Tokenized stocks could help prevent the trading freezes that commonly occur on traditional exchanges, such as the GameStop meme stock halt years ago that locked out traders, says Robinhood CEO Vlad Tenev.
Tenev said in an X post on Wednesday that the GameStop trading freeze in 2021 was “one of the strangest and most visible equity market failures in recent history,” caused by complicated rules stemming from the two-day stock settlement period at the time.
“What happens when you combine slow, outdated financial infrastructure with unprecedented trading volume and volatility in a small number of stocks? Massive deposit requirements, trading restrictions, and millions of unhappy customers,” he added.
Many exchanges, including the New York Stock Exchange (NYSE), are launching tokenized stock platforms.
Tenev said these platforms may be needed to achieve real-time settlement, which “has proven elusive in the traditional equities markets, with a slew of legacy stakeholders to manage.”
“As the advantages become increasingly clear, I believe it is inevitable that the US embraces this technology,” he added.
Tokenization to ease pressure on financial system: Tenev
Tenev noted that the settlement of stocks in the US has since decreased to one day since the freeze, but argued that it is “still far too long” as settlement times can take up to three days if a transaction occurs on Friday, or up to four days on long weekends.
“That’s where tokenization comes in,” he added. “Moving equities on-chain in tokenized form allows them to benefit from the real-time settlement properties of blockchain technology.”
One of the key reasons Robinhood froze trading of meme stocks in 2021 was that it didn’t have enough cash to facilitate settlement, as rules required it to “put up huge amounts of cash” to reduce the risk in the days between when a stock trades and when it settles, Tenev explained.
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He said the company raised $3 billion over two days to shore up its capital reserves, but in the meantime, “retail investors who wanted to buy GameStop were understandably livid.”
Using tokenization technology to remove the settlement period would mean “much less risk to the system and less pressure on both clearinghouses and brokerages,” Tenev said.
Trading halts are a common occurrence in traditional finance, with the Nasdaq and NYSE together having temporarily stopped trading over 100 times across various stocks on Wednesday alone, mostly in five-minute blocks in a bid to smooth volatility.
Regulatory clarity to help adoption
Tenev said now is a “timely opportunity” for regulatory clarity as the Securities and Exchange Commission has embraced experimenting with tokenized securities while Congress is looking to pass crypto rules, dubbed the CLARITY Act.
“By working with the SEC and pushing for sensible US equity tokenization guidelines via CLARITY, together we can ensure that trading restrictions like we saw in 2021 never have to happen again,” he added.
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