Industry Opinion
Is Financial World Entering Tokenized Era?
By Nironjan Roy, CPA, CMA — Certified Anti-money laundering Specialist and Banker
After stablecoins, cryptocurrency tokens, tokenized money market products, and tokenized bank deposits, shares of listed companies are also expected to be tokenized soon, bringing a revolutionary change to the financial industry.
According to media reports, the SEC (Securities & Exchange Commission) has made a milestone decision by clearing the path for trading venues to offer tokenized stocks in the U.S. through two five-year innovation exemptions, which will help companies prepare to launch tokenized stock trading platforms.
However, the SEC’s decision is not a clear permission, as it also imposes conditions. The SEC's decision to allow tokenized stock carries the strictest safeguards for corporate issues. The conditions state that, before allowing a third party to begin trading tokenized stocks, the venue must give the issuing company 30 days' notice. If that company objects, the venue cannot proceed with offering tokenized stock trading. This SEC decision will allow temporary exemptions for authorized trading venues and market makers from certain stock-trading rules that previously restricted trading in digital tokens representing shares of listed companies. Tokenized stocks trade on the blockchain, the digital ledger system of cryptocurrency; however, the option to trade tokenized stock on the blockchain is limited to some overseas investors. After the SEC's decision on tokenized stocks, stock trading will adopt a new framework in which a tokenized stock gives its holder the same rights as a regular share.
Tokenized stocks are digital tokens that represent shares of public companies and are traded on stock exchanges. Tokenized stocks may seem like a new concept, but these products are not new, because tokenized derivatives that track share prices without ownership rights already exist in the stock market. When tokenized stocks are traded on blockchain platforms, the tokens will confer all the rights of shares to tokenized shareholders, including dividend payouts and the ability to vote on the shareholder agenda.
Tokenized stocks, when officially launched, will have multiple advantages. The tokens will trade on the blockchain platform, allowing round-the-clock trading; i.e., tokenized stocks can be traded twenty-four hours a day, seven days a week, whereas traditional stocks trade only during daily trading hours.
Tokenized stocks will give international investors access to the U.S. market, so people worldwide can invest in and trade tokenized stocks in the U.S. Supporters of tokenized stocks believe this option will open the world’s deepest and most liquid capital markets to investors worldwide. They also argue that a blockchain platform for trading tokenized stocks could expedite trade processing by removing middlemen, which would not only reduce transaction costs but also increase returns for investors.
Some also think that not only tokenized stocks but any form of tokenized assets would help the markets function smoothly and uninterruptedly under pressure. As reported in the media, some bank executives have said a tokenized money-market fund can serve as an instantaneous collateral facility that can move instantly to back up trades during stressful situations.
Tokenized stocks are expected to be traded on some blockchain platforms. Among others, Robinhood, Coinbase, Kraken, and Gemini have been offering blockchain-based versions of U.S. Stocks and Exchange-traded funds to investors outside the U.S. Even Asset Managers, including BlackRock and JPMorgan Chase Bank’s asset management wing, have launched tokenized money-market funds, although these products are mainly limited to institutional and high-end investors.
The SEC decision will now pave the way for common people to trade tokenized stocks. However, there are some opposing views against rapidly tokenizing capital market instruments, as some opponents argue that trading stocks during off-hours or low-volume periods, which is the main feature of tokenized stocks, may leave prices vulnerable to excessive volatility and cyber risks.
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Some corporate executives have also opposed this move, arguing that tokenizing stock may allow traders to bypass U.S. regulation, interfere with a company’s ability to raise capital, and even deny investors the same shareholder rights. Against corporate executives’ view, proponents of tokenized stock argue that companies cannot control the financial products created from shares once they become publicly traded instruments.
The stock market is a place where manipulation is a high risk; therefore, stringent compliance practices and extremely high levels of surveillance are in place to prevent manipulative attempts. As a self-regulatory organization, the stock exchange itself ensures standardized surveillance and monitoring of market activity. In addition, the SEC oversees market operations. So, manipulative and fraudulent activity in the regular stock exchange is very difficult. However, the blockchain platform where tokenized stock will be traded may not have these preventive measures in place. As a result, the capital market may become discriminatory: traditional stock trading goes through stringent compliance and surveillance during normal trading hours, while tokenized stock may operate under a more lenient process around the clock. Nevertheless, demand for tokenized capital market products is rapidly growing, and with this in mind, the country’s conventional stock exchanges are working hard to introduce tokenized stock trading.
As reported in the media, the two largest stock exchanges, Nasdaq and the New York Stock Exchange, have been actively working on tokenized stocks. Moreover, many Wall Street firms are also eager to move ahead with tokenized stocks. So, the transformation is underway, and the day is not far away when share trading on blockchain platforms becomes the new reality for investors, and the entire financial market takes a tokenized shape.
Tokenizing financial products began a few years ago, and the expanding cryptocurrency market has created scope for more financial products and services to take tokenized forms. Many companies have already introduced tokenized treasury products. Some money market funds have been tokenized, and those tokens are being traded in the market.
Crypto companies are trying to obtain a banking license so that they can offer tokenized deposits. Many commercial banks have begun introducing tokenized deposits, which are expected to launch officially in the coming year. Now, tokenized stocks are coming to the market, which may reshape the entire financial industry. If this initiative receives a positive response from the stakeholders, particularly the issuer companies, fund managers, and investors, then it can be said that tokenized financial products are going to be the new industry dimension.
Because of multiple advantages, tokenized financial products are gaining popularity, primarily in the U.S., and will subsequently be followed by other markets around the world.
The stock market is a place where manipulation is a high risk; therefore, stringent compliance practices and extremely high levels of surveillance are in place to prevent manipulative attempts. As a self-regulatory organization, the stock exchange itself ensures standardized surveillance and monitoring of market activity. In addition, the SEC oversees market operations. So, manipulative and fraudulent activity in the regular stock exchange is very difficult. However, the blockchain platform where tokenized stock will be traded may not have these preventive measures in place. As a result, the capital market may become discriminatory: traditional stock trading goes through stringent compliance and surveillance during normal trading hours, while tokenized stock may operate under a more lenient process around the clock. Nevertheless, demand for tokenized capital market products is rapidly growing, and with this in mind, the country’s conventional stock exchanges are working hard to introduce tokenized stock trading.
As reported in the media, the two largest stock exchanges, Nasdaq and the New York Stock Exchange, have been actively working on tokenized stocks. Moreover, many Wall Street firms are also eager to move ahead with tokenized stocks. So, the transformation is underway, and the day is not far away when share trading on blockchain platforms becomes the new reality for investors, and the entire financial market takes a tokenized shape.
Tokenizing financial products began a few years ago, and the expanding cryptocurrency market has created scope for more financial products and services to take tokenized forms. Many companies have already introduced tokenized treasury products. Some money market funds have been tokenized, and those tokens are being traded in the market.
Crypto companies are trying to obtain a banking license so that they can offer tokenized deposits. Many commercial banks have begun introducing tokenized deposits, which are expected to launch officially in the coming year. Now, tokenized stocks are coming to the market, which may reshape the entire financial industry. If this initiative receives a positive response from the stakeholders, particularly the issuer companies, fund managers, and investors, then it can be said that tokenized financial products are going to be the new industry dimension.
Because of multiple advantages, tokenized financial products are gaining popularity, primarily in the U.S., and will subsequently be followed by other markets around the world.