On Jan. 7, digital exchange DX.Exchange, based and regulated in Estonia, began offering investors the ability to trade digital tokens backed by shares in 10 NASDAQ-listed stocks, including Apple, Amazon, Facebook, and Microsoft. And in October, crowdfunding platform Indiegogo sold tokenized shares of the St. Regis Aspen Resort to SEC-accredited traders.
These two sales are early examples of a growing trend to use blockchain technology to create security token offerings (STO), which are very much like initial coin offerings (ICO) except that they are backed by real-world assets as diverse as stocks and real estate and are issued under very firm and clear regulatory regimes.
According to FinTech firm eToro, security tokens have the potential to completely change the way we look at ownership, as the value of anything from patents to property to paintings can be represented in smart contract-enabled tokens and traded on a blockchain system.
“In a nutshell, tokenization is a method of converting rights to a real-world asset into digital tokens that can be moved, traded, recorded, or stored on a blockchain system,” the company said in a market insight paper. “Tokenizing a property or a work of art introduces a digital signature that is unique and cannot be altered… Furthermore, this token can be split into many sub-tokens, each also carrying the same unique digital signature. This means that ‘shares’ of any real estate or work of art can be traded on the blockchain as crypto-assets. Bottom line, tokenization of non-fungible goods means that ownership of previously illiquid assets can be distributed.”
Likewise, stock traders could use tokenized securities to trade in less than a whole share of a stock, or trade after hours when the markets are closed. While he is “unsure and even skeptical of DX.Exchange’s model because we don’t think that it’s acceptable to list tokenized shares of a company without shareholder consent,” Dan Doney, CEO of FinTech firm Securrency told CNBC, “we do think that the model can meet regulatory standards if executed properly.”
Because security tokens emphasize regulatory compliance, represent value-producing assets and feature automated regulatory reporting the technology can provide “stable value versus the volatility of crypto,” Doney told CNBC.
IN DX.Exchange’s case, its digital stock tokens are regulated under the EU’s MiFID II regulations via licenses from the Estonian Financial Intelligence Unit, not the U.S. Securities and Exchange Commission, and are therefore not available to U.S. citizens, the company said. The stocks backing the tokens are purchased and held in segregated accounts by Cyprus-regulated MPS MarketPlace Securities, Ltd., which generates ERC20 tokens on the Ethereum blockchain. DX.Exchange is also a cryptocurrency exchange.
As for the St. Regis Aspen sale, the Aspen Digital security token offering (STO) was run by Templum Markets, LLC, a U.S. FINRA-registered broker dealer, the company announced on Oct. 22, 2018. The offering, to recapitalize the AAA four-diamond Colorado resort, “represents a groundbreaking moment in the acceptance and growth of regulated digital securities by traditional participants, including institutional investors, lenders, and service providers,” Templum said in its statement. There was strong participation from institutional and high-net-worth investors in the Asia-Pacific region, it added.