This episode demystifies the complex reality of tokenized stocks, revealing the deep regulatory and infrastructural chasm between today's synthetic offerings and the future of a fully on-chain capital market.
The Promise and Problem of Tokenized Stocks
- Core inefficiencies in TradFi: Gabriel points out that you cannot directly swap an Apple share for a Google share in a traditional brokerage account. You must first sell, wait for settlement (T+1), and then buy the new asset.
- Crypto-native advantages: Tokenization introduces crypto's native features to stocks, such as 24/7 markets, global accessibility, and direct asset-for-asset swaps, creating a more efficient system.
- The regulatory barrier: The primary reason tokenized stocks are not yet mainstream is regulation. Publicly traded stocks, known as NMS (National Market System) shares, are among the most heavily regulated assets globally.
- NMS Shares: These are publicly registered securities (like Apple or Google) that trade on national exchanges like NASDAQ or the NYSE, governed by a set of SEC rules called Regulation NMS.
- Gabriel explains that securities laws, in place for over 80 years, mandate a clear ledger of ownership for consumer protection. This runs directly counter to the permissionless nature of many DeFi protocols.
Gabriel states, "It's really about them trying to figure out how do we keep those protections while enabling this new technology, and that takes a long time for them to figure that out."
Deconstructing the Traditional Stock Market
- The Settlement Layer: DTCC: The DTCC (Depository Trust & Clearing Corporation) acts as the centralized, master ledger for nearly all US public securities, analogous to a settlement layer like Ethereum for the stock market. It is a private corporation, not a public utility.
- The Chain of Custody: When you buy a stock through a broker like Fidelity:
- Broker-Dealer (e.g., Fidelity): Holds the stock in an account under your name. Unlike a bank deposit, you legally own the specific shares.
- Clearing House (e.g., Pershing): Sits behind the broker, acting as the custodian. They handle the actual acquisition of shares from the market and sync ownership records with the DTCC.
- Transfer Agent: Works directly with the public company (e.g., Tesla) to maintain its official shareholder list, or cap table, which must reconcile with the DTCC's records.
- From Bearer Assets to Digital Ledgers: Gabriel provides historical context, explaining that the U.S. moved away from physical bearer instruments (where physical possession equals ownership) in the 1980s and 90s to reduce fraud. Today, ownership is determined by entries on these centralized digital ledgers, making bearer shares effectively illegal in the U.S.
Dinari's Breakthrough: A License for Real Tokenized Stocks
- FINRA (Financial Industry Regulatory Authority): A private, self-regulatory organization that the SEC authorizes to write and enforce rules governing broker-dealers.
- A Critical Distinction: Previous licenses were for "digital securities" like tokenized private shares or funds. Dinari's license covers publicly traded NMS stocks, which requires direct integration with the existing DTCC-based system.
- The End Product: This license allows Dinari to issue a token that represents the actual rights of a share—including dividends, voting rights, and stock splits. It is not a derivative or a synthetic wrapper.
- Strategic Insight: This development signals that regulators are creating a compliant path for on-chain equities. For investors, this means a future where they can hold a token with the same legal standing as a share in a Fidelity account.
The Current Landscape: Real vs. "Air Quote" Tokenized Stocks
- Synthetic Trackers (e.g., XStocks): Gabriel explains that platforms like XStocks offer tokens that are not direct ownership of the underlying stock. They are designed to track the financial upside but can diverge significantly in price due to shallow, isolated liquidity. He notes these products are often unavailable in major jurisdictions like the US, EU, and UK.
- Compliant, Region-Locked Offerings (e.g., Robinhood, Gemini): Companies like Robinhood and Gemini (powered by Dinari in the EU) are offering tokenized stocks in Europe. These are structured to be 1:1 backed and tracked, providing legitimate exposure.
- Why the US Delay? Although Dinari has federal approval from FINRA, it must now get licensed in all 50 states, a process Gabriel estimates will take a few more months. This state-by-state process is why compliant offerings have launched in the EU first, where a single license (MIFID) provides access across the union.
The Path Forward: DeFi on Rails
- DeFi on Rails: This concept involves creating permissioned versions of DeFi protocols. Users could access features like atomic lending and borrowing with their tokenized stocks within a compliant, KYC-gated environment.
- Actionable Insight for Researchers: This "walled garden" approach to DeFi is a critical emerging trend. It represents a pragmatic compromise between innovation and regulation and is a major area for protocol development and investment. The architecture of these systems will define the next phase of institutional DeFi.
Hype vs. Reality: A Sobering Outlook
- The Long Road Ahead: Gabriel believes the full promise of an interconnected, on-chain financial system is years away. He cautions against the idea that simply putting a few million dollars of tokenized shares on a DEX fulfills the vision.
Gabriel states, "I believe that is the future. I don't think that future is this year. I think that future is years away."
- Stablecoin Analogy: He compares the current state of tokenized stocks to the early days of stablecoins around 2016-2017. Circle took over a decade to achieve its current level of regulatory acceptance and market size. Tokenized stocks are on a similar, multi-year trajectory.
The Challenge of Tokenizing Private Markets
- The Reg D Hurdle: Gabriel explains that this is extremely difficult due to Regulation D, an SEC rule that allows private companies to raise capital without extensive public disclosures. A key condition of Reg D is a strict restriction on the transfer of shares.
- The Scalability Problem: Every transfer of private shares requires board approval, making a liquid, real-time market impossible under current law.
- A Potential Solution: Gabriel suggests that as on-chain capital markets mature and reduce the cost of going public (e.g., through automated reporting), companies may choose to IPO sooner, giving retail investors earlier access.
A New Era at the SEC
- From Hostility to Collaboration: Under Gary Gensler, the SEC was largely inaccessible. Now, Gabriel reports a significant shift. He recently demoed Dinari's system to 28 SEC officials from various departments.
- Paul Atkins' Vision: The new SEC chair, Paul Atkins, has publicly supported innovation in tokenized equities. Gabriel's direct experience confirms this, noting the agency is actively working to find a compliant path forward.
- Investor Takeaway: The regulatory tide is turning. A more collaborative SEC significantly de-risks the long-term thesis for crypto-based capital markets in the U.S. and accelerates the timeline for compliant product launches.
Conclusion
The episode confirms that while "real" tokenized stocks are not yet widely available, the regulatory and technical foundations are being laid. For investors and researchers, the key is to distinguish between legitimate, fully-backed assets and synthetic derivatives, while closely monitoring the development of compliant "DeFi on Rails" ecosystems.
