Have you ever imagined you could invest in shares using cryptocurrencies? It turns out tokenized stocks, these new financial securities recorded on the blockchain, have great potential. But what are these, and how can you invest in cryptocurrency stocks?
At first glance, they don’t have much in common. And yet, they could end up never leaving each other. Stocks and cryptocurrencies have a joint future that is beginning to take shape.
This future can be summed up in two words: tokenized stocks. A new term to add to your cryptocurrency glossary. If your list is up to date, you should also recognize the word “token.” A token is a digital asset issued and exchangeable on a blockchain.
A cryptocurrency is, therefore, a token, just like an NFT (non-fungible….token), which notably makes it possible to encapsulate photos, videos, cards, or even music. This large family has security tokens, financial securities issued and traded on the blockchain. One of the first issued on the market is the Tesla token.
Tokenization of financial assets: how does it work?
In April 2021, the Binance cryptocurrency exchange announced the opening of a tokenized stock trading service. Users could buy in stable coin BUSD (the stablecoin of the Binance platform indexed on the price of the American dollar) a fraction or the whole of a Tesla, Coinbase, Microstrategy, or Apple share.
This approach by Binance was part of the growing phenomenon of tokenization, particularly, the tokenization of financial assets. The announced goal was to connect the world of traditional finance to that of crypto-assets by allowing companies to find a new source of financing.
Thus, any interested investor could acquire and resell, in a decentralized and secure way, a share of the traditional financial market tokenized in the form of a digital token through a blockchain. However, Binance has decided to remove the tokenized shares from its platform due to difficulties encountered in several European Union member states. Regulators considered the project to be inconsistent with securities regulations.
To understand what the tokenization of financial assets is, it is still necessary to master the concepts of “financial assets” (financial instruments), “tokens,” and “tokenization.”
Financial instruments (or financial assets) are governed by financial laws and regulations, which provides that there are three types of financial instruments:
Financial securities intended to represent assets having a monetary value, such as:
- equity securities issued by joint-stock companies;
- Debt securities.
- Financial contracts or forward financial instruments include swaps, warrants, and options. A financial asset represents ownership or a fraction of a company’s share.
A token is the digital representation of a digital or physical asset registered on a blockchain. The token will then be issued on it and exchangeable peer-to-peer.
Tokenization represents the ownership of a security or real estate and the rights attached to it on a digital token registered on a blockchain. In other words, tokenization allows the securitization of a physical and a digital asset as a token.
Tokenization of a financial asset is the process of registering a financial instrument or a fraction of the ownership of it and the rights attached to it on a digital token.
Ultimately, for the issuer, backing a financial asset with a digital token of the Security Token type will allow investors to acquire either a fraction of the ownership of the financial instrument or the entire it with the rights attached to it.
In this context, several legal questions emerge, particularly on the legal qualification to be given to tokenized financial assets and the applicable regulations.
