FILE PHOTO: A smartphone with displayed Coinbase logo and representation of cryptocurrencies are placed on a keyboard in this illustration taken, June 8, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Elizabeth Howcroft

(Reuters) -A group representing the world's biggest stock exchanges has called on securities regulators to clamp down on so-called tokenised stocks, arguing that the blockchain-based tokens create new risks for investors and could harm market integrity, a letter seen by Reuters shows.

Tokenised equities are blockchain-based tokens created to represent shares in companies. The tokens represent ownership of the securities but investors do not become shareholders in the underlying company.

Crypto exchange Coinbase and broker Robinhood are among those making a push into the nascent sector that could shake up the securities investing landscape.

Proponents say tokenised equities can cut trading costs, speed up settlement and facilitate around-the-clock trading.

The World Federation of Exchanges (WFE), in a letter sent to three regulatory bodies last Friday, said it was concerned the tokens "mimic" equities without providing the same rights or trading safeguards. The letter was sent to the U.S. Securities and Exchange Commission's (SEC) Crypto Task Force, the European Securities and Markets Authority (ESMA), and global securities watchdog IOSCO's Fintech Task Force.

"We are alarmed at the plethora of brokers and crypto-trading platforms offering or intending to offer so-called tokenised U.S. stocks," the WFE, a UK-based industry association for exchanges and clearing houses, said in the letter seen by Reuters.

"These products are marketed as stock tokens or the equivalent to stocks when they are not."

The WFE declined to name which brokers and trading platforms it was referring to.

Issuers of stock - the companies whose stock is being mimicked - could suffer reputational damage if the tokens fail, the WFE said.

The WFE's position reflects the concerns of market infrastructure players and the broader financial sector, WFE CEO Nandini Sukumar told Reuters, adding that some share issuers had expressed concerns to their exchanges.

Regulators should apply securities rules to tokenised assets, clarify legal frameworks for ownership and custody, and prevent them being marketed as equivalent to stocks, the WFE said.

The SEC, ESMA and IOSCO did not immediately respond to requests for comment.

An SEC commissioner said in July tokenised securities must still meet securities regulations.

In June, trading platform Robinhood launched tokenised equities for EU customers, and said it also planned to offer tokens representing shares in privately-held companies, including OpenAI.

OpenAI said in response that it did not endorse the tokens and was not involved in the offering.

Coinbase is seeking permission from the SEC to offer tokenised equities to its customers, Reuters reported in June.

Robinhood and Coinbase did not immediately respond to requests for comment.

(Reporting by Elizabeth Howcroft; Editing by Tommy Reggiori Wilkes, Bernadette Baum and Susan Fenton)