Looking Beyond Tesla: Tokenized Stocks, The Next Big Thing

As we covered yesterday, Tesla and Elon Musk are now Bitcoin Bulls.

But, I think people are misinterpreting why this news is incredibly bullish, and why this builds upon the Gamestop short squeeze two weeks ago.

Both of these events promote the change I am expecting will hit soon: Tokenized Stocks.

SEC Chairman Jay Clayton recently acknowledged in Oct 2020 that all stocks could become tokenized one day and that the door was “wide open” to the possibility if someone wanted to show them how to do so in a way that “adds efficiency”.

Let’s explore some functions this could open for our financial markets.

What is Tokenization?

Tokenization is the process of converting a hard asset into a digital token. The purpose of tokenization is to remove sensitive identifiable information — for example, a bank account number — with a randomized number.

What are the Benefits of Tokenization?

Tokenization facilitates smooth payment experiences and allows for much faster payment mechanisms than traditional payment methods. For example:

If you wanted to transfer money from one bank account to another external bank account, that process can take anywhere from 1–3 business days.

For tokenized assets, that same transfer would occur within minutes.

How is this possible?

Short answer: Tokenized assets live on the blockchain. The level of security the blockchain provides allows for much faster payment processing.

Why Does This Matter?

From a user’s perspective, the buying and selling of assets would likely look the same. However, instead of buying stock shares, you would be buying digital tokens that represent shares of a company.

Utilizing the blockchain to convert stock shares into digital tokens would allow for much more exciting features.

Goods for Goods Exchange

On the Crypto market, you are able to exchange one token directly for another. Let’s say that you own 1 whole Bitcoin (w.o.w). You are able to exchange your Bitcoin directly with any other token.

How would this look on the stock market?

Now let’s say you own 100 shares of Apple stock. In order to buy shares of a different stock, let’s say shares of Amazon: you would have to sell your Apple shares in exchange for money, then use that money to buy shares of Amazon.

Now, imagine if you could trade your 100 shares of Apple directly for shares of Amazon, eliminating the need to sell shares of Apple into liquid cash.

Cool huh?

Faster Withdrawals

Currently, on any stock exchange, it would take about 3–5 business days for your funds to settle after making a stock sale. If you want to cash out a portion of your portfolio, you would have to wait close to 2 weeks to actually spend the money you invested in the stock market.

The process would look something like this:

You sell stock shares and wait 3–5 business days for your funds to settle.

After your funds settle, you would transfer that money back into your bank, which would take another 3–5 business days.

This process can be simplified with some auto-withdrawal features, but I feel this is still not optimal for individuals with lower amounts of cash.

With tokenized stocks, you would have instant access to your invested funds. No more waiting for funds to settle or transfer times.

This would eliminate a major barrier to entry for a majority of people living paycheck-to-paycheck and truly provide equal opportunity for everyone to partake in financial markets.

Even cooler, huh?

A Whole New Financial System

Now, let’s take this to the next level.

If you are able to exchange tokenized stocks for other tokenized stocks and have instant access to those funds, this opens the door for very exciting opportunities.

You could, hypothetically, make everyday purchases with stock shares.

Let’s say you need to go out to pick up some milk. You could buy that milk with stock shares.

Let’s say you go out to a nice dinner with the family. You could pay for that dinner with stock shares.

Let me put it this way: someday you can actually OWN the stocks you buy instead of having Robinhood sell your shares against your will. This would truly revolutionize the way our economy functions. There would be no reason to own liquid cash at this point, as you would be at a disadvantage from not participating in financial markets. It would completely change the way individuals invest and interact with money.

There are so many possibilities. You could be the one to decide to loan out your shares to collect interest. You could have airdrops right to your wallet with dividends. You could easily transfer ownership to your Dad if you wanted to. It is superior in every way, it just needs to break the barrier of those who stand to lose power.

The circumstances of COVID-19 have highlighted the large disconnect between the general economy and financial markets. Tokenized stocks can bridge that disconnect.

What I Imagine

Banks can offer a tokenized stock investing service for everyone. Customers will have the option to opt into this service. The user’s interaction with their money would remain the same. However, banks would hold the customers saving balance in the form of tokenized stocks. This will allow savings rates to parallel financial market growth.