Bankless: What Aspects of Stock Tokens Need Upgrading

Author: Jack Inabinet, Source: Bankless, Translated by: Shaw Jinse Caijing

Tokenized stocks are all the rage, hailed as the next large on-chain asset with real-world utility and mainstream appeal.

Despite the excitement surrounding these financial instruments, they are still in their early stages, with inadequate infrastructure and significant regulatory hurdles, and there is still a long way to go before they can truly compete with traditional financial products.

Today, let's discuss what changes tokenized stocks must undergo before becoming mainstream.

Existing Issues

Although tokenized stocks are portrayed as game changers in blockchain applications, these products are still in the early stages and have a long way to go.

For many tokenized stocks, holders do not have actual ownership of the assets they purchase. Instead, they receive on-chain IOUs (IOU), which grant them the ability to redeem the monetary value represented by the stocks they hold (i.e., stablecoins or cash) in tokens.

Unlike holding traditional stocks through registered brokers, the complex legal packaging used to create tokenized stocks also deprives holders of important rights, such as the right to directly claim company assets and the right to vote through shares.

Tokenized stocks can only be redeemed by investors who are registered with the issuer, and residents of "prohibited jurisdictions" cannot access this functionality. This definition varies by issuer and may change overnight due to legal changes.

Compared to digital native assets that are highly regarded for not requiring trust in third parties and being completely independent of counterparties, users of tokenized stocks rely entirely on the solvency of central custodians to redeem their monetary value claims.

Moreover, while it is natural to see competition in the emerging field of the crypto economy, the proliferation of various tokenized equity standards from different issuers has caused detrimental fragmentation, thereby harming the interests of end consumers.

Solution

For some people, like Mike Silagadze from ether.fi, the recent wave of tokenized stock announcements is just a "meaningless milestone."

Silagadze suggests that instead of creating low-quality traditional financial stock replicas that rely on trusted custodians, it is better to create native digital "bearer shares" that allow startups to circumvent regulation by directly listing tokens on-chain that act as quasi-stocks.

Although the proposal for permissionless bearer shares (also known as unregistered stock offerings) put forward by Silagadze is bound to clash with regulators, the digital asset management company Superstate is leading the way with Opening Bell to launch a compliant pseudo-stock alternative.

Through Opening Bell, companies can raise on-chain funds by directly issuing stocks on Solana or Ethereum. The issued stocks take the form of tokens with built-in compliance mechanisms, such as whitelist and programmatic transfer restrictions.

Although Opening Bell deviates from Silagadze's idealized vision of a permissionless future, it provides a realistic middle ground for issuing tokenized stocks with legally enforceable rights that comply with AML/KYC policies required by almost all existing countries.

Despite the advantages of Opening Bell in terms of compliance, its proprietary brand model presents significant fragmentation risks. Whether stocks migrated from the traditional finance sector or those originally listed on-chain, liquidity may be scattered across different blockchains, centralized and decentralized trading venues, or among competing tokens. Buyers also face additional friction, such as the mandatory KYC verification through Superstate, which limits access and slows down the rate of adoption.

Cryptocurrency is no longer the "Wild West" it once was. Although it is said that the U.S. Securities and Exchange Commission (SEC) is considering providing registration exemptions for securities issued in token form, it seems that achieving this goal is still fraught with challenges.

Tokenization brings a series of tangible benefits to stock traders. While all registered securities will ultimately be traded through a real-time settlement network, the consequences of fragmentation may likely mean that only one "blockchain" can handle the vast majority of such transactions.

In addition, successful stock tokenization will not disperse its liquidity among different proprietary issuers, thus avoiding a poor purchasing experience. Tokenized stocks are still in the early stages of development, but the existing obstacles suggest that a unified issuance standard and compliant single-chain issuance solution will dominate this field.