Tokenization of Securities

Definition

Digital representations of traditional financial assets (e.g., stocks, bonds, real estate) issued on a blockchain, conveying ownership rights.

Key Benefits

Fractional ownership, 24/7 trading, enhanced liquidity (especially for illiquid assets), greater transparency, increased efficiency, reduced costs, automation of processes, democratization of investment.

Key Challenges

Regulatory uncertainty, technical vulnerabilities, liquidity issues, compliance with existing securities regulations (e.g., Investment Company Act, broker-dealer rules), complex classification (e.g., security-based swaps).

Issuance Process

Involves creating a security token on a blockchain that digitally represents a real tradable asset, often through a Security Token Offering (STO).

Regulatory Landscape

Characterized by an uneven global approach, with some jurisdictions (e.g., Malta, Switzerland) making progressive plans, while the US regulatory environment is improving but requires specific legislation (e.g., CLARITY Act).

Underlying Technology

Blockchain, Distributed Ledger Technology (DLT), Smart Contracts.

Potential Applications

Enhancing risk management in Decentralized Finance (DeFi), enabling the Creator Economy on Blockchain, bringing Real World Assets on Blockchain.

Ongoing

Ongoing

Ongoing

Ongoing

Future

Future

Tokenized securities are traditional financial assets (like stocks, bonds, or real estate) that have been converted into digital tokens on a blockchain. They represent ownership rights to an underlying asset, just like conventional securities, but with the technological advantages of blockchain. Key point: Tokenized securities blend traditional finance with blockchain technology, creating digital versions of familiar investment vehicles. [...] Tokenized securities are digital representations of traditional financial assets like stocks, bonds, or real estate, issued on blockchain networks to offer benefits such as fractional ownership, 24/7 trading, and greater transparency. While they enhance access and efficiency in investing, they must comply with existing securities regulations and carry unique risks like regulatory uncertainty, technical vulnerabilities, and liquidity challenges. ### Table of Contents [...] Key point: Always approach tokenized securities with the same due diligence you'd apply to traditional investments, plus additional attention to technological factors. ## The Future of Financial Asset Tokenization The tokenization of traditional assets represents a significant evolution in how we think about ownership and investment. As DLT-based financial instruments mature, we're likely to see increasing adoption by mainstream financial institutions.

For tokenized securities, the developer creates on-chain tokens that each represent a share of equity in a company or other security, or another asset that offers the right to cashflows. This tokenization can open up possibilities — such as instantaneous settlement, share fractionalization and daily dividend payments — that make the product more efficient or functionally diverse than its TradFi counterpart. [...] The SEC’s Crypto Task Force cited past “hostility” toward digital assets and aims to create a regulatory framework. Tokenized securities face complex regulatory challenges, including compliance with the Investment Company Act and broker-dealer rules. Developers must consider regulatory frameworks from the start to avoid undermining the economic and technological benefits of blockchain projects. [...] If a tokenized security gives its holder exposure to the economic performance of one or more securities, it may have crossed over into the complicated world of security-based swaps. Generally, tokens that provide for the exchange of future payments based on the value of a security (or events relating to that security) without conveying ownership rights are likely to be swaps. Security-based swaps are under the joint jurisdiction of the SEC and the Commodity Futures Trading Commission. The

Benefits A new “token economy” offers the potential for a more efficient and fair financial world by greatly reducing the friction involved in the creation, buying, and selling of securities. We see four key advantages that tokenization provides for both investors and sellers: • • Greater liquidity By tokenizing assets—especially private securities or typically illiquid assets such as fine art—these tokens can be then be traded on a secondary market of the issuer’s choice. This access to a [...] The tokenization of assets refers to the process of issuing a blockchain token (specifically, a security token) that digitally represents a real tradable asset—in many ways similar to the traditional process of securitization, with a modern twist. These security tokens are created through a type of initial coin offering (ICO) sometimes referred to as a security token offering (STO) to distinguish it from other types of ICOs, which can produce different tokens such as equity, utility, or payment [...] There has been a considerably uneven approach so far to regulating and accepting tokenization, but there are signs that the traditional market infrastructure is adapting to the token economy. For example, both the US SEC and EU’s ESMA have made comments, albeit generic, in this area. Meanwhile, Malta and Switzerland have made more progressive plans to accommodate new marketplaces for tokenized securities1. Having a clear regulatory framework is of vital importance Inside magazine issue 19 |

With tokenization, many of the traditionally laborious and manual processes involved in bringing securities to public and private markets may be transferred to the blockchain and automated. This benefits issuers and investors in a wide variety of ways from increasing efficiency to reducing room for error, which ultimately bring significant reductions in cost. [...] Like traditional securities, a security token is a financial instrument that represents ownership interest in an asset– only it’s been created digitally, or tokenized, to unlock the power of the blockchain. Put simply: security tokens are digital representations of securities on a blockchain. As with traditional securities, security tokens are subject to regulation and need to conform to strict compliance standards. [...] Utilizing blockchain technology brings increased efficiency and reduced error to the creation, issuance, and management of securities, which ultimately reduces cost as well. But tokenization is profitable in other ways, too. Tokenization also increases liquidity of traditionally illiquid, non-fractionable assets like real estate. For investors, this means increased democratization and the ability to diversify one’s portfolio with access to previously unavailable assets.