When will smart contracts replace ETF funds? The rise and concerns of tokenization of stocks.

The rise of tokenized stocks provides new avenues for investing in companies like Tesla and Nvidia. This article explores their operating principles, similarities to ETFs, and potential regulatory risks and concerns, analyzing whether smart contracts will change traditional finance. This article is based on a piece by Prathik Desai, organized, translated, and penned by Block unicorn. (Summary: The hidden agenda of tokenizing US stocks: using "regulatory dividends" to siphon "global liquidity") (Background: SEC warns about "tokenization of US stocks," Hester Peirce: Security tokens are still securities and are in contact with Robinhood) In the late 1980s, Nathan Most worked at the US stock exchange. However, he was neither a banker nor a trader. He was a physicist who had worked for many years in the logistics industry, responsible for transporting metals and goods. Financial instruments were not his starting point; practical systems were. At that time, mutual funds were a popular way to gain broad market exposure. They offered diversification to investors but also came with latency. You couldn't buy and sell at any time during trading days. You placed an order and then waited until the market closed to know the transaction price (by the way, they still trade this way to this day). This experience felt outdated, especially for those accustomed to instant buying and selling of individual stocks. Nathan proposed a workaround: create a product that tracks the S&P 500 index but trades like a single stock. Package the entire index into a new form and list it on the exchange. The proposal faced skepticism. The design of mutual funds was not intended for trading like stocks. The relevant legal framework did not exist at the time, and the market did not seem to need it. Nevertheless, he continued to push forward. Tokenized Stocks In 1993, the SPDR, represented by the ticker SPY, made its debut. This was essentially the first exchange-traded fund (ETF). A tool that represents hundreds of stocks. Initially regarded as a niche product, it gradually became one of the most traded securities globally. On many trading days, SPY's volume exceeded that of the stocks it tracked. A synthetic structure achieved greater liquidity than its underlying assets. Today, this story is once again significant. Not because of the launch of another fund, but because of what is happening on-chain. Platforms like Robinhood, Backed Finance, Dinari, and Republic have begun offering tokenized stocks—blockchain-based assets designed to reflect the prices of private companies like Tesla, Nvidia, and even OpenAI. These tokens are marketed as a way to gain exposure rather than ownership. There are no shareholder rights and no voting power. You are not purchasing equity in the traditional sense. What you hold is a token associated with equity. This distinction is important, as it has sparked controversy. Even OpenAI and Elon Musk have expressed concerns about the tokenized stocks offered by Robinhood. Robinhood CEO Tenev later had to clarify that these tokens actually allow retail investors to access these private assets. Unlike traditional stocks issued by the company itself, these tokens are created by third parties. Some claim to hold real stocks in custody, providing a 1:1 backing. Others are completely synthetic. The experience feels familiar: prices fluctuate like stocks, and the interface resembles brokerage apps, although the legal and financial substance behind them is often weaker. Nevertheless, they still attract specific types of investors. Especially investors outside the US, who cannot directly invest in US stocks. If you live in Lagos, Manila, or Mumbai and want to invest in Nvidia, you usually need a foreign brokerage account, a higher minimum balance, and longer settlement periods. Meanwhile, on-chain trading of tokens tracks the underlying stocks' movements on the exchange. Tokenized stocks eliminate friction in the trading process. Think about it: no wire transfers, no forms, no thresholds. Just a wallet and a market. This access feels novel, although its mechanisms are similar to older systems. But there's a practical issue here. Many of these platforms—Robinhood, Kraken, and Dinari—cannot operate in many emerging economies outside the US. For example, it remains unclear whether an Indian user can legally or practically purchase tokenized stocks through these channels. If tokenized stocks are to genuinely expand access to global markets, the friction will not only be technical but also regulatory, geographic, and infrastructural. How Derivatives Work Futures contracts have long provided a way to trade without touching the underlying assets. Options allow investors to express views on volatility, timing, or direction, often without needing to buy the stocks themselves. In each case, options products become another pathway to the underlying asset. The emergence of tokenized stocks carries similar intent. They do not claim to be better than the stock market. They simply provide another investment avenue, especially for those historically excluded from public investments. New derivatives typically follow a recognizable trajectory. Initially, the market is chaotic. Investors are unsure how to price them, traders hesitate over risks, and regulators stand back and observe. Then speculators rush in. They test the waters, expand product ranges, and exploit inefficient arbitrage. Over time, if the product proves effective, it will be adopted by more mainstream participants. Ultimately, it becomes infrastructure. This is the development trajectory of index futures, ETFs, and even Bitcoin derivatives on CME and Binance. They were not initially designed as tools for everyone. They began in the playground of speculation: faster, riskier, but more flexible. Tokenized stocks may follow a similar path. Initially used by retail traders chasing exposure to elusive assets like OpenAI or pre-IPO companies. Then adopted by arbitrageurs, exploiting the price differences between the tokens and their underlying stocks. If trading volume continues to grow and infrastructure matures, institutional investors may also begin using them, particularly in jurisdictions where compliance frameworks emerge. Early activity may seem noisy, with insufficient liquidity, wide spreads, and clear weekend price gaps. But derivatives markets often start this way. They are by no means perfect replicas. They are stress tests. They are the market's way of discovering demand before the asset itself adjusts. This structure has an interesting feature or flaw, depending on how you look at it. Time lag. The traditional stock market has opening and closing hours. Even most derivatives based on stocks trade during market hours. But tokenized stocks do not always follow these rhythms. If a US stock closes at $130 on Friday and a significant event occurs on Saturday—like an earnings report leak or a geopolitical event—the token might start reacting to it, even though the stock itself is static. This allows investors and traders to consider information that comes in while the stock market is closed. Time lag only becomes an issue when the trading volume of tokenized stocks significantly exceeds that of the stocks themselves. The futures market addresses this challenge through funding rates and margin adjustments. ETFs rely on authorized participants and arbitrage mechanisms to maintain price consistency. So far, tokenized stocks have not yet had these systems. Prices may exhibit fluctuations...