Author: Matt Levine
Translated by: BitpushNews
First, let me briefly summarize the history of the US public stock market:
In the early days, anyone could raise funds for a project by selling stocks to the public, and many did so, often accompanied by false promises.
This phenomenon peaked in the 1920s, with people rushing to buy stocks and leveraging borrowed money for speculation. The stock market then crashed, leading to the Great Depression. To restore market confidence, Congress passed a series of laws (especially the Securities Act of 1933 and the Securities Exchange Act of 1934) to regulate the public stock market. From then on, companies wanting to sell stocks to the public had to disclose business details, publish audited financial statements, and disclose major events to ensure investor awareness.
Of course, this only applied to listed companies, with exceptions for companies not raising funds from the public. If your father-in-law gives you some startup capital to open a local hardware store, the federal government obviously won't require you to submit audit reports.
Over time, these exceptions became increasingly important. In the 1920s, the best way to finance a business was to publicly issue stocks to thousands of retail investors; by the 2020s, the best way to raise funds might be to call SoftBank's Masayoshi Son directly and ask for $10 billion - he would likely agree, and you wouldn't need to disclose financial reports or face retail investors.
"The private market has become the new public market," I often say. In the past, the main advantage of going public was the ability to raise large amounts of capital, as the public market had more abundant funds. Today, the private market holds trillions of dollars, making going public unnecessary. Star tech companies like SpaceX, OpenAI, and Stripe can raise billions at valuations of hundreds of billions without going public.
They indeed do this because going public is troublesome: mandatory financial disclosure, updating business progress (with potential lawsuits for misinformation), and potentially attracting unwelcome shareholders. Additionally, public stock price fluctuations can be a headache for management. For popular private companies, this is actually convenient - they can raise funds while avoiding the complexities of going public.
But for the public, this may not be a good thing. Retail investors want to invest in companies like SpaceX but have no access, only able to buy fragmented shares at high prices through gray channels. Over the past decade, a narrative has grown: "Modern economic growth is driven by private companies, the most exciting companies are private, and ordinary investors cannot participate - this must change."
How to change? My previous discussion has shown this is difficult. Many large private companies simply don't want to go public because public markets are both annoying and expensive. The core reason private markets can replace public markets is that global capital is highly concentrated in private equity, venture capital, family offices, and people like Masayoshi Son - they don't need retail investors' funds (at least SpaceX doesn't; some private companies might need retail investors, but they may not be high-quality targets).
Nevertheless, people want to try. Conceptually, here are some potential solutions:
Make going public easier. Reduce expensive information disclosure regulations. Make it harder for shareholders to sue companies, for activist investors to win proxy fights, and for short sellers to criticize companies. Clearly, there are trade-offs, but it might be worth it. If going public is no longer more complicated or expensive, perhaps SpaceX, Stripe, and OpenAI would shrug and say "sure, let's go public." Historically, this is what people often say when discussing problem-solving.
Make being private more difficult. Increase expensive information disclosure regulations for private companies. Pass a law stating "if you have more than X dollars in revenue, you must publish audited financial statements, and anyone can sue you if they find errors." You occasionally see efforts in this direction; in 2022, the US Securities and Exchange Commission (SEC) began "developing a plan to require more private companies to regularly disclose their financial and operational information."
Restructure the economy and wealth distribution to reduce large institutional capital pools, making going public to the masses the only way to obtain significant capital. This seems difficult.
But there's a more radical approach: directly abolish public company rules. Allow any company to sell stocks to the public without disclosure or auditing. Let the public assess risks themselves - if a company refuses to provide financial reports, you simply don't buy (but you can buy!). Fraud would remain illegal, but mandatory disclosure would become voluntary. Companies that believe disclosure helps fundraising can still follow current securities laws; those who don't want to can directly sell to the public.
Few openly support this approach. After all, US securities regulation over the past century has generally been considered successful - markets are deeper, valuations more reasonable, and fraud less common, all because of mandatory disclosure for public companies.
However, the crypto industry found a "shortcut": raising funds by issuing "tokens" (a type of economic rights certificate similar to stocks) without complying with securities laws. The theoretical results have been mixed, but seem to be experiencing a revival in recent years.
