The team at Security Token Market (STM) has released their first-ever tokenized stock report.
STM notes that most industry participants or observers are familiar with security tokens, or digitized assets in equity, fixed income, real estate, investment fund shares, commodities, and structured products “traded and held on a blockchain, but not as familiar with tokenized stocks.”
STM also mentioned in a blog post that a tokenized stock is “a digital asset that trades on various licensed exchanges using blockchain technology.”
In most cases, they are “a type of derivative that tracks the performance of an underlying stock, such as Apple (NYSE: AAPL) or Tesla (NASDAQ: TSLA),” the company explained while adding that by purchasing one share of tokenized stock, you “don’t have any ownership in the underlying equity.” Instead, you own “a derivative collateralized by a share of the underlying stock that tracks its performance,” the STM team clarified.
They added that tokenized stocks trade on several platforms — the most prominent being FTX and Bittrex.
STM continued:
“To become eligible to purchase tokenized shares of a company on these exchanges, one must pass the regulatory requirements including KYC and AML compliance. At this time, only international investors approved to trade on the respective exchanges can purchase tokenized stocks.”
They added:
“Even though the token you purchase is a mirrored asset of the underlying equity, most platforms ensure that investors are entitled to the same dividend payout if the true equity shares pay dividends. While FTX and Bittrex provide the medium to purchase these shares, they do not custody any of the tokenized stock.”
Brokerage firms such as CM-Equity and Digital Assets AG usually tokenize these stocks. Notably, investors may redeem the tokenized stock for “the actual underlying stock.”
STM’s blog post also confirmed that not every stock that is traded on traditional markets is “yet available for purchase via a tokenized manner.”
Although it varies based on the exchange, most mega-cap companies like Apple ($AAPL), Google ($GOOG), Facebook ($FB), and Tesla ($TSLA) are “available to invest in via their tokenized stock.”
They also mentioned tha thte regulatory status of trading tokenized stocks is “not fully clear.”
Following the crypto craze of 2018, the Securities and Exchange Commission (SEC) “cracked down on the industry and classified many coins and offerings that went public via an ICO as securities.”
This would mean that they “should be regulated as such and should be subject to extreme scrutiny,” the STM blog noted while adding that if this were the case, the platform that trades these assets would have “to be registered with the SEC as a national securities exchange.”
But tokenized stock platforms “pushed back on this notion and argued that they were trading derivatives, not stocks, so they shouldn’t be subject to the same scrutiny as platforms that trade actual securities,” the STM blog added.
They also mentioned:
“Such determination remains unresolved. This regulatory grey area leaves the door open for potential risks for both investors and exchanges. Even still, hundreds of thousands of investors have used tokenized stocks to diversify their investment portfolios.”
Advantages of tokenized stocks, according to STM:
- 24/7 live and nonstop trading — 3 AM on a Saturday? Yup. Noon on Christmas? Yes, please. 7 PM on New Year’s Day? Why not.
- Fractionalized stock ownership — Investors can buy ½ a share, ¼ share, or even0.7204825 shares of $TSLA!
- Worldwide Access — International investors can get their hands on assets that may have originally been tough to invest in.
- Instant-settlement — Traditionally, in the public-equity markets, investors have to wait up to two business days (T+2) for settlement to complete — tokenized stocks are virtually instant due to the nature of blockchain technology!
Disadvantages:
- Non-transparent asset collateral — In buying a derivative product, “one should expect — and demand — full transparency on the holding of the underlying asset.” Unfortunately, this is “not the case with the tokenized stocks on the market.”
- There is “no private placement documentation, proof of holding, or insight into the settlement process.” This certainly “poses a risk, as investors cannot be certain that collateral requirements have been met.” This has “historically been the main cause of regulatory scrutiny by regulators in this asset class.”
- No voting rights as a shareholder — While you are buying a digital asset that does not have voting rights, “the stock providers– like CM-Equity and Digital Assets AG– offer stock redemption opportunities where investors can use their tokenized stocks as a coupon for the true equity.”
- Regulatory grey area — Still “awaiting certain flags from regulatory agencies worldwide.”
For more details on this update, check here.
