Why tokenized stocks from Tesla and Co. are only an interim solution

The shares of large stock exchange companies are finding their way onto the crypto market more and more frequently. This refers to so-called tokenized stocks or tokenized stocks. What it is really about, what the advantages are and why they should not be confused with security tokens or digital securities.

A new trend in the crypto sector is the tokenization of stocks. So-called tokenized stocks offer the option of trading classic stocks such as Apple, Tesla or Google in tokenized form. The further bridging of the crypto-economy to the traditional financial market ensures that one frees oneself in parts from the inefficient infrastructures of the traditional securities sector and gives the shares “wings” with the help of token infrastructures.

The benefits of tokenized stocks

While stocks are usually subject to restrictions such as stock exchange trading hours or stronger regional restrictions depending on the jurisdiction, tokenized stocks traded on crypto exchanges are not. The token shares can be traded 24/7 on trading platforms such as Binance, FTX, Bitpanda or Bittrex. Fractional ownership can also be implemented. So if you don’t own 2,800 euros for an Amazon share, you can purchase shares in a single share via tokenized stocks.

At the same time, there is the possibility of adding a new asset class to your token portfolio without having to leave the crypto ecosystem. As with the stablecoin Tether USDT, traders have the opportunity to quickly switch from the highly volatile cryptocurrencies to an asset class that is less volatile – of course, it always depends on the share.

The possibility of using further leverage options is also interesting. Of course there are numerous derivatives for Apple, Google, Tesla and Co. such as warrants, leverage certificates, etc. With the help of smart contracts and programmable securities or securities derivatives, however, new interesting trading options can arise. In addition to the tokenized stocks, tokenized futures are also establishing themselves, which enable leveraged investing in the stock values. A lot more financial innovation and sophisticated product design can be expected here in the future.

Investors, on the other hand, have to be careful with liquidity. Even if an Apple share can be traded very liquid, this does not apply to the tokenized representation. The trading volume on the crypto exchanges mentioned is negligible compared to the real stock markets and is therefore of no interest to institutional investors.

Tokenized Stocks vs. Security Token

Nevertheless, one should be aware that tokenized shares, as they are available on the crypto trading platforms, are only an intermediate step or a workaround. After all, the underlyings are by no means digital, but remain traditionally documented. In contrast to security tokens, i.e. digital securities that are not documented, tokenized stocks are only a derivative hybrid solution that tries to combine old and new. Nonetheless, tokenized stocks are a good way to start trading existing stock corporations on the crypto market today.

If in the future securities will only be issued digitally as tokens, then the tokenized stocks, as currently on Binance and Co., only make limited sense. The addition “tokenized” will then be omitted because the share itself is based on tokens as an underlying asset and not just the derivative.

However, it will be a few years before this happens. Regulations and institutions need very long lead times before a final transformation takes place. Instead, tokenized securities have to adapt to the rules of the game of current market conditions. Companies that want to be taken seriously on Wall Street and have billions of dollars in capital need still have to be traditionally documented, see Coinbase DPO. For the time being, security tokens are only for small companies and start-ups, as there is not yet a sufficient ecosystem for them. Especially since most jurisdictions still need amendments to the law. This also explains why there is still no secondary market for security tokens in Germany and why you can only tokenize outside capital. Shares as security tokens are currently still excluded.

Securities: Same anachronism as in payment transactions

Just like our payment transactions, securities processing is also out of date. While information can circulate in real time and 24/7, our value infrastructures lag behind. In contrast to an email that you send, it does make a difference whether you send a bank transfer on a Tuesday morning or a Sunday morning. It also makes a difference whether you send the transfer to the savings bank next door or to a financial institution in New York. Many middlemen and outdated IT systems ensure that the Amazon parcel from abroad sometimes arrives at home faster than the payment at the supplier.

The situation is similar with securities. Here, too, a distinction must be made between booking and value date. Although we can execute orders in a matter of seconds, the booking of the securities, i.e. the actual transfer of ownership, does not take place until two to three days later. The underlyings of the tokenized stocks cannot avoid this slow processing either. Only the token derivative can change hands in seconds. It would be different with security tokens: just like cryptocurrencies, they could enable an immediate transfer of ownership and thus reduce costs and errors.

Tokenized stocks as a warning shot for the traditional financial industry

As irrelevant as the capitalization of tokenized stocks and digital securities is at present, they clearly show where we are headed. The exchanges, banks, brokers, etc. that are now dealing with this may survive. All others will be replaced by new players.

The first exchanges and start-ups are already working on a two-speed securities sector. As soon as the GO comes from the legislature, stock exchange operators such as the Stuttgart Stock Exchange can offer a new market segment for digital securities. Another example would be the blockchain protocol Dusk Network (DUSK), which wants to tokenize SMEs and make them tradable with the Dutch exchange NPEX. Progress can be expected in the next few months, as the first legislative amendments are about to be implemented.