By Matt Levine

Compiled by: BitpushNews

First, let me briefly summarize the history of the U.S. public stock market:

In the early days, anyone could finance a project by selling shares to the public, and many did, often with false promises.

This phenomenon reached its peak in the 1920s, when people rushed to buy stocks and borrowed money to speculate with leverage. Then the stock market crashed and the Great Depression came. In order 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, if a company wanted to sell stock to the public, it had to disclose business details, publish audited financial statements, and disclose major events to ensure that investors were informed.

Of course, this only applies to publicly traded companies; there are exceptions for companies that don't raise money from the public. If your father-in-law gives you some seed money to open a local hardware store, the federal government obviously won't require you to file audited statements.

Over time, these exceptions become more important. In the 1920s, the best way for a company to raise money was to issue shares to thousands of retail investors. In the 2020s, the best way to raise money might be to call SoftBank's Masayoshi Son and ask for $10 billion - he'll probably agree, and you don't have to disclose financial statements or deal with retail investors.

I often say that “private markets are the new public markets.” In the past, the main benefit of going public was that you could raise a lot of money because there was more money in the public markets. Today, with trillions of dollars sitting in the private markets, going public is no longer necessary. Star tech companies like SpaceX, OpenAI, and Stripe have raised billions at valuations of hundreds of billions without going public.

They do so because going public is a hassle: they have to disclose financial reports, update business progress (and may be sued if the information is wrong), and may attract shareholders they don't like. In addition, public fluctuations in stock prices may also cause headaches for management. For popular private companies, this is actually a convenience - they can raise funds without the tediousness of going public.

But this is not necessarily a good thing for the public. Retail investors want to invest in companies like SpaceX but have no way to get in. They can only buy fragmented shares at high prices through gray channels. Over the past decade, a view has become increasingly popular: "Modern economic growth is mostly driven by private enterprises. The most exciting companies are private, but ordinary investors cannot participate. This must change."

How to change? My previous discussion has shown that this is difficult. Many large private companies do not want to go public at all because the public market is annoying and expensive. The core reason why the private market can replace the public market is that global capital is highly concentrated in the hands of private equity funds, venture capital, family offices and people like Masayoshi Son - they do not need retail investors' money at all (at least SpaceX does not; perhaps some private companies need retail investors, but they may not be high-quality targets).

Still, people want to try. Conceptually, here are some ways to solve the problem:

Make it easier to go public. Cut expensive disclosure regulations. Make it harder for shareholders to sue companies, harder for activists to win proxy fights, harder for short sellers to criticize companies. Obviously, there are tradeoffs here, but maybe they’re worth it. If going public is no longer more cumbersome or expensive than going private, maybe SpaceX, Stripe, and OpenAI will shrug and say “sure, let’s go public.” Historically, this is what people say when they talk about solving problems.

Make it harder to be private. Add expensive disclosure regulations for private companies. Pass a law that says, “If you have more than X dollars in revenue, you must publish audited financial statements, and if they show errors, anyone can sue you.” You occasionally see efforts in this direction; in 2022, the Securities and Exchange Commission (SEC) began “developing a plan to require more private companies to disclose information about their financials and operations on a regular basis.”

Restructuring the economy and wealth distribution so that there are fewer large institutional pools of capital and the only way to get that much capital is to sell stock to the public looks hard.

But there is an even more radical approach: simply abolish the public company rules. Allow any company to sell stock to the public, without disclosure or audits. The public will make their own judgments about risk—if a company refuses to provide financial statements, you don’t have to buy (but you can!). Fraud will still be illegal, but mandatory disclosure will become voluntary. Companies can still follow existing securities laws if they think disclosure will help them raise funds; if they don’t, they can sell shares directly to the public.

Few people publicly support this plan. After all, the past century of US securities regulation has been generally regarded as a success - the market is deeper, valuations are more reasonable, and fraud is less, all because of mandatory disclosure by listed companies.

However, the cryptocurrency industry has found a "shortcut": raising funds by issuing "tokens" (a kind of economic rights certificate similar to stocks) without having to comply with securities laws. This theory has mixed results, but it seems to be revived in recent years.

Today, most companies still issue stocks, not tokens. But tokenization offers a new way of thinking: rebrand 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 the word 'blockchain' will not make illegal legal", but it is no longer obvious now.

