Author: Vlad Tenev, Co-founder and CEO of Robinhood

Translation by: Hu Tao, ChainCatcher

What exactly happened? How can we ensure that such events do not happen again?

Five years ago today, Robinhood and other brokerages were forced to stop buying several "meme stocks," the most notable being GameStop. This was one of the most bizarre and attention-grabbing stock market crashes in recent years.

The fundamental reason for the trading halt was a complex set of clearinghouse risk management rules designed to mitigate the risks associated with the two-day settlement period for U.S. stock trading at the time. These rules required brokerages to deposit large sums of money to reduce the risk during the period from trading to settlement for "meme stocks." What happens when slow, outdated financial infrastructure combines with unprecedented trading volumes and volatility for a few stocks? Huge deposit requirements, trading restrictions, and millions of dissatisfied customers.

Retail investors wanting to buy GameStop stock were understandably furious. In their eyes, Robinhood went from hero to villain. Just a month into my role as CEO of Robinhood, I faced my first major crisis. After many team members worked tirelessly for 72 hours to address the urgent situation and raised over $3 billion to bolster capital reserves, we finally had time to calm down and assess the situation. I vowed to do everything in my power not only to enhance Robinhood's ability to respond in similar situations but also to drive improvements across the entire system to ensure that such events do not happen again.

We strongly advocated for real-time settlement of U.S. stock trading, ultimately reducing the settlement period from two days (T+2) to T+1—arguably the most significant achievement during Gary Gensler's tenure at the U.S. Securities and Exchange Commission (SEC), despite other aspects of that period being less than favorable.

However, in today's 24-hour news cycle and real-time market response era, a T+1 settlement period is still too long, especially when the actual settlement period is T+3 on Fridays and T+4 during long weekends. Our pursuit of real-time settlement continues, but in the traditional stock market, achieving real-time settlement has been challenging due to the need to manage numerous legacy stakeholders. Clearly, we need a new approach.

Tokenization has emerged as a solution. Tokenization refers to the process of converting assets like stocks into tokens that exist on a blockchain. In addition to numerous advantages such as cost reduction, native splitting, and 24/7 trading, tokenizing stocks on-chain allows them to benefit from the real-time settlement characteristics of blockchain technology. The absence of lengthy settlement periods significantly reduces systemic risk and alleviates pressure on clearinghouses and brokerages, enabling customers to trade freely anytime and anywhere.

We have already seen the feasibility of this approach. In Europe, Robinhood has launched over 2,000 tokens representing U.S.-listed stocks. These tokens allow European traders to invest in U.S. stocks and receive dividend income. In the coming months, we plan to open up 24/7 trading and decentralized finance (DeFi) services, allowing investors to self-custody their stock tokens and engage in lending, staking, and other operations.

As the advantages become increasingly apparent, I believe it is imperative for the U.S. to embrace this technology. We have already seen some progress: major U.S. exchanges and clearinghouses recently announced plans for stock tokenization.

However, all these efforts will be in vain without a clear regulatory framework. Fortunately, we now have an excellent opportunity. The current leadership of the SEC is actively embracing innovation and promoting tokenization experiments. Additionally, Congress is actively reviewing the CLARITY Act, an important piece of cryptocurrency legislation that requires the SEC to continue advancing this technology and establish modernized rules for stock tokenization. This act will ensure that future SEC leadership does not abandon or overturn the progress made by the current SEC.

By collaborating with the SEC and promoting the establishment of reasonable U.S. stock tokenization guidelines through CLARITY, we can work together to ensure that trading restrictions like those in 2021 do not happen again. Let’s seize the opportunity to fully unlock real-time settlement for retail traders.

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