About the Centralization Issues Involved in RWA Trading and the Role Centralized Institutions May Play in RWA Trading

Earlier, I had made some inferences and guesses based on my understanding of USDC regarding the centralization issues involved in RWA trading, but I had not received confirmation on the details.

Recently, there have been many articles and accounts online discussing a popular area in RWA: stock token trading (which involves tokenizing stocks and allowing users to trade them on-chain). These articles provide detailed technical insights and implementation processes for stock token trading.

Taking this opportunity, I studied these articles to enrich my understanding of some details.

Today, I would like to share some key details about stock token trading.

In stock token trading, users are ostensibly trading tokens, but in reality, they are trading the stocks represented by those tokens. To ensure that this transaction is secure and reliable in terms of ownership, the key is to guarantee that when a user holds a token, they actually hold the stock represented by that token.

However, this point is not eliminated in most current implementations; rather, it is strongly bound to centralized institutions. The common practice is that the stocks represented by the tokens need to be frozen, and then the token issuance platform issues tokens corresponding to the frozen stocks on a 1:1 basis.

As long as the token exists on the token platform, the corresponding stock must be frozen.

This achieves 100% collateralization of stock tokens with actual stocks.

Where are these stocks frozen?

The current common practice is to have them collateralized and frozen on brokerage platforms.

When the number of tokens purchased by users on the token platform exceeds the frozen stocks, the platform must purchase more stocks on the brokerage platform to freeze; when users sell a large number of tokens, leading to a decrease in the demand for corresponding stocks, the platform can release the frozen stocks on the brokerage platform.

This is the current technical implementation method for stock token trading.

Technically, this process is very similar to USDC.

Both involve 100% custody of "physical" assets, and then issuing corresponding tokens on the blockchain. The only difference is that one collateralizes dollars and issues a stablecoin corresponding to those dollars, while the other collateralizes stocks and issues stock tokens corresponding to those stocks.

In this type of stock token trading, the strength of the stock token trading platform entirely depends on the liquidity of stocks it can attract: whichever token platform has the strength to "freeze" enough stocks can bring enough "stocks" to the crypto platform and issue tokens.

By this standard, it is evident that Robinhood stands out among the competitors in this space, as it is itself a brokerage and already possesses considerable stock resources. Freezing stocks and issuing stock tokens is merely a game of transferring from one hand to the other for them.

I believe industry insiders can understand this play, and it certainly won't be exclusive to any one company. Moreover, looking at the entire U.S. brokerage industry, there are quite a few firms that are stronger than Robinhood. Therefore, this lucrative opportunity must be enticing to large institutions.

But what about retail investors?

Will there be any benefits for them?

A recent regulation in Hong Kong's stablecoin policy has made me adopt a cautious attitude toward this.

A certain regulation in Hong Kong requires stablecoin holders to undergo KYC. In fact, current U.S. stock brokerage platforms also require KYC. I believe that future stock token trading platforms, especially those that are compliant, will likely have KYC requirements as well.

If that is the case, what is the difference from opening an account with a brokerage platform with KYC?

Additionally, I am very concerned about the critical role centralized platforms play in this implementation method: they are key providers of liquidity. Regulatory agencies can completely control the entire business by restricting them.

My interest in stock token trading has always been quite lukewarm because I am not very interested in trading stocks on-chain, but I am more interested in trading equity in unlisted companies on-chain.

However, after reviewing the above implementation method, my interest in trading equity has also diminished significantly. Since regulatory agencies can require KYC for participants in stock trading, the requirements for regulating equity trading are likely to be even higher, demanding stricter and higher standards of KYC than for stocks.