Tokenized stocks have other advantages: stocks on the blockchain may be self-custodied, highly leveraged loans on DeFi platforms, 24-hour trading, etc. But the real temptation is that as long as they are called "tokenized", private company stocks can be sold to the public bypassing US disclosure rules. This means that the securities law system established in the 1930s may be emptied.

Of course, the US isn’t there yet, but that’s the goal. This week, Robinhood announced that it will launch tokenized stocks (initially limited to non-US users and mainly US stocks):

Robinhood Markets Inc. has joined the blockchain stock trading wave, offering 24/5 trading of tokenized U.S. stocks to 150,000 users in 30 countries.

Details of its structure show that the underlying assets are held in custody by licensed U.S. institutions (in theory, tokenization allows naked short selling of stocks, but Robinhood’s tokens are fully collateralized).

What’s more noteworthy is that Robinhood also gave away private company tokens as a promotion:

To celebrate the launch, Robinhood is giving away €5 worth of OpenAI and SpaceX tokens to EU users who register before July 7, for a total allocation of $1 million in OpenAI tokens and $500,000 in SpaceX tokens.

“We’re addressing historic investment inequality — now everyone can buy into these companies,” said John Kobryat, general manager of Robinhood’s crypto business.

Although it is currently limited to Europe, the goal is clear: to allow the public to buy OpenAI and SpaceX stocks through brokerage apps without requiring companies to disclose their financial reports.

Robinhood CEO Vlad Tenev said bluntly in a podcast:

“For private companies, the argument for banning retail investment is simply untenable. People can buy depreciating goods on Amazon and meme coins, but they can’t buy OpenAI stock? This is illogical.”

That's right! The public can speculate in the stock market (zero-day options), the cryptocurrency world (meme coins), and sports lottery (Robinhood once promoted Super Bowl betting). In comparison, SpaceX or OpenAI are better targets. The distinction between public and private is indeed irrelevant to the level of risk - there are junk in the public market and pearls in the private market.

But we must recognize the essence of the matter: "the public should be able to invest in private enterprises" is itself a paradox.

The core characteristics of private enterprises are:

Not open to the public.

Not subject to disclosure constraints of listed companies.

Therefore, “allowing the public to invest in private companies” is equivalent to “allowing companies to sell shares to the public without disclosing information.” This may not be ridiculous - perhaps you think disclosure rules are outdated and hinder innovation, but this is the essence of tokenization.

Tenev is not alone. BlackRock CEO Larry Fink has also advocated for tokenization and made it clear that the goal is to circumvent disclosure rules. He wrote in a letter to shareholders this year:

“Tokenization democratizes investing…High-return investments are often limited to large institutions, mainly due to legal and operational frictions. Tokenization can remove barriers and allow more people to obtain high returns.”

The “legal friction” here refers to the fact that some companies are private because they don’t want to comply with securities disclosure rules, and the tokenized solution is that they can sell shares to the public without complying with those rules.

Again, this solution doesn’t work in the US yet. You can’t yet sell “tokens” of private company stock (or private credit loans, private equity funds, etc.) directly to the US public without disclosure. But many of the big players in finance are advocating for this, and the regulatory environment seems pretty receptive, and you can understand why. The public wants to buy private investments, and intermediaries want to sell them, and the disclosure rules get in the way. Saying “we should get rid of the disclosure rules” sounds bad, backward, and greedy. Saying “tokenize” sounds good, modern, and cool.

A bit of old-fashioned history.

Around 2020, crypto projects raised money from the public with false promises. People leveraged and speculated, and then the bubble burst, ushering in the "crypto winter". At the end of 2022, you may have imagined a variety of possible outcomes, including:

1) Encryption is permanently silent;

2) Congress regulates crypto the way it regulated the stock market in the 1930s, possibly creating new rules to restore confidence in crypto markets, requiring disclosures, regulating conflicts of interest, and imposing capital requirements. (We’re definitely seeing some of this; the Genius Act imposed capital requirements on stablecoins.)

But the reality is a third way (which I personally did not predict), where the financial industry seems to be looking for a way to abolish the disclosure and trading rules of the stock market, making the stock market more like cryptocurrencies, rather than making cryptocurrencies more like regulated stock markets.