The ongoing discussion surrounding Robinhood's AMC token has raised important questions about the legitimacy of various tokenization models, with the SEC establishing its stance. Tram Doman from Bullish suggests that the critical inquiry now revolves around what conditions must be met for these tokens to function as a market.
AMC's CEO Adam Aron has labeled Robinhood's tokenized AMC shares a "quasi-fake market" and has indicated the possibility of legal action. In response, Robinhood's Vlad Tenev argued that a public company cannot dictate every product associated with its stock.
This public disagreement has sparked a debate on the legitimacy of different token types: a wrapped token, representing a claim on the underlying share, versus an issuer-sponsored token that is registered with the transfer agent. On September 17, the SEC provided a five-year exemption allowing for the trading of tokenized U.S. stocks on the blockchain, but only if the token mirrors the dividends, voting rights, and class rights of the actual shares, thus excluding synthetic exposures like Robinhood’s token.
Robinhood's AMC Token Performance
During a seven-session period from August 31 to September 9, Robinhood’s AMC token's price remained relatively close to AMC's NYSE closing price, with a median deviation of just 0.87% and a maximum of 2.71%, according to data from the Uniswap pool where most trading occurs. However, significant price discrepancies arose when the underlying market was closed. For instance, just before midnight on September 3, the AMC token surged from $2.55 to a peak of $23.16, a staggering ninefold increase from its earlier NYSE close, before quickly dropping back to $3.26 within an hour, with trading volume reaching $10.5 million in that period.
Wrapped tokens like Robinhood’s AMC are generally structured as claims against offshore issuers, who back the tokens with the corresponding shares. Ideally, if these positions are matched perfectly, the prices should align. However, in practice, these tokens are traded separately, leading to price divergences. Arbitrage opportunities arise, as high-frequency trading firms and market-making desks step in to align market prices, similar to how depositary receipts and ETFs maintain their values relative to their underlying assets.
In Robinhood's situation, the issuer has designated only one authorized participant capable of creating and redeeming tokens. While the price spike occurred during permitted minting hours, this participant did not issue or withdraw any tokens at that time. Data reveals that 47 tokens were minted on September 4, all between noon and 7 p.m. ET, well after the token had diverged from its pegged price.
In a properly functioning market, a dealer can short-sell or utilize their inventory to capitalize on price premiums and replenish later. However, without a mechanism to borrow tokens, the only way to acquire new tokens is through pre-funding with the issuer, necessitating the purchase of shares first. If the NYSE is closed, the broker would have needed to buy shares before the market closed, incurring costs for hedging that are limited by the on-chain pool's capacity. This situation transforms into a proprietary bet using the firm’s own capital rather than a traditional arbitrage opportunity.
If an issuer mints tokens without possessing the underlying shares, it risks having unmet obligations, which is problematic for an instrument that is supposed to be fully collateralized.
The sell-off that drove the price down was primarily due to profit-taking by holders; no actual shares were exchanged during this process. The trading activity was purely within the token market, with all participants making directional bets using their own capital.
Interestingly, the price movements of the AMC token became influenced by external factors, including the launch of a meme coin that was quoted in tokenized AMC. As demand for this meme coin increased, the pool sold AMC tokens to acquire it, inadvertently driving up the price of the stock token. Consequently, the value of an instrument intended to reflect a cinema chain's shares was dictated by speculative demand for a meme coin, leading to disconnected pricing for downstream consumers.
To mitigate the impact of price discrepancies on the underlying stock, the SEC’s exemption limits on-chain trading volumes to 0.25% of a large-cap stock's average daily volume, and 2.5% for other listed stocks. Wrapped tokens issued offshore to non-U.S. holders, including Robinhood’s, remain outside SEC oversight and continue operating as they have.
Exploring Wrapped Tokens
Wrapped tokens have proven useful, especially in emerging markets where access to U.S. equities can be limited or costly. Robinhood's stock tokens encompass over 190 companies across 120 countries, with alternatives like xStocks and Ondo providing similar services. Outside of the U.S., this model does not necessitate issuer consent, shareholder registry entries, or market-specific authorizations, which contributes to its wide reach but also introduces counterparty risks for holders.
The wrapped token model enhances distribution but can lead to price dislocations and reduced investor rights and issuer transparency. The challenge is not specific to Robinhood or any other issuer; price discovery does not cease when U.S. markets close, as various brokers operate beyond regular hours, managing order flow both domestically and internationally. However, sourcing sufficient underlying shares becomes challenging when primary exchanges are offline. Thus, while holders possess claims, they lack a viable market to convert these claims outside the NYSE's limited operating hours, which are just 32.5 hours out of a total 168 hours each week. Consequently, the premium between the token's price and the last share close represents a risk that buyers accept and pay for when prices converge at the market's opening.
Understanding Issuer-Sponsored Tokens (IST)
The issuer-sponsored token model involves the tokenization of registered shares, with the issuer and its transfer agent participating in the transaction. This model not only offers advantages such as 24/7 trading and programmability, but it also ensures that the token represents the actual security, including voting rights and corporate actions.
This changes the risk profile for market makers. When quoting a wrapped token at 3 a.m., they are dealing with a claim on a share without a live price reference. In contrast, when quoting an IST, they are handling the security itself, making the print a direct transaction in the stock. While this does not automatically guarantee informative pricing, it eliminates conversion risks between different instruments and reduces counterparty risks associated with intermediaries.
However, ISTs have limited reach beyond their regulatory framework compared to wrapped tokens. The broader distribution of wrapped tokens comes from their classification as different instruments under lighter regulations, while ISTs maintain their integrity by being the actual shares. Currently, ISTs are relatively rare, with only a few trading, including Bullish’s BLSH, and liquidity remains low.
Advancing Market Infrastructure
The debate surrounding AMC has focused on which entities are permitted to issue stock tokens on-chain. The more complex issue is how to cultivate a market that extends beyond mere issuance. The wrapped token market is constrained by a conversion mechanism that links two distinct instruments operating on different schedules. The IST approach seeks to overcome these limitations: with proper infrastructure, authentic price discovery can occur at any time across licensed platforms, involving a broader range of participants rather than just a select few.
The issuer-sponsored token serves the regulated market, while the wrapped token provides access to those outside it. Running both concurrently allows for mutual benefits: the wrapped token market gains a live price reference and an instrument for market makers to engage in arbitrage, while the issuer-sponsored market attracts activity from arbitrageurs who hold tokens as inventory to facilitate trading in wrapped tokens. By collateralizing wrapped tokens with ISTs, both creation and redemption can occur seamlessly, eliminating dependence on traditional cash markets for share sourcing. This integration transforms the two markets into interconnected components of a unified infrastructure, catering to diverse user needs.
Moving forward, discussions should concentrate on reducing spreads for market participants during off-hours, expediting conversions between different instruments, enabling continuous market operations, and determining who will develop the necessary infrastructure. No single company can construct the entire ecosystem required; exchanges, brokers, fund managers, market makers, transfer agents, and clearinghouses each possess essential parts but lack the entirety. The primary goal for industry groups such as the IST Coalition is to bring these stakeholders together to collaboratively build a comprehensive market.
Note: The opinions expressed in this piece are those of the author and do not necessarily reflect the views of CoinDesk, Inc. or its affiliates.