I spoke to billionaire FTX CEO and Bitcoin investor Sam Bankman-Fried, who described tokenization as a growing trend.
One of the most important points is that, depending on the exchange, tokenized stock may or may not have collateral behind it.
There are other important nuances for would-be investors, such as whether or not owning a tokenized stock gives you ownership rights to get paid stock dividends and be able to vote as a shareholder.
The short answer is you own a collateralized digital derivative product that can be traded much like the spot instrument, i.e.
One of the potentially disruptive qualities of tokenized securities is that they could steamroll the large retail FX and Contract for Difference industry, which is well established and generally offers tradable instruments that are not saved to a blockchain.
Another factor is latency, which exists due to potential internet communication delays depending on where the trader is located, or the actual liquidity for that security at the crypto exchange.
Try to transfer your AAPL/BUSD or AAPL.cx securities to FTX and you will be informed that the stock token is not portable to other crypto exchanges or to your local brokerage firm where you have your securities portfolio.
Worst case scenario, the value of the investment resides digitally at a firm that may not offer the service tomorrow or could be at risk if the other intermediary firms went out of business.
The number of crypto exchanges offering tokenized stocks is relatively small still, but appears to be growing rapidly now that they have been adopted by select market leaders.
The collateralized tokenized stocks hitting the market are mainly originating from two European firms working together in different capacities to serve various crypto exchanges.
By contrast, Binance, states that stock tokens are “generally redeemable from the issuer” and that a special redemption fee may apply and that the redemption is “generally settled in stablecoin”.
Counterparty risk is the non-compliance risk in a transaction, such as between an investor and the brokerage firm or exchange holding a security on behalf of the investor.
For the tokenized stock, there are some separation of duties by the exchange, the holder of the shares, and the company minting the new token.
Last week, German regulator BaFin served Binance a warning that its German unit Binance Germany risked being fined for offering its digital tokens without publishing an investor prospectus.
One of the reasons why prospectuses filed with regulatory authorities like the SEC play an important role for investors has a lot to do with risks – especially for new investment vehicles like tokenized stocks.
FTX and its brokerage partner CM-Equity currently require any interested client to complete a full identity verification, a review of relevant terminology, and a suitability questionnaire that gauges a person’s proficiency with this type of financial products.
Prior to my analyst days, I was head of sales for Interbank FX, a fast-growing brokerage firm that was ranked #46 in 2008 by INC magazine.