Tokenization Creates New Intermediary Layer: Alpaca Dominates Market
Tokenization, touted as a way to eliminate stockbrokers and intermediaries in the financial system, has instead created a concentrated layer of brokerage under its decentralized facade. Alpaca, a self-clearing broker-dealer founded in 2015, says it custodies more than $1.5 billion of shares backing tokenized equities, which represents roughly 94% of the market. This dominance raises concerns about the decentralization and security of tokenized stocks.
The SEC has warned that third-party stock tokens can expose investors to additional ownership and intermediary risks, as they may not hold the underlying rights and entitlements associated with the shares. For example, holders of most Alpaca-backed products currently receive no voting rights and no direct dividend entitlement. The Broadridge governance work is a tacit acknowledgment that these protections don't yet travel with the token.
The biggest stress test for the tokenized stock market happened in June, when SpaceX priced the largest IPO in history and Binance sold more than $557 million in tokenized pre-IPO access through xStocks. However, the shares never arrived, and every buyer was refunded. The breakdown happened at the allocation layer where shares are sourced, upstream of Alpaca's custody desk.
The Depository Trust and Clearing Corporation (DTCC) is set to launch its Tokenization Service in October, which will let DTC-held securities be issued directly as tokens and converted back and forth between traditional and tokenized form. This move could effectively reorder the market and challenge Alpaca's dominance.