In recent years, the financial industry has witnessed a surge of interest in tokenized securities—digital representations of traditional assets that can be bought, sold, and transferred on blockchain platforms. While the concept promises greater accessibility, faster settlement, and the allure of modern technology, not all tokenization approaches are created equal.
One particularly controversial method is the use of synthetic tokenized stocks, which do not represent direct ownership of the underlying equity but instead rely on derivative contracts, escrow arrangements, or other indirect mechanisms to mimic the economic performance of a share. Aaron Kaplan, the founder of the investment firm Promethum, has been vocal about why this synthetic model is fundamentally at odds with the core values that have made U.S. equity markets a global benchmark.
He emphasizes that the United States enjoys a reputation for robust investor protection, transparent corporate governance, and a clear legal framework that guarantees that a holder of a share truly owns a slice of the issuing company. This confidence is not merely a matter of sentiment; it underpins capital formation, liquidity, and the willingness of both domestic and foreign investors to allocate capital to American enterprises.
Synthetic tokenized stocks, however, dilute that certainty. Instead of granting the token holder a direct claim to the corporation’s assets, voting rights, and dividend entitlements, these tokens are often backed by a set of contractual agreements that replicate the price movements of the underlying stock. In practice, this means that the token holder’s rights are contingent on the performance and solvency of a third‑party intermediary—typically a custodian, a smart‑contract platform, or a special‑purpose vehicle (SPV) that holds the actual shares on behalf of token owners.
If any link in this chain fails, the token holder may find themselves without recourse, even though the underlying stock continues to trade on a regulated exchange. Kaplan points out three primary ways in which synthetic tokenization undermines the interests of American investors: 1. **Erosion of Ownership Rights**: Traditional shares confer voting power, the ability to attend shareholder meetings, and a direct claim on residual assets in the event of liquidation. Synthetic tokens rarely convey these rights, leaving investors with a purely economic exposure that can be stripped away without warning.
This disconnect runs counter to the principle that equity ownership should be both financial and participatory. 2.
**Increased Counterparty Risk**: Because the token’s value is derived from an agreement rather than actual share ownership, investors become dependent on the creditworthiness and operational integrity of the token issuer or the custodial entity. Should the custodian face insolvency, regulatory action, or a cyber‑attack, token holders may suffer losses that are unrelated to the performance of the underlying company.
3. **Undermining the Issuer‑Led Capital Market Model**: The United States has long relied on a model where corporations raise capital directly from investors through public offerings, secondary market trading, and transparent disclosure regimes. Synthetic tokenization sidesteps this model, allowing capital to be raised and traded through opaque, often unregulated channels.
This can dilute the effectiveness of market signals, distort price discovery, and ultimately weaken the feedback loop that informs corporate governance and strategic decision‑making. Beyond these structural concerns, there are practical regulatory implications. The U.S. Securities and Exchange Commission (SEC) has made clear that any token that represents an interest in a security must comply with existing securities laws, including registration, disclosure, and antifraud provisions.
Synthetic tokens that are marketed as “stock equivalents” but lack a clear ownership link may fall into a regulatory gray area, exposing investors to enforcement actions, forced token delistings, or sudden loss of liquidity. Moreover, the synthetic approach can create a false sense of security for investors who assume they are purchasing the same product as a conventional share.
Because the token’s price often mirrors the underlying stock’s market price, many participants may not recognize the hidden layers of risk. This misperception can lead to over‑exposure, especially among retail investors who are attracted by the novelty of blockchain‑based assets but lack the sophistication to assess counterparty and custodial risks. In contrast, genuine tokenization—where each digital token is backed by a one‑to‑one claim on an actual share held in a regulated custodial account—preserves the legal ownership rights and aligns with existing securities frameworks. Such a model can still deliver many of the touted benefits of blockchain, such as fractional ownership, faster settlement, and broader market access, without sacrificing the investor protections that have made U.S.
markets trustworthy. Kaplan’s argument ultimately calls for a cautious, principle‑driven approach to innovation. He urges regulators, market participants, and technology providers to prioritize transparency, enforce clear ownership structures, and ensure that any tokenized representation of a stock does not compromise the foundational rights of shareholders.
By doing so, the industry can harness the efficiencies of distributed ledger technology while safeguarding the integrity of the capital markets that have long been a hallmark of the American financial system. In summary, synthetic tokenized stocks present a set of risks that run counter to the expectations and legal protections enjoyed by U.S. investors. They dilute ownership rights, introduce additional layers of counterparty risk, and bypass the established issuer‑led capital formation process.
For investors who value the certainty that comes with holding a genuine share—voting power, dividend entitlement, and a direct claim on corporate assets—synthetic tokens fall short. The path forward should focus on authentic tokenization models that maintain the full suite of shareholder rights, comply with securities regulations, and preserve the trust that underpins the United States’ position as a global leader in equity markets.