Robinhood plans to expand tokenized stocks with 24/7 trading, real-time settlement, and self-custody, aiming to fix equity market fragilities.
Robinhood plans to expand its tokenized stock offering with round-the-clock trading. The brokerage also targets near-real-time settlement and self-custody. The initiative is a reflection of what was learned in the case of 2021 halt of trading of GameStop. That event exposed weaknesses in traditional US equity infrastructure.
GameStop Crisis Still Shapes Robinhood’s Market Vision
Robinhood CEO Vlad Tenev said the episode of 2021 changed his views. During their time, brokers have limited the purchase of meme stocks such as GameStop. Extreme volatility and clearinghouse requirements were followed by the restrictions. In the process, millions of retail traders were affected.
According to Tenev, volatility was not the essential problem. Instead, cycles of multi-day settlement caused structural risk. At the time, US equity trades were settling in 2 days. Brokers were obliged to put up large collateral during times of stress.
These rules forced Robinhood and others to stop buying, at least for a time. Clearinghouses required billions of dollars in deposits. Robinhood raised over $3B capital in 72 hours. However, customer trust was badly hit.
Following the crisis, Robinhood pushed for more expedited settlement. This effort helped to move from T+2 to T+1 settlement. Changing was approved by regulators with the leadership of the SEC. Yet, Tenev says that T+1 is still not enough.
He observed that T+1 is effectively T+3 on Fridays. However, during long weekends, the period of settlement can be extended to T+4. In modern markets, such delays cause an increase in systemic pressure. Therefore, a new approach is needed.
Tokenization Seen as Path to Real-Time Equity Markets
Robinhood considers tokenization to be that alternative. Tokenization is the process of converting stocks into blockchains that are then tokenized. These tokens are able to trade round-the-clock and settle nearly instantly. As a result, the collateral risk is reduced considerably.
Blockchain settlement eliminates the long cycles of clearing. Clearinghouses are exposed less during volatile times. Brokers are flexible in this manner without having restrictions. Retail traders enjoy continuous access.
Robinhood has already tested this model in Europe. Over 2000 tokenized US stocks are available there. These tokens offer exposure to US equities and dividends. European users can trade outside the normal market hours.
In the coming months, Robinhood is looking at further expansion. The firm wants to allow 24*7 trading and DeFi access. Investors would also benefit from the self-custody options. Additional features can include lending and staking.
Congress Considers CLARITY Act for Tokenized Equity Rules
Tenev believes that US adoption is inevitable. Several major US exchanges and clearinghouses are looking at tokenization. However, regulatory clarity is still necessary. Without it, mass deployment is limited.
The SEC has recently explained its position. Tokenized securities are not immune from federal securities laws. Therefore, compliant issues and trading models are needed. Robinhood has been outspoken in this regard.
The company has also supported US crypto market structure legislation. It suggests that in order for institutional adoption to take place, certainty is required. Engagement with European regulators has already influenced its strategy.
Congress is currently contemplating the CLARITY Act. The bill would mandate the SEC to set modern rules regarding tokenized equities. It would also insure progress against future regulatory reversals.
Robinhood believes collaboration is the key. By collaborating with the regulators, systemic risks can be mitigated. Tokenized equities could avoid 2021 repeats. Real-time settlement could become the norm for retail traders after all.