In a significant move this week, Coinbase has expanded its offerings to include conventional stock and ETF trading for all U.S. customers. This new feature allows users to execute zero-commission trades across both cryptocurrencies and stocks within a single application. The service is enhanced through a partnership with Yahoo Finance and offers trading hours extending 24 hours a day, five days a week. Furthermore, customers can purchase fractional shares starting from as low as $1, positioning Coinbase as a direct competitor to platforms like Robinhood.
However, within the fine print of Coinbase’s announcement lies a potentially impactful signal regarding tokenized equities. Coinbase stated that “more information regarding tokenized equities will be available in the coming months,” and specified that these equities would not fall under the purview of either Coinbase Capital Markets Corp. or Coinbase, Inc. This exclusion raises crucial questions about which entity will facilitate tokenized equities and under what regulatory framework.
The typical approach to establishing a tokenized securities trading platform in the United States would go through the existing broker-dealer infrastructure. Notably, another Coinbase entity, Coinbase Securities, has previously held an alternative trading system (ATS) license, which unfortunately lapsed in early 2024. Recently, the Depository Trust & Clearing Corporation (DTCC) has exhibited a willingness to embrace tokenization, announcing that securities eligible under DTCC can soon be tokenized and that these tokenized assets can be settled on-chain outside the conventional settlement infrastructure.
However, should Coinbase utilize either its Capital Markets or Securities divisions to handle tokenized stocks, it would be subject to various Regulation National Market System (Reg NMS) rules, which encompass best execution obligations and order protection requirements. Coinbase has publicly expressed that these rules may not be suitable for blockchain-based trading operations, prompting opposition from traditional finance entities. By excluding Coinbase Capital Markets from its tokenized equities offering, the exchange is strategically distancing itself from these regulatory burdens.
Alternative methods of structuring tokenized stocks to bypass NMS requirements do exist, such as with equity swaps similar to those implemented by Robinhood. However, these present their challenges; equity swaps fall under SEC jurisdiction as security-based swaps, making them available only to Eligible Contract Participants, effectively excluding retail traders. Additionally, Coinbase has announced plans for offshore perpetuals but stipulated that these products will not be accessible to U.S. customers.
The prospect of an offshore structure for tokenized stocks also appears unlikely. With an overwhelming 84% of its projected 2025 revenue anticipated to come from U.S. sources, using an offshore strategy seems at odds with Coinbase’s predominantly domestic user base.
The changing regulatory landscape opened by the SEC under Chair Paul Atkins offers another avenue for Coinbase. In his recent comments, Atkins hinted at the viability of trading tokenized securities on permissionless blockchains through decentralized finance (DeFi) automated market makers (AMMs). This could potentially come with exemptions from certain regulations that do not align with how the technology functions. Notably, this framework requires stock issuers to voluntarily opt into the tokenization process, limiting the initial pool of participants to companies already engaged in digital assets, such as Coinbase and its peers.
This whitelisting requirement should pose minimal hurdles for Coinbase, as the company already possesses Know Your Customer (KYC) data for its entire user base. The process of allowing verified customers to become eligible token holders appears straightforward administratively.
The integration of Coinbase’s Layer 2 blockchain, Base, could enhance this structure by providing the necessary settlement infrastructure. The decentralized exchange (DEX) Aerodrome, notable for its independence from Coinbase yet functioning as the liquidity mechanism for AMMs on Base, offers a potential venue for trading without falling into the ATS category, while solving the issues regarding tokenization facilitation and customer onboarding.
For U.S. users, the switch to tokenized stocks promises tangible benefits. Unlike conventional shares, tokenized equities would operate around the clock, allowing users to respond to market fluctuations without the current restrictions posed by traditional trading hours. Additionally, they would serve as native on-chain collateral, facilitating processes such as decentralized finance (DeFi) lending and margin trading, which are currently unattainable with traditional assets.
A noteworthy regulatory development might be on the horizon. The structure posited by the Atkins framework outlines the necessity for specialist transfer agents to oversee the eligibility of tokenized assets. While Coinbase has yet to become a registered transfer agent with the SEC, banks that maintain a national charter register as transfer agents with the Office of the Comptroller of the Currency. Interestingly, Coinbase has applied for a national trust charter through the Coinbase National Trust Company (CNTC), which aims to provide custodian services and enable interactions with certain smart contracts.
If successful, this charter could provide the regulatory foundation necessary to carry out the whitelisting function essential for tokenized equities while maintaining a clean separation from the conventional broker-dealer framework.
Coinbase’s recent foray into conventional stock trading illustrates its ambitions in the retail brokerage space, while the nuances in fine print hint at broader, more innovative offerings on the horizon. Although the specific regulatory channels for tokenized equities remain uncertain, a potential structure is evolving that could reshape the trading landscape for both crypto and equity markets.
