Publicly-traded stocks are finally moving from analog to digital with tokenized shares
The greater global conversation about the digital economy tends to over-emphasize crypto, which is only a fraction of the blockchain market’s market cap, while under-emphasizing tokenization. While crypto gained popularity as an initial digital tool born out of Decentralized Ledger Technology (DLT), it’s only one tool in the Blockchain ecosystem’s vast toolbox - and it has had its fair share of growing pains. However, that narrative imbalance is about to change as the tokenization of real-world assets explodes in use.
Tokenization is coming of age
Tokenization is best described as the process of taking a tangible “asset” and replicating it on a blockchain in the form of a “token,” which becomes a digital representation, even a proxy, of the asset.
Tokenization isn’t anything new because blockchain technology isn’t new. In fact, for the past decade, global industries have been leveraging the immutability and seamlessness that DLT provides everywhere, from supply chain to healthcare. Specifically, the $9.3 trillion alternative asset market has benefited from the emergence of security tokens. Created and managed on-chain, security tokens enable new forms of fully-regulated financing and investor engagement in private market assets that were once off-limits to the majority of investors.
While security tokens have already proven to combine the best of traditional markets and blockchain technology, the financial sector hasn’t fully embraced the potential of these digital tools and the wealth of opportunities they offer for retail and institutional investors alike. But with an improved settlement process, broader reach and accessibility, and an established regulatory framework, security tokens have become an early blueprint for major financial institutions to pursue and fund promising DLT-based programs within their organizations.
The Tokenization Boom is Happening Now
This growing interest and funding, alongside the availability of regulated tokenized asset exchanges, has created an environment ripe for an explosion of private and public asset tokenization.
BlackRock CEO Larry Fink said, "the next generation for markets, the next generation for securities, will be tokenization of securities."
Over the past few months, we’ve seen financial institutions and official organizations not just trialing, but issuing shares, credit notes, municipal bonds, development bonds, funds, commercial paper, and even gold on blockchains like Polygon. Cité Gestion, a Swiss private bank managing billions in assets, recently tokenized shares. In contrast, the Swiss city of Lugano issued a digital bond that can be traded on the regulated SDX exchange and the SIX Swiss Exchange. Brazil’s second-largest private bank, Bradesco, also launched its first tokenized credit note backed by the Central Bank of Brazil. In the U.S., investment management firm Hamilton Lane opened the first of three tokenized funds.
Traditional exchanges want in on the tokenization boom as well. Major exchanges and asset managers like Nasdaq, Goldman Sachs, JP Morgan, HSBC, and others are already building the foundations for a tokenized future, including end-to-end tokenized asset infrastructure on permissioned and public blockchains that support the digital life cycle across multiple asset classes.
There is a concerted and global effort to move from analog to digital finance. But while these initial efforts are impressive and necessary, the momentum is all moving towards the “holy grail” of tokenized assets - tokenized shares.
Tokenized Shares offer all the regulation of traditional stocks without all the inefficiencies
Tokenized shares refer to the digital tokens that represent shares in a company - public or private. Similarly to traditional shares, tokenized shares represent ownership in a company and entitle the holder to a portion of the company’s profits and voting rights. However, because tokenized shares are the digital version of traditional shares, they are more readily tradable since they can be bought and sold on digital asset exchanges without a traditional stockbroker.
Additionally, tokenized shares can be divided into fractional ones, allowing for more flexible and affordable investment opportunities. Furthermore, tokenized shares can be traded 24/7, whereas traditional stock exchanges have specific trading hours. This allows for greater liquidity and potentially faster execution of trades.
There are several reasons why a publicly traded company may want to tokenize all or a portion of its shares:
Attracting new investors: Tokenization can attract a new class of investors interested in blockchain technology and digital assets. This can potentially increase demand for a company’s shares and drive up the share price.
Innovation: Tokenization can be seen as an innovative way for a company to demonstrate its commitment to staying at the forefront of technology and financial innovation.
Data transparency: Data is stored and accessed securely on the blockchain, providing credible insights to investors.
Regulated and secure: Tokenized shares, like security tokens, are deemed by regulators as securities, which provides legal protection for investors. SEC-registered platforms like INX already enable regulated trading of cryptocurrencies, security tokens, and tokenized shares securely.
Shorter settlement time – Tokens are traded 24/7 with a record that can be updated in minutes, compared to T+3-day settlement times. We have proven this in equity markets, and our thesis is that it will hold for all markets.
Operational efficiency – Mostly manual processes, such as compliance and corporate action, can be “automated” via smart contracts. Plus, tokenization can reduce transaction costs associated with buying and selling traditional shares, such as brokerage and transfer fees.
Flexibility – Tokens can be customized with unlimited share and debt. Plus, investors have more payment options, including crypto. Additionally, companies have the flexibility to either offer a portion of their shares or all of them on-chain - creating a solid hybrid model for tokenized shares.
What’s Next for Tokenized Shares
After the period of volatility the crypto market experienced in 2022, with the fall of massive platforms like FTX, Voyager, and others, tokenized shares may be the answer to investors wanting to participate in the explosive growth of the digital economy, but understandably weary of unregulated crypto. Converting a familiar, relatively stable, pre-regulated asset (publicly traded stock) into a blockchain-based tokenized share is attractive to today’s investors and a welcomed and inevitable next step in digitizing the global financial system.
In the near term, more and more companies will explore some version of share tokenization, with hybrid models - tokenization of just a portion of a company’s total shares on a regulated platform - becoming feasible options. Because financial firms of all sizes realize that tokenization solutions leveraging the power of blockchain hold the promise of being more productive, more democratized, and ultimately more valuable for all.
By Itai Avneri, Deputy CEO & COO of INX