Why Synthetic Tokenized Stocks Harm U.S. Investors

In recent years, the financial industry has witnessed a surge of interest in digital assets, particularly tokenized representations of traditional equities. While the concept of tokenization promises greater accessibility, faster settlement, and broader participation, not all forms of tokenized securities are created equal.

One especially contentious approach is the use of synthetic tokenized stocks—digital instruments that claim to mirror the performance of real‑world shares without actually granting holders direct ownership of the underlying equity. Critics, including Aaron Kaplan, founder of the investment firm Promethum, argue that this synthetic model poses significant risks and disadvantages for American investors, and it threatens to undermine the very foundations of the United States’ capital‑market system. ### The Core Promise of U.S. Equity Markets The United States has long been regarded as the benchmark for transparent, efficient, and investor‑friendly capital markets.

A fundamental pillar of that reputation is the legal certainty that when an investor purchases a share of a publicly traded company, they acquire a bundle of rights: voting power at shareholder meetings, entitlement to dividends, the ability to sell the share on an exchange, and, importantly, a clear claim on the company’s assets in the event of liquidation. This bundle of rights is codified in corporate law, enforced by regulators such as the Securities and Exchange Commission (SEC), and reinforced by a robust system of custodians, clearinghouses, and depositories. Investors worldwide look to U.S. markets as a gold standard because they can trust that ownership is absolute, not merely a contractual claim.

That trust fuels capital inflows, supports high valuations, and encourages companies to raise money through equity offerings. In short, the confidence that “whoever holds a share truly owns it” is a key driver of the market’s global appeal. ### Synthetic Tokenized Stocks: How They Differ Synthetic tokenized stocks deviate from this model in a fundamental way. Rather than representing a direct claim on an actual share, a synthetic token is typically backed by a contractual agreement—often a derivative or a promise from a third‑party issuer—to deliver the economic performance of the underlying stock.

In practice, the token holder does not own the real share; instead, they own a digital contract that mimics price movements, dividend payouts, and sometimes voting rights, but only to the extent that the issuer chooses to honor them. This arrangement introduces several layers of separation between the investor and the underlying asset: 1.

**Counterparty Risk**: The token’s value depends on the issuer’s ability and willingness to fulfill its obligations. If the issuer defaults, the token may become worthless, even if the underlying stock continues to trade normally. 2. **Regulatory Ambiguity**: Synthetic tokens often fall into a gray area between securities and commodities.

Regulators may treat them as unregistered securities, exposing investors to legal uncertainty. 3.

**Limited Rights**: Because the token does not confer actual share ownership, holders may lack voting rights, dividend rights, or other shareholder privileges unless explicitly programmed into the contract. 4. **Liquidity Concerns**: Synthetic tokens typically trade on niche platforms with lower liquidity than major exchanges, making it harder to enter or exit positions at fair prices. ### Undermining Investor Trust Kaplan’s central contention is that synthetic tokenized stocks dilute the trust that investors place in U.S.

equities. When a token merely promises to replicate a stock’s performance, investors must rely on the integrity and solvency of the token issuer rather than on the well‑established legal framework that protects traditional shareholders.

This shift from ownership to contractual promise erodes the certainty that has made U.S. markets attractive for decades. For example, imagine an investor purchases a synthetic token that tracks Apple Inc.

(AAPL). The token’s price rises and falls in line with Apple’s stock, but the investor does not actually own any Apple shares. If Apple declares a dividend, the token may or may not pass that dividend through, depending on the token’s design.

Moreover, if the token issuer experiences financial distress, the investor could lose the entire position, regardless of Apple’s continued profitability. In contrast, a direct holder of Apple shares would still receive dividends and retain voting rights, even if a brokerage firm were to fail (thanks to SIPC insurance and other safeguards).

### Impact on the Issuer‑Led Capital‑Markets Model The United States’ capital‑markets model is fundamentally issuer‑driven: companies issue shares to raise capital, and investors purchase those shares directly from the issuer or through secondary markets. This model aligns incentives—companies receive funds for growth, and shareholders gain a stake in the company’s success. Synthetic tokens bypass the issuer altogether. Instead of a company issuing a new class of shares or a traditional security, a third‑party platform creates a digital wrapper that mimics the stock’s performance.

This decoupling can have several adverse consequences: - **Reduced Capital Raising Efficiency**: Companies may find it harder to raise fresh capital if investors shift toward synthetic alternatives that do not provide direct funding. - **Fragmented Ownership Records**: Accurate shareholder registries are essential for corporate governance, proxy voting, and dividend distribution. Synthetic tokens create a parallel, often opaque, ownership ledger that complicates these processes.

- **Potential for Market Manipulation**: Because synthetic tokens can be created and traded without the same reporting requirements as traditional securities, there is a risk of price manipulation or misinformation spreading unchecked. ### The Broader Regulatory Landscape Regulators worldwide are still grappling with how to classify and supervise synthetic tokenized assets. In the United States, the SEC has taken a cautious stance, emphasizing that many token offerings may constitute unregistered securities.

The agency’s focus on investor protection means that synthetic tokens could face enforcement actions if they are deemed to violate securities laws. Internationally, jurisdictions vary in their approach. Some countries have embraced tokenization with clear regulatory frameworks, while others have issued warnings about the risks of synthetic products. This regulatory patchwork adds another layer of uncertainty for U.S.

investors who might be tempted by the novelty of synthetic tokens but lack clear guidance on their legal status. ### Practical Considerations for Investors Given these concerns, investors should approach synthetic tokenized stocks with a heightened level of diligence: - **Assess Counterparty Creditworthiness**: Investigate the financial health and reputation of the token issuer. Look for transparency in how the synthetic exposure is backed and any collateral arrangements. - **Understand the Token’s Rights**: Review the token’s smart contract or offering documents to determine whether voting, dividend, and other shareholder rights are included.

- **Check Regulatory Compliance**: Verify whether the token is registered or exempt under U.S. securities law, and be aware of any potential legal risks. - **Consider Liquidity**: Evaluate the trading volume and market depth on the platform where the token is listed.

Low liquidity can lead to significant price slippage. - **Diversify**: Do not rely solely on synthetic tokens for exposure to a particular stock or sector. Maintain a balanced portfolio that includes direct equity holdings. ### Conclusion While the allure of tokenized finance is undeniable—offering faster settlement, fractional ownership, and broader access—the synthetic variant of tokenized stocks introduces a set of risks that directly challenge the core strengths of the U.S.

equity market. By replacing true ownership with a contractual promise, synthetic tokens diminish investor confidence, expose holders to additional counterparty risk, and undermine the issuer‑led model that has driven American capital formation for generations. For these reasons, industry experts like Aaron Kaplan caution that synthetic tokenized stocks are, at best, a peripheral innovation and, at worst, a threat to the integrity of the market that investors worldwide have come to trust. Until regulatory clarity emerges and robust safeguards are put in place, investors would be well advised to treat synthetic tokenized stocks with skepticism and to prioritize direct ownership of shares whenever possible.