A New Loophole Just Proved You Don't Actually Own Your Shares – But the Blockchain Fix is Already Live on Solana
A startling finding from a 2025 Stanford Law Review paper confirms what financial insiders have long known: most retail investors possess no direct legal title to the stocks they buy. Instead, they hold a contractual claim called a "security entitlement" against their broker, which in turn holds an interest in an omnibus account registered under the name Cede & Co. – the Depository Trust & Clearing Corporation's (DTCC) nominee. This 1970s-era structure, designed to eliminate paper certificates, has created a $53 trillion tower of counterparty risk.
This "ownership loophole" is not just a technicality; it has real costs. The Stanford study estimates the hidden annual cost for the average retail portfolio at 2.4%, stemming from share lending, settlement float, and arbitrage. More critically, it exposes investors to systemic risk, as seen in broker-dealer failures where customers recovered only 68 cents on the dollar after 18-month waits.
The New Ownership Paradigm: Blockchain tokenization shifts the "golden source" of ownership from the centralized DTCC ledger to a decentralized, transparent blockchain. This allows a registered transfer agent to directly record shareholder identity and rights, eliminating the Cede & Co. abstraction layer.
🏛️ Regulatory Innovation | 📚 Data: Stanford Law Review, DTCC, Solana Foundation
"The current system is a 1970s mainframe wrapped in duct tape. Tokenizing legal title on a public blockchain is the first real upgrade since the paper certificate era. It directly addresses the counterparty risk and opacity that the Stanford paper so clearly quantifies."
The Ownership Loophole & Live Solution: Key Metrics
Sources: Stanford Law Review 2025, DTCC, Solana Foundation, Issuer Filings
Deconstructing the "Ownership Loophole": Entitlement vs. Title
The core of the issue is the legal structure of "street name" registration. When you buy a share of Apple through your broker, a chain of custody is created where legal title never reaches your name:
- You → Broker: You receive a "security entitlement" – a contractual right against your broker.
- Broker → Clearing Corp: Your broker holds an entitlement at a clearing corporation.
- Clearing Corp → Cede & Co.: Ultimate legal title is registered in the name of Cede & Co., the DTCC's nominee.
You are a beneficial owner, not the record owner on the company's official cap table. This abstraction layer creates friction for corporate actions like voting and dividends, adds settlement latency (T+2), and represents a systemic single point of failure.
Retail investors are unsecured creditors of their broker, not direct legal shareholders. The "ownership loophole" is the foundational, legalized abstraction of the modern market. Tokenized equity solves this by recording legal title directly on-chain, making the investor the statutory shareholder of record.
The Hidden Cost & Systemic Risk of the Street-Name System
The Stanford study quantifies the hidden annual cost of this structure at approximately 2.4% for the average retail account. This cost is extracted through mechanisms like:
- Securities Lending: Brokers can lend out "your" shares from the fungible pool without explicit consent, generating revenue they don't share with you.
- Float & Settlement Arbitrage: The T+2 settlement period allows intermediaries to profit from the float.
- Operational & FX Fees: Opaque charges layered throughout the chain of intermediaries.
The systemic risk is even more significant. The pooling of shares facilitates the creation of phantom supply, which can enable practices like naked short selling. The SEC's 2024 report noted failure-to-deliver spikes of 1.9 billion shares in single settlement cycles, often clustered around dividend dates—a sign of dividend-tax arbitrage enabled by the nominee structure.
Critical Context: This isn't a theoretical debate. A May 2025 SEC staff FAQ greenlit the use of a blockchain as a transfer agent's official Master Securityholder File. This is the regulatory foundation being used by platforms like Superstate and standards like Solana's TES-25.
Mechanics of the Fix: Direct Issuance & The TES-25 Standard
The model, demonstrated by Superstate's "Direct Issuance Program" and live implementations like Galaxy Digital (GLXY) on Solana, involves a fundamental shift. The blockchain becomes the transfer agent's ledger, and the token in a KYC-verified wallet is the direct legal share.
On Solana, the Tokenized Equity Standard (TES-25) provides the technical framework. Unlike synthetic products, TES-25 is a Solana-native program embedding legal compliance, featuring:
- Mint-Cap Oracle: Supply is hard-capped to the company's outstanding shares, audited quarterly.
- Corporate-Actions Engine: Dividends, splits, and votes are executed automatically via smart contracts and oracles like Pyth.
