Twenty-five years ago, a massive technological disruption changed the music industry for good. It came via Napster, a platform that let anyone share digital song files, and its sudden popularity upended a nearly century-old distribution model. In response, musicians like Metallica and Dr. Dre, along with their record labels, waged a fierce counter-attack, and drove Napster out of business. But it soon became clear, there was no putting the tech back in the bottle. Now, something similar is playing out in the brokerage industry as a result of another disruptive technology—blockchain—that is leading a growing number of companies to tokenize stocks.
This has been going on for a while, but the disruption posed by blockchain-based stocks made headlines last week after the CEO of AMC had a public tantrum accusing Robinhood of “contemptible, outrageous, disgusting, detestable, inexcusable, vile” behavior for putting its stocks on-chain without permission. Robinhood’s CEO retorted that, just because a company issues a stock, it can’t totally limit what those who buy it can do.
Robinhood is right—sort of. What the company is doing is buying batches of stock, creating a tokenized version of each share, and then offering contracts that provide customers with a financial claim on those tokens. It’s an elegant legal arrangement, and one that creates new opportunities.
For starters, offering tokenized shares of AMC—and many other stocks—means it’s much cheaper and easier for people around the world to own U.S. equities. While Americans can purchase shares of any company they like for negligible fees, that’s not the case for investors in Brazil or South Africa, or other places where trading commissions are steep and some stocks aren’t available at all. For these customers, buying stock is much like it was buying music in the pre-Napster days—so it’s not a surprise tokenized stocks are proving popular in these markets.
The upshot is that, thanks to blockchain, it is cheaper and easier for investors to buy shares of popular companies. So what’s the problem? Why is the CEO of AMC—a guy who leaned into turning his company into a meme stock—so worked up? Part of it is simply a knee-jerk reaction that companies may display in the face of a new technology that might undermine their control.
But there are also some legitimate concerns. For starters, traditional shares of stock come with certain rights—notably the right to vote on certain corporate matters—that Robinhood’s tokenized variation does not. Then there is the question of who, if anyone, is holding the stocks that are supposed to back every blockchain token.
In the case of firms like Robinhood and Coinbase, they work with a FINRA-registered intermediary called Alpaca that takes care of all the record-keeping. There is virtually zero chance they will risk their reputation, and also incur a huge regulatory fine, simply for the opportunity to rugpull a few people overseas who want to buy some AMC stock.
At the same, it’s easy to imagine a fly-by-night outfit offering AMC or Apple “tokens” that turns out to be backed by nothing at all, creating a panic that leads to a broader sell-off of the company’s shares.
The answer to all this is not to halt tokenized stocks—it is to create a legal framework that lets good actors operate. That’s what happened after the collapse of Napster. It took a bruising legal fight, but eventually led to platforms like Spotify and Apple Music, where consumers can buy what they like, while artists can get paid for their work.
The fight over digital music was a bitter one, but that is unlikely to be the case when it comes to tokenized stocks—not least because putting corporate shares on the blockchain does not involve fraught issues like copyright protection for artists. Meanwhile, the tokenization push is getting an assist from big names like Nasdaq, which just invested $100 million in Payward, a blockchain-native financial firm. And, on the regulatory front, the SEC is already working on an innovation exemption for some forms of on-chain stock.
There are still kinks to sort out, including whether the best way to offer tokenized stocks is via the indirect “wrapper” model used by Robinhood or—as newer firms like Securitize and SuperState insist—to issue them directly on the blockchain. But the bottom line is that stocks on the blockchain are coming faster than we think. As the music industry found out the hard way, threats or litigation will never stop a new technology for long.
Jeff John Roberts
[email protected]
@jeffjohnroberts
One more thing: OpenAI CEO Sam Altman sat down with Fortune’s Editor-in-Chief Alyson Shontell in San Francisco on Friday. In their conversation for the Fortune 500: Titans and Disruptors of Industry podcast, Altman said he believes that safety standards are “not at a place” to push AI capabilities much further right now, and that no gamble with the fate of humanity is OK for the sake of his company’s or its investors’ financial gain. He also shared that, given the current concerns, OpenAI won’t go public before 2027. Watch the full interview here.
DECENTRALIZED NEWS
Latitude, a Texas-based startup founded by Stripe and Uber alums, raised a $35M Series A to help businesses plug stablecoins into bank accounts and mobile wallets (Fortune)
The drama over the hack of Blockstream’s L2 network continues as hackers—using messages on the blockchain—refuse to give back over 500 of the 4,000 Bitcoin they stole using a caching exploit (The Block)
A three-person nonprofit is acting as a front group for that $2 million pro-Bitcoin ad campaign in the Wall Street Journal, but it’s unclear who wrote the checks (Fortune)
Coinbase cofounder Fred Ehrsam is using his $2.4 billion fortune to pursue a second act as a key player in remaking Venezuela’s oil industry (WSJ)
Crypto OG Consensys is spinning off its flagship MetaMask wallet into a standalone entity in an apparent bid to accelerate a long-planned IPO (Fortune)
MEME O’ THE MOMENT
Just when Hunter’s comeback was going so well… (read X thread in full here)
