Ep. 758 Why Crypto Tokens Are Starting to Look Like Equity

Crypto tokens are starting to resemble equity economically even when they grant no formal ownership rights. Gabe Shapiro said Metal X focuses on “cybercorps”: ordinary businesses using on-chain workflows and tokenized securities for corporate finance, including fundraising and stock sales. He sees tokens and securities as a continuum. A token can create equity-like incentives through buybacks or revenue-linked spending without giving holders contractual rights to dividends, residual value, or governance, leaving open whether that economic arrangement should count as a security.

BNB illustrates the ambiguity: it provides utility on Binance’s platform, and recurring buybacks use a portion of revenue, but holders have no contractual right to them. The host also described Venice’s VVV model, in which subscription revenue is used to buy tokens on the open market; founder Eric Voorhees characterized the company’s equity as operational while incentives were directed toward the token. Shapiro expects businesses to keep combining tokens and equity, partly because token fundraising can come with fewer constraints. He now sees dual structures as a lasting category and wants them to treat communities more fairly, including by letting qualified token holders participate in periodic equity rounds.

The available structures range from token-only to dual token-and-equity to equity-only. Token-only projects can use legal entities to commit to rules and transparency without granting token rights, though those protections may be weaker than securities. At the other end, an equity business can tokenize shares and move more transparency, revenue flows, or governance on-chain. Metal X’s ACE rounds let investors use a project’s token to buy equity securities, while Pumpcade sold tokenized SAFEs for Pumpcade tokens, giving buyers tokens and an NFT representing an equity position. A token-focused project might instead redeem its token for equity, but a public redemption could require a securities-law exemption; Shapiro raised the possibility of seeking one-time SEC no-action relief.

Tokenization’s legal meaning depends on how directly the token represents ownership. A constitutive arrangement could make a token or on-chain record definitive under corporate documents—for example, bylaws could specify that particular NFTs record stock ownership. Securitize’s ERC-20 approach is loosely constitutive: the blockchain records units held, while a transfer-agent record identifies the owner. Pointer tokenization uses an on-chain record as an instruction to an off-chain transfer agent or mirrors a change already made on the agent’s books. By contrast, Robinhood, Coinbase, and similar models were described as tokens tied to an intermediary’s pool of stock, while more remote synthetic tokens may carry no rights to underlying shares; perpetuals can track a stock’s price without anyone necessarily owning it.

Shapiro said direct issuance and holding could reduce intermediaries and trust requirements, while third-party arrangements that buy shares and issue price-tracking tokens add intermediaries and trust risks. Multiple tokens representing the same stock could also split liquidity across separate pools. Issuers may object to unauthorized tokenization because it can fragment liquidity, raise insider-trading concerns, and reduce issuer control, although wider distribution can expand access and community. AMC objected that it had not consented to Robinhood’s derivative tokenized offering, while Robinhood’s legal representative said the model was permissible. Shapiro said the SEC’s described exemptive guidance requires notice to the issuer and allows an issuer objection to prevent use of the exemption.

If a token sold to raise capital is later found to be a security, the issuer may face rescission: repurchasing tokens at their initial sale price, sometimes with penalties. Rescission rights typically expire after one year, but enforcement can still lead to delisting, an injunction, or a shutdown; Library and Kik were cited as examples. Ranger Finance illustrated a possible contractual remedy: after alleged misrepresentations, token holders voted to receive USDC through smart contracts and burn their tokens. For research, Shapiro advised checking unlock schedules, investor wallets, and contract features such as mint functions, as well as investigating related entities and seeking their legal documents. Published incorporation papers may not show the operative rules if key terms are in unpublished bylaws.

Shapiro said his Gensler-era approach emphasized decentralization, cautious communications, few promises, and less discretionary management. The current environment is easier for builders because lawsuits have largely stopped, but he stressed that laws have not changed and reduced enforcement does not remove legal risk. He characterized the SEC’s approach as keeping promises within securities laws until they are fulfilled, which may encourage projects to avoid promises and rely on image, incentives, or reputation instead. He warned that weaker disclosure and less transparent commitments could erode trust. The Clarity Act’s prospects remained uncertain; Shapiro said its main effect would have been to give the CFTC authority over crypto spot markets, and without legislation a regulatory gap remains. He argued regulators need to understand crypto’s technology and culture, while noting that builders will continue to find ways forward even when government decisions slow them down.