What Are Tokenized Securities?
Tokenized securities represent real-world assets, like stocks, ETFs, or bonds, but are traded on the blockchain rather than through traditional brokerages. You can trade tokenized securities much like you would trade ETH or an NFT, albeit with some significant restrictions, such as where they can be traded and which platforms support trading or minting.
In effect, a tokenized security takes something that already exists and puts it on the blockchain. The idea isn’t new, but it’s gaining momentum, and a number of larger platforms are leading the way, including Ondo and Matrixdock.
How Do They Work?
A tokenized security represents something of value in traditional finance markets. For example, the Ondo Short-Term US Government Bond Fund uses the OUSG token, and the fund owns short-term US treasury bonds sprinkled with a bit of cash to maintain liquidity. The fund holds iShares Short Treasury Bond ETF shares, and real-world assets. OUSG holders own a share of the fund (and its yield) by owning the token rather than the ETF shares.
By backing the token with real-world assets, tokenized securities offer tangible value in an industry where token values are often speculative. Tokenization also promises to increase liquidity and reduce transaction costs for these tangible assets.
What About Other Tokenized Assets?
Tokenized securities aren’t just for stocks and bonds, although that’s where the action is currently. Tokenized securities examples might include tokenized stocks, tokenized bond funds, or even tokenized real estate. Today you can buy shares in a real estate investment trust (REIT) through a brokerage. But at some point, perhaps you’ll just buy tokens instead, safely stored in your ETH wallet.
As the tokenized market grows, the applications and benefits of tokenized securities are nearly endless.
Tokenized Securities vs. Stablecoins
The concept of tokens backed by real-world assets is similar to USDC or USDT, stablecoin tokens primarily backed by cash and bonds. The difference is that rather than Circle (USDC) or Tether (USDT) keeping the yield, token holders benefit from the yield and appreciation of tokenized securities (less a management fee in most cases).
Another difference is transferability. Some tokenized security issuers use the Ethereum ERC-1400 token standard, which can limit transfers of tokens to pre-approved accounts. Expect some KYC/AML requirements with today’s leading issuers to get your wallet address whitelisted.
Where Are Tokenized Securities Traded?
The Ethereum blockchain is the hub of activity for tokenized securities, but there’s no tokenized securities exchange yet. Some platforms restrict who can hold the tokens, which limits trading in the short term. As the industry evolves, you may see additional offerings on other chains with fewer trading restrictions.
Benefits Of Tokenized Securities
The tokenized securities market is growing, but it’s still in its infancy. Over time, we may see material advantages to tracking asset ownership on a crypto ledger rather than with centralized brokerages or similar institutions.
- Increased Liquidity: Crypto never sleeps; trade anytime.
- Accessibility: Smaller investment amounts make ownership more accessible, although that’s not always the case, and some platforms still require a higher minimum purchase ($100,000 USDC) to mint tokens.
- Reduced Transaction Costs: Even when ETH gas prices are high, blockchain still beats traditional finance when it comes to the cost of settling transactions.
- Reliable Collateral: Tokenized securities may provide a more reliable type of collateral for borrowing compared to volatile crypto assets like BTC or ETH.
- Additional Yield Options: In crypto bear markets, safe yields can be challenging to find. Tokenized securities bring additional yield options with less-volatile assets.
- Transparency: Issuers like Matrixdock provide a daily asset statement, so you can verify on-chain and off-chain activity.
For issuers, the benefits of tokenized securities are in two primary areas:
- Management Fees: The issuers get a small fee for making the token available and purchasing the securities that back the tokens. For example, Ondo earns a 0.15% management fee on its bond funds.
- Reduced Costs: Investors enjoy the benefit of lower transaction costs, but token issuers can attract more investors with those lower costs, thereby earning more management fees.
Tokenized Securities Examples
Several tokens are already available for in-demand assets.
- Matrixdock STBT: The Matrixdock Short-term Treasury Bill token represents ownership of T-bills with less than 6-month maturity.
- Ondo OHYG: The Ondo High Yield Corporate Bond Fund token represents ownership of high-yield corporate bonds. Under the hood, the fund owns the iBoxx $ High Yield Corporate Bond ETF.
- Backed Finance:Backed.fi offers popular stocks like Tesla, Apple, and Amazon, backed by real stocks and held by a custodian.
Laws & Regulations
Unsurprisingly, the US is off limits for tokenized securities, as are the UK and a handful of other jurisdictions, depending on which platform you choose for tokenized securities.
Backed.fi, for example, does not offer its tokens to US investors. The not-so-fine print clearly reads that the securities are not and will not be registered with the SEC. In the US, the SEC requires all securities to be registered. This means Backed.fi won’t sell to US investors.
You’ll find similar restrictions on other leading tokenized security platforms like Matrixdock and Onco. As we’ve seen in other parts of the crypto world, failure to register securities or offering unregistered securities in the US can lead to SEC enforcement action, like the recent charges against crypto exchange Bittrex.
The Future Of Tokenized Assets
On-chain T-bills are the main draw in tokenized assets right now, but tokenized stocks are already here, providing a tangible alternative to questionable synthetic stocks found on some crypto exchanges.
The future could bring fractional ownership of nearly any asset worth owning. In some cases, these assets may be simple property, like real estate or gold, while in other cases, they may represent ownership of income-producing assets like dividend stocks or even businesses that aren’t publicly traded on stock exchanges.
The market will determine the future for tokenized assets, but history has shown us that regulators will have a booming voice as well. However, large traditional finance players, like BNY Mellon, have advocated for tokenization. It’s not just the crypto bros. In time, tokenized assets might find their way to main street investors worldwide.
Frequently Asked Questions
The OMMF token from Ondo is one of many tokenized securities examples. The token represents ownership in Ondo’s US Money Markets Fund, a tokenized fund that will invest in a real-world money market fund.
Rather than owning shares in the fund, investors own Ethereum-based tokens, which are easier to trade and held securely in your own self-custody crypto wallets.
Yes. US regulators deem stock shares to be securities. By extension, tokenized stocks are also securities.
Tokenized securities are real-world securities, like stocks and bonds, that are represented by tokens on the blockchain; the token issuer backs the token with real-world assets.
Security tokens usually refer to tokens sold to raise funds for a crypto project – but with an expectation of a financial return through the efforts of others (one of the litmus tests for an asset being a security in the eyes of the SEC). One example might be the LBRY token, which the SEC deemed to be a security because the token was used to raise funds for the Library Protocol.
Sources
- Public Companies. Investor.gov.
- Registration Under the Securities Act of 1933. Investor.gov.
![Derive.xyz Review [year]: Pros, Cons, & Features](/_next/image/?url=https%3A%2F%2Fmilkroad.b-cdn.net%2F44261ba69489a001102bcac0e139b457e70fdfa0-1400x786.png%3Fw%3D600&w=3840&q=75)