Tokenized Stocks May Be The Key To Crypto’s Adoption

Today, I want to talk about one of the most exciting developments for crypto in an otherwise bleak year.

Last month was full of HUGE pieces of news and indicators for the months and years to come, and yet, as usual, people only wanted to talk about “number go up! number go down!”

So, what’s got me truly, genuinely, and emphatically excited right now?

It’s simple: Tokenized. Stocks.

First, let’s understand what Stocks really are and what Tokenizing them really means. What you need to know is that Stocks are just Equity, so we’re just Tokenizing Equity.

Think about tokenized equity like any standard share purchased in a listed company, except that those shares are in the form of crypto tokens.

To draw a parallel with present-day equity share ownership – say, you purchased shares of a listed company during its initial public offering (IPO), or bought them on the stock exchange. These shares are then credited to your DEMAT account. Tokenized equity shares work the same way, except that those shares are in the digital form of cryptocoins or tokens, and instead of going into your DEMAT account, they are credited to your blockchain-hosted account.

The traditional methods of raising capital face quite a few operational hurdles. For instance, regulatory requirements like regular maintenance of books and accounts and adherence stock exchanges’ strict rules, reluctance on part of banks and other financial institutions to issue credit, and challenges faced by business owners in convincing private investors to buy parts of business are a few of these problems.

In contrast, tokenizing the business ownership in the form of equity shares on a blockchain offers a lot of flexibility in fund raising. The low-cost method allows for a more democratic way to realistically value the business depending on the direct participation of the interested investors. The valuation is mainly dependent on market forces, rather than on a select group of sponsors or angel investors.

Basically, tokenization opens up a world of possibilities. . . literally.

And, here’s why I’m really excited by this thought: it’s not wishful thinking. It’s really happening.

Last month we heard Jay Clayton, chairman of the U.S. Securities and Exchange Commission (SEC), show belief in blockchain’s power and thinks that all stocks could become tokenized one day.

In a webinar hosted jointly by the Chamber of Digital Commerce and blockchain startup Securrency on Friday, Clayton said all stock trading is today electronic, compared to 20 years ago. In the past, there were stock certificates, and today there are digital entries representing stocks. “It may be very well the case that those all become tokenized,” said Clayton.

The webinar, titled “Two Sides of the American Coin: Innovation & Regulation of Digital Assets,” focused on what is needed to grow the blockchain and crypto space. Brian Brooks, the acting comptroller of the currency at the Office of the Comptroller of the Currency (OCC), also participated.

Both Clayton and Brooks said that they welcome innovation in the crypto space, but of course, within regulatory frameworks. Are current frameworks sufficient?

“The short answer is yes,” said Clayton. “Our regulatory framework, the principles of our framework, is time tested, and it’s been time-tested through many innovations.”

Brooks, who recently joined the OCC from Coinbase, said he believes that blockchain networks are “fundamentally more resilient and efficient than vertically integrated sort of control towers,” and that is why there is a need for a framework that is “safe and sound.”

“We have a strong interest in trying to envision a medium-term future, not a tomorrow future where people are speculating on bitcoin price movements, but a medium-term future where these blockchain networks that have been built are basically the internet of finance…are kind of a mind-blowing challenge to the banking model,” said Brooks.

However, “most cryptocurrency projects are going to fail,” according to Brooks. “They’re not going to be relevant to a particular need, or they’re going to raise fundamental legal compliance issues or something like that.”

But as regulators, “we need to…articulate what we think blockchain adds to the ecosystem,” said Brooks. He gave two recent examples of how the OCC allowed national banks to custody crypto and hold reserve funds for stablecoin issuers. “So I think coming together as you know joint regulators and specifying that is going to be a good thing ultimately for the projects that are valuable,” said Brooks.

As for who drives frameworks for the crypto industry, Clayton said it depends on the functionality. “If we’re talking about stablecoins as an area for enhancing efficiencies in the payment system, well the people who regulate the payment system, the banking regulators, they should drive this,” said Clayton. “If you’re talking about in the preamble, there was tokenization of ETFs [exchange-traded products], well, you know we should drive that.”

Clayton went on to say that the SEC is “willing to drive that,” and its door is “wide open if you want to show how to use to tokenize the ETF product in a way that adds efficiency.”

“We want to meet with you. We want to facilitate that. Of course, you got to register it and do what you would do with any other ETF,” said Clayton.

He continued: “What we don’t like is when someone says, you know, the function is payments so you really ought to look past the securities law stuff. I can’t do that, you know, I wouldn’t be doing my job… come tell us about it. Don’t pretend that it’s, you know, a payment system when it’s actually a financing vehicle.”

As for clarity on what token is a security and what is not, Clayton said: “If you’re not trying to finance your network, you’re not trying to give people a return on your network, it’s probably not a security. But if what you’re trying to do is finance your network with your token or provide people with a return for using the network with your token, you look at the traditional tested security, it’s pretty clear it’s a security.”

So, just so we’re clear, the SEC Chairmen, head of the Federal organization that infamously shot down every Bitcoin ETF application, is giving the green light to do the opposite: create a tokenized ETF of stocks. This nod of approval, combined with a surge of interest from Wall St. in crypto, is the key to tokenizing other real-world assets, such as stocks, ETFs, commodities, and more. With the right developed solutions, I’d reason we’ll have the ability to tokenize any asset very soon, opening the door to over 40,000 different tokenized assets currently trading on over 30 top global stock exchanges.

Yeah, that’s big.

We’ll explore this massive topic tomorrow some more.