Centrifuge Weighs Converting Tokens to Stock, Highlighting Gaps in Law
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Centrifuge, a platform for tokenizing real-world assets, proposed a token-to-equity conversion program that would allow some holders of its native token CFG to convert their tokens into company equity. According to Centrifuge Improvement Proposal (CIP) 172, as Centrifuge’s institutional adoption has grown, the trade-offs of operating with a public token have become increasingly apparent. These include constraints around institutional participation and governance, regulatory overhang, and the ongoing costs of maintaining public token liquidity and market infrastructure.
Under the proposed plan, Centrifuge Network Foundation would re-register as a Cayman Islands company, and eligible CFG holders could subscribe for tokenized equity at a rate of one CFG token per share. Holders of 100,000 CFG or more would be entered directly into the share register; smaller holders would be routed through a CoinList-administered trust structure. Participation in the program would be optional, and holders who don’t convert could keep or sell their CFG. Centrifuge said it would work to maintain market liquidity during a defined conversion window. Notably, there was no mention in the proposal of a token buyback program as seen in similar proposals in the past.
The proposal’s stated goals are to unlock institutional and venture capital that a token structure inhibits, accelerate growth, and create a single, cleaner value-accrual mechanism instead of a split token/equity structure.
OUR TAKE
This is an example of yet another major protocol (Centrifuge holds more than $1.6 billion in total value locked) seeking to remove the token and DAO governance from the value and operational stacks. This was also seen with Across protocol this year (covered by Galaxy Research in March). Despite the equity conversion structures taking different approaches, the proposals cited similar motivations around improving long-term protocol growth and better tapping institutional investor bases.
The proposal underscores the difficulty and limitations of operating with a token compared to equity today, specifically for organizations that sit awkwardly between the blockchain-native and traditional financial worlds. Using Centrifuge and Across as a guide, the main issues of the current DAO/token structure appear to pool around legal and regulatory gaps as opposed to being an outright admission that the model will never work. This is evident in the frictions each proposal highlighted, which included the difficulties under the token/DAO wrapper of entering enforceable contracts and revenue agreements with institutional counterparties, compliance hurdles, and governance participation. As a result, we don’t believe the severity of these issues will persist in perpetuity and expect the DAO/token model to undergo a wider experimentation phase in the coming years.
Certain developments underway may address the regulatory and legal frictions through diverging channels. On the compliance and regulatory overhang side, the CLARITY Act’s “mature blockchain system” designation and the SEC’s proposed Regulation Crypto Assets and its safe harbor from “investment contract” status, directly target the regulatory exposure and compliance costs/difficulty Centrifuge and Across each cited. (Unfortunately, CLARITY’s odds of passage this year have slimmed considerably, though President Trump did urge Congress to pass a “fair version” of the bill during a press conference Wednesday.)
On the enforceability side of the coin, a separate wave of state-level legislation (e.g. Wyoming’s DUNA framework, and similar DAO-entity statutes in Utah, Vermont, and the Marshall Islands) gives DAOs a path to legal personhood, letting them be recognized as separate legal entities that can engage in binding contracts, own assets, and enter revenue agreements with institutional counterparties.
Combined, these mechanisms address some of the components outlined in each of the past two major protocol token-to-equity conversion programs, which suggest tokens’ disadvantages relative to equity may be a function of today’s regulatory and legal gaps rather than something inherent to the token/DAO structure itself.