heated discussions about the tokenization of real-world assets ( RWA ). However, a certain artificial intelligence company quickly issued a statement indicating that it has no association with these tokens and warned that they do not represent the company’s actual equity.

This event not only reveals the contradiction between financial innovation and traditional equity management, but also provides a thought-provoking case for global regulators and market participants. This article will delve into the impact and significance of this event.

1. Event Background

1. Related Company Profile

The internet brokerage is a financial services company based in California, USA. The company primarily offers free stock trading apps and websites for retail investors, focusing on innovative financial products and service models.

The company has established branches in Europe and obtained a financial brokerage license and a cryptocurrency service provider license issued by the local central bank, allowing it to provide related services throughout the European Economic Area.

2. Event Description

The brokerage announced at a European financial summit that it is launching a “stock token” product for EU users, allowing investors to trade over 200 types of US stocks and ETFs around the clock in token form using blockchain technology. Among the most noteworthy aspects is the tokenization of stocks from certain artificial intelligence companies and other unlisted companies, with relevant tokens airdropped to users as rewards.

However, the AI company later issued a statement indicating that these tokens are not company equity, the company has not collaborated with the brokerage, nor does it endorse it. This has raised many questions in the market.

2. Operating Model

1.Token essence

These “stock tokens” are essentially tokenized contracts on the blockchain that are linked to the shares held by brokers in a special purpose entity (SPV). Brokers link the token price to the value of the shares in the SPV by holding shares of the SPV that control a certain number of shares in the target company.

Therefore, the underlying asset of the token is the broker’s shareholding in the SPV company it has established. When users purchase the token, they are not buying actual stocks, but rather a contract that follows its price and is recorded on the blockchain. There are two layers of separation between the token holders and the actual equity, and the token price will fluctuate with the change in the value of the shares in the SPV.

In short, token holders have the right to obtain corresponding price difference earnings based on the value fluctuations of relevant rights in the SPV, but do not own actual equity. This rule is written into the blockchain, and the token becomes a certificate for investors to hold this right.

2. Focus of Controversy

From the above description, it can be seen that the statements of the broker and the target company are not contradictory. The target company denies that the Token is equivalent to equity, emphasizing that it has not authorized any equity-related products. Meanwhile, the broker acknowledges that the Token is a “contract linked to the price,” consistent with its design.

The focus of the dispute between the two parties is whether this indirect linkage is legal and compliant, rather than the factual description of the process itself.

The motivation for brokers to launch tokens

The token launched by the brokerage this time is essentially an attempt at a “consensus asset”, aimed at allowing ordinary investors to trade based on their judgment of the future value of unlisted companies. This attempt addresses three major pain points in the current investment market:

• Low accessibility of quality assets: Top tech companies have not gone public, making it difficult for ordinary investors to share in their growth dividends.

• The threshold for traditional private equity and venture capital is too high, making it inaccessible for retail investors.

• The surge in demand from investors for innovative assets reflects a strong desire for new narratives and new asset classes.

In this context, brokerages are attempting to break the closed nature of the traditional financial system through tokenized trading, providing retail investors with a new investment channel based on market consensus. Choosing well-known artificial intelligence companies as targets is due to their high market attention and influence, which can attract investors through their brand effect.

4. Regulatory Situation

The tokens issued by the broker are currently subject to regulation by the Bank of Lithuania and the European Union. The Bank of Lithuania, as the lead regulatory authority within the EU, has initiated an investigation, requiring details regarding the structure, marketing, and consumer communication of the relevant tokens to assess their legality and compliance.

These stock tokens are issued as derivatives under the regulation of the Markets in Financial Instruments Directive II ( MiFID II ). With the increase in trading volume, they may also need to be subject to regulation by the European Securities and Markets Authority, and it is essential to ensure compliance with related requirements such as prospectus disclosure. Currently, this token is only available in Europe and has not yet entered the US market.

The reason brokers can issue such tokens in Europe is mainly because:

1. The threshold for retail investors to participate in trading complex financial products is relatively low in the EU.

2. Its stock tokens can be issued as derivatives under MiFID II regulation, with the underlying assets custodied by a licensed institution in the United States, thus meeting the EU’s compliance requirements for financial products to some extent.

3. Brokers in the EU use their applications to provide services to retail investors, and their cryptocurrency applications in Europe have transformed into more comprehensive investment platforms.

