The traditional market for financial instruments, including stocks, is regulated by many institutions, depending on the country where the companies are located. Blockchain is the ticket to a space in which regulations are supposed to give way to liberty and anonymity (which government institutions are trying to influence). Tokenized stocks combine the best of both worlds. Find out what they are and how they work in the article!
Let’s take a closer look at tokenized stocks
The process of converting a stock or other asset ownership into a digital token on a blockchain is referred to as tokenization. These tokens can represent fractional ownership of the underlying asset and can be traded on digital asset exchanges. Tokens are issued on the blockchain based on the shares held in reserve by the depositary. Each token’s price is linked to the value of the shares. Tokenized stocks are designed to make it easier for investors to buy and sell shares in a company while also increasing stock market liquidity.
Tokenized stocks vs. tokenized equity
Let’s understand the difference between tokenized stocks and tokenized equity.
The process of converting ownership of a stock or other financial asset into a digital token on a blockchain is referred to as tokenized stock and tokenized equity. The main distinction between the two is that tokenized stock typically refers to the conversion of publicly traded stocks. In contrast, tokenized equity can refer to any ownership stake in a company, including private equity.
Tokenized equity can refer to either share in a private company or a specific type of investment vehicle, such as a real estate investment trust (REIT) or a private equity fund. These assets are not publicly traded, and ownership is typically limited to a small number of accredited investors. Tokenizing these assets enables them to be traded on digital asset exchanges, making them more accessible to a broader range of investors.
Overall, both tokenized stock and tokenized equity seek to increase liquidity, provide fractional ownership, and make it easier for investors to buy and sell shares in a company; however, tokenized equity may be more complex and subject to more restrictive regulations, whereas tokenized stock is publicly traded.
Advantages of tokenized stocks:
Increased liquidity: tokenized stocks can be traded on digital asset exchanges, enabling more frequent buying and selling and better pricing for investors.
Lower barriers to entry: tokenized stocks can be purchased and traded using a digital wallet, eliminating the need for a traditional brokerage account and potentially lowering investor costs and barriers to entry.
Transparency: tokenized stock can be tracked on the blockchain, providing transparency and immutability.
Fractional ownership: tokenized stocks can be divided into smaller units, allowing investors to buy a smaller share of a company and make it more accessible to a broader range of investors.
Faster settlement: tokenized stock can settle faster than traditional stocks since the process is automated by a smart contract.
24/7 trading: digital exchanges are working 24/7, which enables investors to trade whenever they want.
Smart contract: Smart contract technology can be used to automate ownership transfer and ensure regulatory compliance with tokenized stock.
Disadvantages of tokenized stocks:
Regulation: tokenized stocks are still relatively new, and regulatory oversight and compliance can be uncertain. It can pose risks to investors and limit the availability of tokenized stocks in certain jurisdictions.
Lack of investor protection: traditional stocks have several mechanisms in place to protect investors, such as regulatory oversight and deposit insurance. Tokenized stocks do not provide the same level of protection, so investors must exercise greater caution when investing.
Security risks: tokenized stocks are kept in digital wallets, which are susceptible to hacking and other forms of fraud. Investors should take appropriate precautions to safeguard their digital assets, such as using a hardware wallet and protecting their private keys.
Liquidity risk: tokenized stocks may not be as liquid as traditional stocks, especially if they are not traded on a large, established exchange. That makes it difficult for investors to buy or sell their stock at a reasonable price.
Volatility: tokenized stocks, like traditional stocks, can face significant price fluctuations. That can increase the level of risk for investors.
Complexity: understanding the technology behind tokenized stocks and how to trade them can be complex, especially for investors unfamiliar with digital assets.
The tokenization of assets is a relatively new phenomenon that has emerged in recent years. It’s important to remember that some exchanges don’t actually trade tokenized stocks but rather “synthetic assets” or “synths,” which are assets that look like other assets but aren’t directly linked to them. It is not uncommon for tokenized stocks to be held by only a few cryptocurrency wallets, posing a risk to the asset’s liquidity. On the other hand, tokenized stocks are an intriguing concept that more and more businesses may adopt in the future. It’s an interesting way to raise capital while also balancing two worlds: traditional and decentralized trading.