CNA Explains: What are tokenised stocks?

Key Concepts

• Tokenized Securities: Digital representations of traditional assets (like stocks, bonds) on a blockchain.
• Blockchain: A decentralized, distributed ledger technology that underpins cryptocurrencies and tokenized assets.
• Digital Wallet: A software or hardware device used to store digital assets, including cryptocurrencies and tokenized securities.
• Fractional Ownership: The ability to own a small portion of an asset, rather than the entire asset, enabled by tokenization.
• Instant Settlement: The immediate completion of a trade, contrasting with traditional multi-day settlement periods.
• Price Exposure: Gaining financial benefit from the price movements of an asset without holding direct ownership or associated rights (like voting).

Introduction to Tokenized Securities

Digital innovation is transforming traditional stocks by integrating them with blockchain technology, the same foundation used for cryptocurrencies. This has led to the emergence of tokenized securities as a novel method for investors to engage in trading company shares. While offering new opportunities, this nascent field is characterized by early adoption rates and evolving regulatory landscapes, which introduce inherent risks.

Mechanism of Tokenized Securities

Tokenized securities are essentially traditional stocks or other financial assets represented as digital tokens on a blockchain. These digital tokens are stored and managed within a digital wallet, akin to how cryptocurrency coins are held. Each token is designed to mirror the price of an underlying real-world share. In principle, this system allows for direct digital trading between investors, bypassing the need for traditional stock exchanges.

Key Advantages and Benefits

1. Faster Settlement and 24/7 Trading: Traditional stock trades typically take approximately two days to settle. In contrast, tokenized securities could theoretically achieve instant settlement, enabling continuous 24/7 trading beyond conventional stock market hours.
2. Fractional Ownership and Accessibility: Tokenization facilitates fractional ownership, allowing investors to purchase tokens that represent small portions of company shares for a fraction of the price of a full share. This mechanism significantly lowers investment barriers, boosts portfolio diversification, and provides emerging market investors with easier access to global stocks without the necessity of foreign brokerage accounts.
3. Benefits for Financial Institutions: For major banks and financial firms, the promise of faster settlement means less capital is locked up in processing, thereby freeing up funds for other business uses and improving overall capital efficiency.

Current Adoption and Examples

The adoption of tokenized securities is gaining traction across various platforms:

• Platforms like Robinhood and eToro are already offering tokenized U.S. stocks in Europe.
• Major cryptocurrency exchanges such as Coinbase, Gemini, and Kraken are actively exploring tokenization.
• Beyond stocks, major banks are experimenting with tokenizing bonds and funds, indicating a broader application of this technology within traditional finance.

Risks and Concerns

While the crypto industry promotes tokenized securities as a significant leap forward, traditional financial firms and regulatory experts are raising "alarm bells" due to potential risks to investors and market stability. A key concern highlighted is the lack of direct ownership rights and associated privileges. As stated in the transcript, "You do not have a voting rights as a holder of the tokenized assets," emphasizing that these assets primarily offer "price exposure without actual ownership." This means investors can benefit from price movements but lack the corporate governance rights typically associated with direct share ownership.

Regulatory Landscape

Recognizing the nascent stage and potential implications of tokenized securities, regulators in key financial hubs such as Singapore, Hong Kong, and Europe are actively working to clarify and establish comprehensive rules and frameworks around these digital assets.

Conclusion and Future Outlook

Despite being in its early stages, the maturation of regulatory frameworks could position tokenized assets as a crucial bridge between traditional finance and the burgeoning blockchain economy. For everyday investors, this could translate into lower trading costs and increased convenience. However, it also introduces new risks that require careful navigation, underscoring the need for robust regulatory clarity and investor education.