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For a long time, the prevailing narrative was that Wall Street was coming for crypto as institutions muscled their way onchain and began filling the bag with blue chip assets such as BTC and ETH. Now the pendulum appears to be swinging the other way as crypto rushes to tokenize traditional assets and make them tradable onchain as well as on centralized exchanges.
The lines between TradFi and DeFi are becoming increasingly blurred as assets move in both directions, crossing the bridges that now connect the once isolated worlds. Institutional demand for digital assets has seen the creation of ETFs to cater to demand for traditional investors. Crypto investors, meanwhile, have long had their pick of digital assets and are now craving something different. And in tokenized equities, they’ve found it in stocks that can be traded around the clock.
New Stocks on the Blockchain
In late May, US crypto exchange Kraken revealed that it was launching tokenized equities, allowing investors in certain jurisdictions to trade stocks such as Apple, Tesla, and Nvidia 24/7. It’s the latest crypto company to make a move for the lucrative equities market, which has remained largely untapped despite the explosive growth in real-world-assets (RWAs) that’s now surpassed $23B.
Kraken’s equities offering is being implemented with the aid of xStocks, developed by Backed, with Mark Greenberg, Kraken Global Head of Consumer, summarizing the value proposition succintly: “Access to traditional U.S. equities remains slow, costly and restricted. With xStocks, we’re using blockchain technology to deliver something better – open, instant, accessible and borderless exposure to some of America’s most iconic companies.”
That, in essence, is the bull case for tokenizing stocks. It opens them up to a wider investor group that has had limited access to equities up until now, while adding the ability for stocks to be traded outside of US hours – and indeed outside of the US itself.
Lingling Jiang, Partner at DWF Labs, agrees with Greenberg’s assessment, noting: “Kraken’s launch of tokenized U.S. equities via xStocks marks a significant advancement in the integration of traditional finance with blockchain technology. By offering digital tokens backed 1:1 by actual shares of companies like Apple, Tesla, and Nvidia, and issuing them on the Solana blockchain, Kraken is providing non-U.S. investors with 24/7 access to U.S. equities, bypassing traditional market hours and intermediaries.”
She adds: “While this development opens up exciting opportunities, it also brings forth important considerations regarding regulatory compliance and investor protection. Kraken has stated that it is actively working with various regulators to ensure that xStocks are offered legally in each jurisdiction.”
Slowly Then All at Once
Tokenized equities isn’t a new idea, it should be noted, but it’s one that’s taken time to become a working reality, largely due to the regulatory challenges associated with offering securities to global investors. As far back as 2021, Binance briefly experimented with tokenized stocks before walking this idea back once the compliance challenges crystallized, while the likes of tZERO and Polymath have also been developing tokenized securities for years.
This time is different, however, now that the regulatory climate is much more receptive to blockchain finance, aided by a lighter touch SEC and a groundswell of institutional goodwill. In addition to Kraken, Robinhood announced plans in May to develop a blockchain-based platform for European retail investors, allowing them to trade tokenized versions of US stocks. The same month, Dinari raised $12.7M to make tokenized stocks available to non-US investors.
Let Them Trade Stonks
Stonks, as stocks are colloquially known in the cryptosphere, don’t typically produce the sort of double-digit percentage gains crypto traders are accustomed to realizing on good days. But their relative stability makes them attractive in other ways. Unlike stablecoins, they have the potential to grow in value, providing a low-risk option for crypto traders looking to park profits while they wait for the next opportunity to materialize.
But to view tokenized equities as merely the gateway to trading stocks is to miss out on the bigger picture of what blockchain brings to the table. As DWF Labs’ Lingling Jiang notes, it represents “a pivotal step towards a more inclusive and efficient financial system, where traditional assets can be accessed and utilized in innovative ways through blockchain technology.”
Stocks have the potential to become the bedrock for a host of DeFi primitives, serving as collateral for borrowing and as backing for stablecoins and other financial instruments. Today TESLA. Tomorrow, tokenized equity lending platforms. Of course, all of this has to be implemented while maintaining full compliance to ensure that only approved investors can access these instruments onchain.The total value of tokenized stocks stands at just $340M, a drop in the ocean compared to the trillions that are traded on Wall Street. But it’s a start. And now the foundations are in place for trading equities onchain, this capitalization looks poised to undergo explosive growth. BlackRock’s Larry Fink has predicted that every stock and bond could eventually be tokenized. While that scenario is still years away, the wheels have been set in motion.
Image by Sergei Tokmakov, Esq. <https://Terms.Law> from Pixabay