Today, most companies still issue stocks rather than tokens. But tokenization offers a new perspective: rename private company stocks as tokens and sell them to the public. You call it "stock tokenization" and put it on the blockchain. In 2015, I wrote that "saying 'blockchain' three times doesn't make something illegal legal," but this is no longer obvious.
Tokenized stocks have other advantages: stocks on the blockchain could enable self-custody, high-leverage loans on DeFi platforms, 24-hour trading, etc. But the real temptation is that by calling it "tokenized," private company stocks can bypass US disclosure rules and be sold to the public. This means the securities law system established in the 1930s could be circumvented.
Of course, the US hasn't reached this point yet, but this is the goal. This week, Robinhood announced the launch of tokenized stocks (initially limited to non-US users, focusing on US stocks):
Robinhood Markets Inc. joins the blockchain stock trading wave, offering 24/5 trading of tokenized US stocks to 150,000 users in 30 countries.
Its structural details show that the underlying assets are custodied by licensed US institutions (theoretically, tokenization could allow naked short selling, but Robinhood's tokens are fully collateralized).
More notably, Robinhood also gave away private company tokens as a promotion:
To celebrate the launch, Robinhood will give EU users who register before July 7 tokens worth 5 euros for OpenAI and SpaceX, totaling 1 million USD in OpenAI tokens and 500,000 USD in SpaceX tokens.
John Kubriack, Robinhood's Head of Crypto Business, said: "We want to solve historical investment inequality - now everyone can buy these companies."
Although currently limited to Europe, the goal is clear: allow the public to buy OpenAI and SpaceX stocks through a brokerage app without companies disclosing financial reports.
Robinhood CEO Vlad Tenev directly stated in a podcast:
"For private companies, the argument against allowing retail investment doesn't hold up. People can buy depreciated goods on Amazon, can buy meme coins, but can't buy OpenAI stocks? That's illogical."
He's right! The public can already speculate in the stock market (zero-day options), crypto, and sports betting (Robinhood once offered Super Bowl bets). In comparison, SpaceX or OpenAI are actually higher-quality targets. The public-private distinction isn't necessarily related to risk - the public market has garbage, and the private market has gems.
But we must recognize the essence: "The public should be able to invest in private companies" is itself a paradox.
The core characteristics of private companies are:
Not open to the public,
Not bound by public company disclosure requirements.
Therefore, "allowing the public to invest in private companies" is equivalent to "allowing companies to sell stocks to the public without disclosing information." This isn't necessarily absurd - perhaps you believe disclosure rules are outdated and hinder innovation, but this is the essence of tokenization.
Tenev is not alone. BlackRock CEO Larry Fink also advocates for tokenization and explicitly states the goal is to circumvent disclosure rules. He wrote in his letter to shareholders this year:
"Tokenization democratizes investment... High-return investments are often limited to large institutions, primarily due to legal and operational friction. Tokenization can eliminate barriers and allow more people to access high yields."
Here, "legal friction" refers to some companies being private because they do not want to comply with securities disclosure rules, and the tokenization solution is that they can sell stocks to the public without adhering to these rules.
Again, this solution has not yet been effective in the United States. You still cannot directly sell "tokens" of private company stocks (or private credit loans, private equity funds, etc.) to the US public without disclosure. However, many major players in the financial world are advocating for this, and the regulatory environment seems quite receptive. You can understand the reasons. The public wants to buy private investments, intermediaries want to sell, but disclosure rules hinder everything. Saying "we should abolish disclosure rules" sounds terrible, backward, and greedy. But saying "tokenization" sounds good, modern, and cool.
A bit more old-fashioned history.
Around 2020, crypto projects raised funds from the public through false promises. People leveraged speculative investments, and then the bubble burst, ushering in the Crypto Winter. By the end of 2022, you might have imagined various possible outcomes, including:
1) Crypto permanently falls silent;
2) Congress regulates crypto like the stock market in the 1930s, potentially creating new rules to restore confidence in the crypto market, requiring information disclosure, regulating conflicts of interest, and imposing capital requirements. (We have indeed seen some of this; the Genius Act imposed capital requirements on stablecoins.)
But the reality is a third path (which I personally did not predict), where the financial industry seems to be finding a way to abolish stock market information disclosure and trading rules, making the stock market more like cryptocurrency, rather than making cryptocurrency more like a regulated stock market.