3. Benefits and Risks for All Parties

1. The returns and risks for investors

For investors, the benefits of subscribing to this type of Token may include:

• Indirect access to investment opportunities in private markets. There is a theoretical possibility of profiting from the future valuation growth of the target company. If the company performs well and its valuation increases, the Token price may rise accordingly, allowing subscribers to gain profit by selling.

But at the same time, it also faces the following risks:

• Do not own actual equity, unable to enjoy the real shareholder rights such as voting rights and dividend rights, and the rights cannot be guaranteed like holding real equity.

• Value fluctuations and valuation risks. Although the Token price is linked to the value of the shares held by the SPV, it may not accurately reflect the actual value of the company. The valuation of unlisted companies inherently has a high degree of uncertainty, and once significant fluctuations occur, the Token price may also fluctuate dramatically, potentially leading to substantial losses for subscribers.

Therefore, investors need to carefully identify the risks involved, as the risk coefficient is much higher than that of traditional RWA projects.

2. Project Party’s Revenue and Risk

For the issuer, the potential benefits include:

• The stock price has risen. After the announcement of this event, brokerage stocks surged by about 10%, indicating that the market recognizes its innovative products, leading to an increase in the company’s market value and shareholder equity, while also enhancing its influence in the capital market.

• Capture market share and expand the customer base. The newly launched tokenized product is aimed at EU customers, lowering the investment threshold and simplifying the KYC verification process.

At the same time, it also faces the following risks:

• Market risk. The price of the token is linked to the value of shares in the SPV, while the valuation of the target company is influenced by various factors, leading to high volatility and uncertainty. If the valuation falls short of expectations or even declines, it may weaken market confidence and impact the brand reputation and business development of the securities.

• Credit risk. Tokens are essentially a type of synthetic derivative, and the realization of investor rights heavily relies on the broker’s ability to perform. If there is a business crisis, failure to perform, or even fraudulent behavior, it will harm the interests of investors and trigger a crisis of trust.

4. Differences from Traditional RWA Projects

This event differs from traditional RWA( real-world asset) projects in several ways:

1. Underlying assets: The underlying assets of this project are the equity of the SPV company, rather than directly holding shares of the target company. Traditional RWA projects usually hold or represent the corresponding assets directly.

2. Issuer: Issued by large traditional financial institutions rather than cryptocurrency companies. This grants the project higher credibility but also brings more regulatory challenges.

3. Regulatory Environment: Operating under the EU financial regulatory framework, facing stricter compliance requirements. Traditional RWA projects mostly operate within the cryptocurrency ecosystem, where regulation is relatively vague.

4. Investor positioning: primarily aimed at retail investors in the traditional financial sector, rather than users in the cryptocurrency space. This expands the potential user base but also increases the difficulty of education and risk control.

5. Trading method: trading through traditional brokerage platforms rather than decentralized exchanges. This provides higher liquidity and convenience, but sacrifices a certain degree of decentralization.

6. Price Discovery Mechanism: The price of the Token is directly linked to the value of shares in the SPV, making price discovery more transparent. The price formation mechanism of traditional RWA projects is often not clear enough.

7. Risk Attributes: In addition to the risks faced by traditional RWA projects, there are also more complex legal and regulatory risks, such as shareholder equity disputes.

5. Professional Interpretation

The reason why this incident has caused a strong reaction is that the issuer has entered the cryptocurrency field as a traditional financial institution, which is fundamentally different from the previous penetration of traditional finance by cryptocurrency institutions. The audience of traditional financial institutions mostly lacks relevant experience, and their brand itself brings significant market influence.

However, this operation also faces many challenges:

1. Conflict of Interest: If some institutions can implement tokenization while others cannot follow suit, it will lead to unilateral occupation of interests, making it difficult to obtain cooperation from other institutions.

2. Market Volatility: If tokenized exits become the norm, it may exacerbate the volatility of stock prices, making the investment market more speculative.

3. Legal disputes: The borderless nature of tokens conflicts with the border restrictions of listing rules, impacting the global market.

4. Regulatory Challenges: The free circulation of tokens on the chain is difficult to regulate, lacking proactive regulatory motivation, which may harm the interests of shareholders.

Although “stock tokenization” has its drawbacks on certain levels, as an innovative initiative in the Web3 field, its exploration still holds some positive significance. However, both investors and other institutions willing to try should approach it with caution. The balance between financial innovation and regulation reflected by this event is worth the industry’s in-depth consideration.