Michael Burry, the “Big Short” investor, arguescrypto-style trading of stocks might leave ordinary investors exposed to hazards they don’t fully comprehend.
Michael Burry is warning that Wall Street may be about to embark on a financial experiment that could transform the way Americans purchase and sell stocks and not necessarily for the better.
The investor, who gained fame for anticipating the 2008 housing market crash, also blasted a Securities and Exchange Commission proposalthat may allow tokenized equities to be traded on blockchain networks just like cryptocurrencies.
If authorized, the scheme would permit investors to trade digital assets similar to stock 24/7, instead of just during regular U.S. market hours.
That sounds convenient. But detractors argue it could also lead to uncertainty, weaker investor safeguards and a fragmented market in which prices no longer move in concert.
Burry believes regulators may be underestimating those risks.
“We may be headed full-on to a Snow Crash cyber-punk future,” Burry wrote on Substack. “This may be the point in time that needs to be stopped from going forward by some future being.”
The proposal might apparently allow third parties to tokenize stocks without the companies’ official approval. That means investors may someday acquire blockchain copies of stocks that aren’t formally issued by the underlying firms.
Burry isn’t alone in his fears.
Citadel Securities, one of the major market-making businesses in the U.S., had previously cautioned the SEC that tokenized equities might give rise to a parallel stock market outside of the regular national market system.
That prospect is scaring some Wall Street veterans.
Michael Burry says tokenized stocks may confuse investors
The SEC proposal would supposedly allow for two types of tokenized stocks: ones authorized by the corporation and third-party types produced on their own.
That distinction may become very important to investors.
A tokenized stock might look like a standard share on a trading app, but it may not have the same rights. Some tokenized products may lack the voting rights, dividend eligibility, or legal ownership protections that come with ordinary shares.
Daniel Labovitz, CEO of Green Impact Exchange, warned that investors could misunderstand what they actually own.
“The tokens may not represent actual ownership of the company, and token holders may not get all the benefits of the share,” Labovitz said.
The issue is more than just rights of ownership.
If the trading of tokenized shares is separate from the regular shares, the two prices can diverge. A tokenized representation of a stock might trade at a considerably higher price than the genuine stock on regulated markets.
That kind of market fragmentation is unusual in traditional equities, where pricing mechanisms are set up to keep markets in line.
Crypto-style trading alters that dynamic.
In the US, traditional stock markets close overnight and on weekends. Markets based on blockchain don’t.
If important news breaks after hours or on the weekend, tokenized shares could fluctuate dramatically before traditional exchanges even open.
That could create large pricing gaps by Monday morning.
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That might produce a market that is more difficult to understand and riskier to manage for regular investors.
Key concerns surrounding tokenized stocks
- Ownership uncertainty: Some tokenized stocks may not grant traditional shareholder rights.
- Price fragmentation: Blockchain-based versions of stocks could trade at different prices than regulated shares.
- Higher volatility: Around-the-clock trading may increase sudden price swings.
- Weaker protections: Some tokenized platforms may not follow the same investor-protection standards.
- Cybersecurity threats: Decentralized finance platforms have repeatedly been targeted by hackers.
- Liquidity risks: Thin overnight trading could magnify losses during market shocks.
Citadel Securities warns SEC about shadow stock market
Citadel Securities raised similar concerns in its warning to the SEC.
The firm said permitting tokenized U.S. equities to trade outside the established national market structure might erode transparency, degrade the quality of liquidity and undermine investor safeguards built into regulated exchanges.
That’s a big deal since the way the stock market is set up today is meant to ensure that investors get the best price in the most efficient way, no matter where the trade takes place.
Maybe a broken blockchain ecosystem doesn’t play by the same rules.
Proponents of tokenized stocks claim that blockchain might modernize financial markets by shortening settlement times and broadening access to investors abroad.
Such economies, critics say, could come at the expense of stability.
Burry seems to fit squarely within that camp.
“Regulators have one job. Do not open scary doors,” Burry wrote in another Substack comment.
More Wall Street:
The SEC proposal might also expose stock investors to vulnerabilities that have frequently roiled the cryptocurrency markets.
Decentralized finance platforms have seen big hacks, liquidity freezes and fast collapses during instances of market stress.
With tokenized equities gaining popularity, traditional investors may be exposed to comparable risks without fully comprehending the differences between regulated brokerage accounts and blockchain assets.
Reports have also highlighted fears that the SEC exemption could erode some of the know-your-customer and anti-money laundering safeguards available in traditional finance.
That could raise the danger of fraud, manipulation and market abuse.
Another big worry is volatility.
Crypto markets are known for their dramatic overnight volatility, spurred by low liquidity and emotional trading. If tokenized stocks start trading 24/7, investors could be exposed to dramatic price swings outside of typical market hours when protections are lacking.
That might be particularly damaging for unsophisticated investors who think tokenized shares behave much like regular stocks.
Maybe they don’t.
SEC proposal could reshape how investors trade stocks
The proposal from the SEC is still pending and tokenized equities are not expected to replace regular equity markets anytime soon.
But the dispute underscores a widening rift on Wall Street over how far financial markets should go toward crypto-style infrastructure.
Advocates say tokenization may revolutionize investment, making buying and selling faster, easier and 24/7.
Critics say the convenience may come at a cost.
For many investors, the risk may not be the blockchain technology itself. The bigger difficulty may be uncertainty about what is actually being bought and sold.
An equity-linked token may, at first sight, look like a controlled share. But if it does not have the same legal protections, shareholder rights or regulatory monitoring, investors may only find out about those disparities at times of market stress.
That’s precisely what Burry and other doubters are worried about.
Retail investors already face a lot of complexity and fast-moving financial markets. Bringing crypto-style trading frameworks into traditional equities would make those markets even more difficult to manage.
The idea of 24-hour trading in stocks might sound like a breakthrough.
But skeptics fear investors may someday find that convenience and safety are not always one and the same.
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