The team at Security Token Market (STM) released its very first tokenized stock report.
STM notes that most industry participants or observers are familiar with security tokens, or digitized assets in stocks, fixed income, immovable, investment fund stocks, 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, it is “a type of derivative product that tracks the performance of an underlying stock, such as Apple (NYSE: AAPL) or You’re here (NASDAQ: TSLA), ”the company explained, adding that by buying a token stock, you“ have no ownership in the underlying stock ”. Instead, you own “a derivative guaranteed by a share of the underlying stock that tracks its performance,” the STM team said.
They added that token stocks trade on multiple platforms, the most important of which are FTX and Bittrex.
The STM continued:
“To become eligible to purchase a company’s tokenized shares on these exchanges, one must meet regulatory requirements, including KYC and AML compliance. At present, only international investors authorized to trade on the respective stock exchanges can purchase token shares. “
“Even if the token you buy is a mirror asset of the underlying stock, most platforms guarantee that investors are entitled to the same dividend payout if the real stocks pay dividends. Although FTX and Bittrex provide the means to buy these shares, they do not keep any of the tokenized shares. “
Brokerage firms such as CM-Equity and Digital Assets SA generally symbolize these stocks. Notably, investors can redeem the tokenized stock against “the actual underlying stock”.
STM’s blog post also confirmed that not all stocks traded in traditional markets are “yet available for purchase via a token manner.”
Although this varies by exchange, most mega-cap companies like Apple ($ AAPL), Google ($ GOOG), Facebook ($ FB) and Tesla ($ TSLA) are “available to invest through their stocks. tokenized “.
They also mentioned that the regulatory status of token stock trading is “not entirely clear.”
Following the crypto craze of 2018, the Securities and Exchange Commission (SEC) “clamped down on the industry and classified many coins and offers that were made public through an ICO as securities.”
This would mean that they “should be regulated as such and should be subject to scrutiny,” the STM blog noted while adding that if so, the platform that trades these assets should “be registered. with the SEC as the national securities exchange.
But token stock platforms “pushed this notion back and argued that they trade derivatives, not stocks, so they shouldn’t be subjected to the same scrutiny as platforms that trade real securities.” “, added the STM blog.
They also mentioned:
“Such determination remains unresolved. This regulatory gray area leaves the door open to potential risks for both investors and the stock markets. Even still, hundreds of thousands of investors have used token stocks to diversify their investment portfolios. “
Advantages of tokenized shares, according to the STM:
- 24/7 live and non-stop trading – 3 am on a Saturday? Yeah. Noon at Christmas? Yes please. 7 p.m. on New Years? Why not.
- Fractional shareholding – Investors can buy ½ share, ¼ share or even 0.7204825 share of $ TSLA!
- Global Access – International investors can get their hands on assets that may have been difficult to invest in originally.
- Instant settlement – Traditionally in the stock market, investors have to wait up to two business days (T + 2) for settlement to complete – tokenized stocks are virtually instantaneous due to the nature of blockchain technology!
- Non-transparent asset guarantee – When buying a derivative, “we must expect – and demand – total transparency on the holding of the underlying asset”. Unfortunately, this is “not the case with tokenized stocks in the market”.
- There is “no private placement documentation, no proof of ownership or no overview of the settlement process.” This “certainly presents a risk, as investors cannot be sure that the collateral requirements have been met.” This has “historically been the main cause of regulatory oversight by regulators of this asset class”.
- No voting rights as a shareholder – While you are buying a digital asset that does not have voting rights, “equity providers – like CM-Equity and Digital Assets AG – offer share buyback opportunities where investors can use their tokenized shares as a coupon for real fairness.
- Regulatory gray area – Still “waiting for certain flags from regulatory agencies around the world”.
For more details on this update, see here.