Why companies are tokenizing their stocks

Key Concepts

• Tokenization: The process of converting securities into digital tokens on a blockchain.
• Distributed Ledger Technology (DLT): A decentralized database shared and synchronized across multiple participants, with blockchain being a prominent example.
• SPAC (Special Purpose Acquisition Company): A shell company that raises capital through an IPO to acquire an existing private company.
• Transfer Agent: An entity responsible for maintaining records of stock ownership and facilitating the transfer of shares.
• Beneficial Owner: The actual owner of an asset, even if it's registered in another's name.
• Native Representation: The token directly represents the underlying security, not a copy or derivative.
• Cap Table: A record of a company's ownership structure, detailing who owns how many shares.
• DTC (Depository Trust Company): A U.S. securities depository that holds stocks on behalf of brokerage firms.
• CD&Co: A subsidiary of DTC that holds stocks in its name.
• S4 Filing: A document filed with the SEC for mergers and acquisitions.

Securitize's Public Offering and the Value of Tokenization

Securitize has become the first company of its kind to go public through a SPAC deal with Caner Fitzgerald Equity Partners 2, valued at $1.25 billion. This development highlights the growing momentum behind tokenization and its potential to revolutionize capital markets. Carlos Domingo, founder and CEO of Securitize, explained the core concepts and benefits of tokenization.

Understanding Tokenization

Tokenization, in layman's terms, is the process of moving traditional securities, which reside on antiquated, siloed ledger systems, onto modern public distributed ledger technology like blockchain. This transition offers significant efficiencies by updating ledgers for every transaction, including stock trades, bond issuances, fund redemptions, interest payments, and dividend distributions.

Key Benefits of Tokenization:

• Democratized Access: Makes a broader range of assets more accessible to investors.
• Enhanced Liquidity: Facilitates easier movement and trading of assets.
• Improved Borrowing: Simplifies the process of borrowing against tokenized assets.
• Timely Dividends: Ensures prompt dividend payments to beneficial owners.
• Better Asset Holding and Trading: Offers a more efficient way to hold and transact with assets.

Tokenization vs. Traditional Securitization: The Native Representation

A common point of confusion is the creation of a "token twin" of an asset versus securitizing the asset itself. Domingo clarified that Securitize's approach involves creating a native representation of the security on the blockchain. The token is not a copy but the actual security, with its ownership recorded on a distributed ledger.

How it Works with Stocks:

Domingo explained that even when buying stocks through platforms like Robinhood, investors don't directly hold the stock under their name on the company's cap table. Instead, the shares are typically held by the Depository Trust Company (DTC) through its subsidiary CD&Co. Investors can, however, request to have these stocks registered under their name via a transfer agent. When a transfer agent utilizes blockchain as its ledger, this process effectively becomes tokenization.

Advantages of Tokenized Ownership:

• True Ownership: Investors are the direct beneficial owners of the stock.
• Direct Rights: Enables direct voting rights and immediate dividend receipt.
• Transparency: Clear identification of beneficial owners.

The Future of Tokenization in Capital Markets

While new technologies rarely completely displace old ones, Domingo anticipates that blockchain-based rails will emerge alongside existing financial systems. This new market, built on blockchain, will be more efficient, faster, cheaper, and easier to access. Over time, there will likely be a migration of assets and activities to these more advanced rails.

Feedback Loop and Market Disruptions:

Domingo asserted that tokenization itself does not create a feedback loop that disrupts the underlying asset. The token merely represents ownership. Price fluctuations of the asset are independent of whether it's tokenized or held traditionally. However, he acknowledged that creating on-chain markets requires careful consideration of regulations that guarantee transaction prices and other assurances present in traditional markets.

Demand and Global Applications

While the U.S. market is perceived as having high accessibility to stocks through brokerage accounts and platforms like Robinhood, Domingo highlighted a significant demand for tokenization in regions like Europe. In Europe, access to brokerage accounts and frequent stock transactions are less common. Tokenization offers a more efficient way to provide non-U.S. individuals with access to traditional financial assets, similar to how they engage with cryptocurrencies.

Securitize's SPAC Strategy

Securitize opted for a SPAC merger over a traditional IPO for several strategic reasons:

• Suitability for Company Size: A SPAC, when executed correctly, is an effective mechanism for companies of Securitize's scale.
• De-risking the Process: The SPAC route derisks both the process and the outcome.
• Pre-Announced Valuation and Funding: The valuation has already been announced, and the PIPE (Private Investment in Public Equity) has been raised, meaning the capital is secured.
• Streamlined Regulatory Filing: The primary remaining step is the regulatory filing of the S4 document, which outlines the merger agreement. This contrasts with a traditional IPO, where regulatory work precedes market engagement.
• Expedited Timeline: With the SPAC, Securitize has its partner, funding, and valuation set. Once government operations resume and the S4 filing is submitted to the SEC, the review process is expected to take two to three months, leading to public trading.

Conclusion:

Securitize's public offering via a SPAC marks a significant milestone for tokenization. The company's CEO, Carlos Domingo, articulated the fundamental value proposition of tokenization: transforming traditional securities into digital tokens on blockchain technology to enhance efficiency, accessibility, and ownership rights. While not a complete replacement for existing systems, tokenization is poised to create a parallel, more advanced market that will likely see increasing adoption, particularly in regions with less developed traditional financial infrastructure. Securitize's strategic choice of a SPAC facilitated a faster and more de-risked path to becoming a publicly traded company.