Coinbase Enters Tokenized Stock Fray on Third-Party ‘Wrapper’ Side

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On Monday, Coinbase launched tokenized equities on its layer-2 network Base. According to the launch announcement, “a Coinbase Tokenized Stock is a real share that you actually own, onchain. Authorized participants, which are institutional market makers, buy the shares. Those shares go to Alpaca, a regulated broker and custodian, in a bankruptcy-remote structure supervised by Abu Dhabi Global Market’s (ADGM) regulatory authority. If you hold the token, you hold a direct claim on the share. Coinbase Tokenized Stocks are the real deal.” Tokens are built on the company’s previously announced B20 standard.

Coinbase launched with four stocks in the first batch: NVIDIA (NVDAc), Meta (METAc), Apple (AAPLc), and Alphabet (GOOGLc). In total, about $7.5m worth of share supply in these four stocks currently exists on Base. Coinbase has created contracts for 13 stocks in total, but only those four have any circulating supply. The others are AMZN, COIN, CIRCL, INTC, MSFT, MSTR, SNDK, SPCX, and TSLA.

These tokenized stocks are not accessible to Americans, though with a VPN they can be accessed through the Uniswap or Aerodrome frontends. Coinbase also announced that it is allowing its tokenized stocks to be used as collateral in Aave on Base.

Our take

The march to tokenize stocks continues, though yet again the activity is offshore. For the U.S., the market is still waiting for the Securities and Exchange Commission (SEC) to publish its long-awaited “innovation exemption,” a time-limited exemptive relief that we expect will allow for the trading of Reg NMS stocks in decentralized finance trading protocols.

While Regulation Crypto Assets (“Reg Crypto”), published by the SEC last week, is a formal rulemaking proposal relating to the primary issuance of non-security tokens (and primarily modifies compliance obligations under the Securities Act), the innovation exemption relates to the secondary trading of securities under the Exchange Act.

Bloomberg reported in May that the SEC was on the verge of announcing the innovation exemption, but then internal disputes about whether to include third-party issuer tokenized stocks (also sometimes called “wrappers”) in the exemption caused the regulator to delay its rollout. The SEC may also have delayed publication to avoid complicating the ongoing CLARITY Act negotiations in the U.S. Senate. As we wrote several weeks ago, though, the clock is now becoming an issue.

Assuming the “innovation exemption” will ultimately be a time-limited sandbox meant to pilot stock trading onchain, participants need sufficient time to surface issues to inform eventual rulemaking. Then the rulemaking itself will take a long time, and it’s also likely to result in litigation. And presumably this needs to progress from sandbox to adopted rule in the next 28 months before the Trump administration leaves office.

Coinbase’s design, as with most tokenized stocks today, is the “third-party issuer” variety. There is no evidence that NVIDIA, Meta, Apple, or Google consented to the tokenization of their stocks in this manner. We’ve previously noted that third-party issued stocks obviate the relationship between issuer and shareholder potentially to the detriment of both. The question of “what you actually own” when you buy a third-party issued token, such as those issued by Ondo, xStocks, or now Coinbase, is a real one. The trickiness of the situation was highlighted in Coinbase’s own launch announcement, in which it called the stock tokens are “a real share that you actually own” but, just two sentences later, said “you hold a direct claim on the share.” Which is it? A real share, or a claim on a share?

Coinbase called the stock tokens “a real share that you actually own” but, just two sentences later, said “you hold a direct claim on the share.” Which is it? A real share, or a claim on a share?

In these wrapped setups, the tokenholder’s relationship is actually to a third-party structure of some kind (in this case, Coinbase Onchain SPV Ltd., a special-purpose vehicle incorporated in Abu Dhabi), not the issuer of the underlying equity. The extent to which shareholder rights are passed to the tokenholder is determined by the third-party issuer’s terms and conditions. In the case of Coinbase Tokenized Stocks, the token represents a beneficial interest in the pool of deposited shares and economic interest in the shares’ value, while legal title generally will remain with the trust, and tokenholders’ ability to exercise shareholder-related rights is essentially determined by the SPV (more details on that in the prospectuses for the tokens; AAPLc, for example).

Tokenized GLXY, on the other hand, is an issuer sponsored tokenized security, because we (Galaxy, the issuer) explicitly honor it as Class A Common Stock, and it is tracked and maintained by our own SEC-registered transfer agent, Superstate. This is the core of the dispute in the marketplace on this topic: third-party issued tokenized stocks scale better but have legal drawbacks, while issuer-sponsored tokenized stocks are less scalable to launch because each issuer needs to take action to enable it, but they carry much clearer shareholder rights. (For a fuller explanation of the terms “third-party issued” and “issuer-sponsored,” read our writeup on the SEC’s security token taxonomy from January.)

It’s still unclear where the SEC is going to come down on this issue for the innovation exemption, or when the SEC will publish the innovation exemption at all. Ultimately, we hope the exemption will allow for innovation and experimentation, albeit within limits and under the SEC’s watchful eye, so that the market will have an opportunity to decide the best way forward. – Alex Thorn