Tokenised stocks are derivatives in the form of digital coins or tokens that are pegged to publicly traded stocks. Essentially, they are cryptocurrency tokens that correlate to the price of real stocks, such as Uber, Facebook, Tesla and Netflix, that are normally traded on a stock exchange. Tokenised stocks bridge the gap between traditional stock markets and cryptocurrency markets by allowing cryptocurrency traders to trade stock derivatives on cryptocurrency exchanges without needing to use a traditional stockbroker.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
Characteristics of tokenised tokens
Tokenised stocks have the following unique properties:
- Globally available. For investors outside the United States, it can be difficult to purchase stocks from companies such as Tesla and Apple. Tokenised stocks solve this problem because they are accessible to people from all over the world.
- Highly divisible. Tokenised stocks are divisible, unlike their traditional counterparts. Divisibility makes it possible for ordinary investors to purchase a fraction of a share. For example, an investor with only $300 could not afford one Amazon stock at the beginning of 2021 because it was trading at $3,000. However, the investor could easily buy a tenth of the share for $300 if the share was tokenised.
- Traded 24/7. Unlike traditional stocks, which can only be traded at specific hours of the day, tokenised stocks can be traded any time of the day or night.
How do tokenised stocks work?
To better understand how tokenised stocks work, think of a tokenised stock as an ordinary equity share you would buy in a publicly listed company. The only difference is that these stocks are in the form of digital tokens.
If you bought a company's stock from an exchange, or during the company's initial public offering (IPO), you would receive the shares in your brokerage account. The process is the same for tokenised stocks, except that because tokenised stocks are blockchain-based, they are purchased through a cryptocurrency exchange.
In most cases, a custodian and an investment institution are involved in the process of making a token from an equity stock. The investment institution is responsible for purchasing the underlying stock and the custodian keeps it as a reserve. Based on the shares preserved in reserve, tokens are issued on a blockchain platform. Each token's price is tied to the value of the reserved shares.
The tokens are then listed on a cryptocurrency exchange so investors can purchase them and begin trading. When an investor purchases the tokenised shares, they indirectly become owners of part of the equity stock locked in reserve.
Be mindful though that not all tokenised stocks are represented by the same amount of real-world shares. This is especially true for decentralised (DeFi) platforms like Synthetix and Mirror Protocol, which only track the price of stocks. Make sure to do your due diligence before purchasing tokenised stocks so that you know exactly what you are getting.
Who can trade tokenised stocks?
Tokenised stocks are a good option for any investor who is ready to move beyond cryptocurrencies into the traditional finance markets. Investors who are unable to acquire a stockbroker account, or find the process too complicated, can also venture into trading tokenised stocks to gain experience in the traditional equity markets.
Tokenised stocks can also improve market access and provide flexibility to users who find it difficult to purchase fully paid-up shares.
You must also live in an area that allows you to purchase and trade tokenised stocks, which is still a legal grey area in some regions.
Where can you trade tokenised stocks?
If your country of residence allows you to trade tokenised stocks, here are some of the top platforms you can use to purchase these digital assets.
Bittrex
Bittrex is a well-known cryptocurrency exchange that has been in operation since 2014.
Bittrex issues tokenised stocks in association with a Switzerland-based asset-tokenisation platform known as DigitalAssets.AG.
All the tokenised stocks issued on Bittrex are backed by actual equity shares that are kept in reserve by DigitalAssets.AG.
Features of tokenised stocks on Bittrex include the following:
- Token holders receive dividends declared on equity stocks.
- Token holders cannot attend AGMs or vote on the network, except at the discretion of DigitalAssets.AG.
- Tokenised stocks are traded 24/7.
- Bittrex charges fees equivalent to any similar trade in the spot market.
Bitpanda
Bitpanda is a crypto exchange that also offers tokenised stocks known as Bitpanda stocks. Bitpanda works with Bitpanda Financial Services, which holds the actual equity stocks.
Features of Bitpanda stocks include the following:
- Token holders receive dividends declared on the equity stocks.
- A spread is applied over the buy and sell price but there are no transaction fees charged.
- Trading is open 24/7.
- Token holders cannot vote or attend AGMs.
Mirror Protocol
Mirror Protocol is a decentralised (DeFi) platform that offers synthetic tokens. These assets, which are known as mAssets, mirror the value of real-world assets, although the synthetic tokens are not backed by the real-world assets they mirror.
In the place of a reserve of actual stocks, Mirror has a collateralised debt position (CDP). Any user who mints an mAsset (known as a miner) provides collateral in the network. The platform maintains a minimum CDP ratio of 150%. Below this ratio, the collateral is liquidated and paid back to the miner.
Features of mAssets include the following:
- No KYC requirements.
- Tokens are not attached to real-world assets, so holders do not have any sort of shareholder rights.
- Mirror is completely decentralised.
- Token holders don't receive dividends declared on the equity stocks.
- The platform charges a transaction fee of 0.3%.
- Trading is open 24/7.
- mAssets are tradable on Uniswap and Pancakeswap.
Synthetix
Synthetix is an Ethereum-based blockchain protocol for synthetic assets known as Synths. Synths track the value of real-world assets, but they are not backed by those assets. For instance, Synthetic Netflix stocks would behave like real Netflix stocks, but there would be no Netflix stock put in reserve to back the synthetic ones.
Synthetix works like Mirror Protocol, except in Synthetix, there is unlimited liquidity instead of a collateralised debt position.
Features of Synths in the Synthetix network include the following:
- Trading fees are 0.3% of the transaction value.
- Token holders do not receive dividends or shareholder rights.
- No KYC requirements.
- Trading of Synths is open 24/7.
How to use Synthetix
Compare exchanges that trade tokenised stocks
Use the table below to compare exchanges that trade tokenised stocks on features, fees, coins and payment methods.
Advantages of tokenised stocks
- Tokenised stocks are traded 24/7 since the cryptocurrency market never closes. This is unlike traditional shares, which are traded for a limited period of the day.
- Tokenised stocks have faster transaction times when compared to traditional equity stocks.
- Transactions involving tokenised stocks are cost-effective and, on some exchanges, free.
- They allow fractional ownership since they are highly divisible.
- In some cases, token holders receive dividends declared on a particular share.
Disadvantages of tokenised stocks
- Holding tokenised stock involves more risk than holding the actual stock because there are more intermediaries involved with tokenised stocks. For example, there is the cryptocurrency exchange, the SEC, the custodial firm and the company whose share is under consideration.
- Token holders do not have any voting rights in the company, unlike equity shareholders who are involved in the decision-making process.
- The company behind the tokenised stock does not allow token holders to attend annual general meetings.
- Exchanges and custodians require token holders to go through additional KYC.
Verdict
Tokenised stocks present people who are unable to invest in real-world equity shares with the opportunity to benefit from the shares. They also allow investors who would not ordinarily be able to afford shares in high-profile companies to buy fractions of digital shares that represent the real shares. They are therefore able to invest what they can afford.
That being said, it is your responsibility as an investor to ensure the credibility of the reserve or collateral asset basis on which the tokenised stocks you are purchasing have been issued. Also, ensure that you are allowed to purchase tokenised stocks where you live and that the crypto exchange or platform you wish to use supports users from your area.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