- Native Compliance Layer: KYC (via integrations like Cipher-Pass) and transfer restrictions are enforced at the token-program level.
| Feature | Traditional Model (DTCC Street-Name) | Tokenized Model (e.g., TES-25 on Solana) |
|---|---|---|
| Legal Title Holder | Cede & Co. (DTCC Nominee) | Wallet Holder (Direct Owner) |
| Settlement Time | T+2 (2 Business Days) | ~0.4 Seconds |
| Trading Hours | 9:30 AM - 4:00 PM ET, Weekdays | 24/7/365 |
| Corporate Action Efficiency | Manual, Broker-Mediated, Slow | Automated, On-Chain, Instant |
| Hidden Cost / Counterparty Risk | ~2.4% annual cost, High Systemic Risk | ~0%, Drastically Reduced |
The results are tangible. When early TES-25 adopter MicroAlgo Ltd. (MLGO) declared a dividend in November 2025, 97.4% of tokenized holders received it instantly in USDC, compared to a T+3 wait and only 68% participation for traditional holders.
Tokenization in Action: Live On-Chain Metrics (TES-25)
Performance from early TES-25 adopters vs. DTCC averages. Source: SolanaFM, issuer reports.
The 2026 Roadmap: From Live Issuance to Hybrid Markets
While primary issuance is operational, the evolution towards a mature, hybrid market structure is mapped for 2026. Key developments include:
1. Expanding Distribution: Exchanges like Backpack plan to list these native tokenized equities. Nasdaq CEO Adena Friedman has expressed interest in a "parallel TES-25 segment" for 24/7 trading, targeting late 2026.
2. Traditional Infrastructure Adaptation: The DTCC itself is piloting a DLT node for tokenized collateral, signaling an inevitable bridge between legacy and new systems. Nasdaq's filing to support tokenized securities trading assumes this bridge will be ready.
3. Regulatory Momentum: The bipartisan TOKEN Act of 2025 seeks to make the SEC's digital asset sandbox permanent and raise tokenization limits, having passed a key committee vote 42-11.
4. Corporate Law Alignment: The Delaware Corporate Law Section published a model by-law in 2025 recognizing on-chain ledgers as a valid shareholder register, removing a major legal hurdle.
The "ownership loophole" debate has moved from academic theory to live solution. With SEC-registered shares on Solana, a clear regulatory pathway, and roadmaps from Nasdaq and the DTCC, the transition to direct, tokenized ownership is in its early operational phase. The 2026 market will be defined by the efficiency and transparency of the bridge being built between the legacy street-name system and the new world of wallet-native equity.
FAQ: Understanding the Share Ownership Loophole & The Blockchain Fix
What is the "ownership loophole" that proves I don't own my shares?
The "loophole" is the standard market practice of "street name" registration. When you buy stock, legal title is held in the name of Cede & Co. (the DTCC's nominee), not yours. You become a beneficial owner with contractual rights against your broker, not the direct legal owner on the company's official shareholder list. This creates layers of abstraction and counterparty risk.
How do tokenized shares on Solana/Ethereum fix this?
A registered transfer agent (like Superstate) uses the blockchain as the official Master Securityholder File, a practice approved by the SEC in 2025. The token in your KYC-verified wallet represents direct legal title, bypassing the Cede & Co. layer entirely. Standards like Solana's TES-25 embed compliance and corporate action automation directly into the token's program.
Is this technology just for initial sales, or can these tokenized shares be traded?
Primary issuance is live now (e.g., Galaxy Digital, MicroAlgo). For secondary trading, infrastructure is rapidly developing. Exchanges like Backpack plan compliant trading, and Nasdaq aims for late 2026 support. Any trading venue must operate within existing securities regulations (as a broker-dealer or Alternative Trading System), applying all standard market rules to the on-chain asset.
About the Author: Albert Brown
Albert Brown is a cryptocurrency investor and journalist specializing in regulatory technology (RegTech) and the tokenization of real-world assets (RWA). With a background in fintech law, he analyzes the convergence of securities regulation, blockchain infrastructure, and financial market structure, focusing on how decentralized technology is reshaping traditional finance from within.
Disclaimer: This content is for informational purposes only and does not constitute financial, legal, or investment advice. Tokenized securities are complex instruments subject to stringent regulations and technological risks. Always conduct your own thorough research and consult with qualified financial and legal advisors before making any investment decisions.