Author:Vlad TenevCo-founder and CEO of Robinhood
Translated by: Hu Tao, ChainCatcher
What exactly happened? And how can we ensure that such incidents do not happen again?
Five years ago today, Robinhood and other brokers were forced to stop customers from buying several "meme stocks," most notably GameStop. This was one of the most bizarre and attention-grabbing stock market crashes in recent years.
The fundamental reason for this trading halt lies in a complex set of clearinghouse risk management rules designed to mitigate the risks associated with the two-day settlement cycle for U.S. stock trades at the time. These rules require brokers to deposit large amounts of capital to reduce the risk associated with "meme stock" trades during the settlement period. What happens when a slow and outdated financial infrastructure is combined with unprecedented trading volumes and volatility in just a few stocks? The result is massive deposit requirements, trading restrictions, and millions of dissatisfied customers.
Retail investors who wanted to buy GameStop stock were naturally furious. In their eyes, Robinhood had transformed from a hero into the villain. Just one month into my role as CEO of Robinhood, I was already facing the first major crisis of my tenure. After many team members worked nonstop for 72 hours to address the urgent situation and raised over $3 billion to replenish our capital reserves, we finally had a moment to pause and assess the situation. I vowed to do everything in my power not only to improve Robinhood's ability to respond to similar situations in the future, but also to drive broader systemic improvements to ensure that such events never happen again.
We strongly advocate for real-time settlement of U.S. stock trading, ultimately shortening the settlement cycle from two days (T+2) to T+1. This can arguably be considered the most significant achievement during Gary Gensler's tenure as the head of the U.S. Securities and Exchange Commission (SEC), despite other aspects of that period being largely regrettable.
However, in today's era of 24-hour news cycles and real-time market reactions, the T+1 settlement cycle is still too long—especially when the actual settlement cycle becomes T+3 on Fridays and T+4 during long weekends. Our pursuit of real-time settlement continues, but in traditional stock markets, achieving real-time settlement has consistently proven difficult 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 such as stocks into tokens that exist on a blockchain. In addition to numerous advantages such as reduced costs, native divisibility, and 24/7 trading, tokenizing stocks on a blockchain also enables them to benefit from the real-time settlement features of blockchain technology. Eliminating lengthy settlement cycles significantly reduces systemic risk and alleviates the pressure on clearinghouses and brokers, allowing clients to trade freely at any time and from any location.
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 enable European traders to invest in U.S. stocks and receive dividend income. In the coming months, we plan to introduce 24/7 trading and decentralized finance (DeFi) services, allowing investors to self-custody their stock tokens and engage in activities such as lending and staking.
As the advantages become increasingly evident, I believe it is inevitable for the United States to adopt this technology. We have already seen some progress: major U.S. exchanges and clearinghouses recently announced plans for stock tokenization.
However, without a clear regulatory framework, these efforts will all be in vain. Fortunately, we are now presented with an excellent opportunity. The current leadership of the U.S. Securities and Exchange Commission (SEC) is actively embracing innovation and promoting tokenization experiments. In addition, Congress is actively considering the "CLARITY Act," an important piece of cryptocurrency legislation that requires the SEC to continue advancing this technology and to establish modernized rules for stock tokenization. This bill will ensure that future SEC administrations will not abandon or overturn the progress made by the current SEC.
By working with the U.S. Securities and Exchange Commission (SEC) and advancing reasonable U.S. stock tokenization guidelines through CLARITY, we can collectively ensure that trading restrictions like those seen in 2021 do not happen again. Let's seize this opportunity to fully unlock real-time settlement for retail traders.