Let’s talk about what tokenized shares and security tokens are. Why do large companies are interested in this method of raising capital? What are the advantages of asset tokenization?
What are tokenized shares?
Tokenized shares are digital bonds, stocks, derivatives, and other securities presented in e-format or on a blockchain chain. Their value is determined by external financial assets. These “digital securities” are issued through STOs.
Securities token life cycle chart is provided by Securities Industry and Financial Markets Association (“SIFMA”) and PricewaterhouseCoopers, LLP
The US Securities and Exchange Commission (SEC) recognizes certain public tokens as securities. So, these tokens are subject to registration, and this process leads to the new term known as Security Token Offering (STO).
STOs are similar to Initial Coin Offerings (ICOs) as the ways for raising investment. However, STOs are proposals where the securities issue regulator recognizes that the token is a security.
Why are large companies invest in STOs?
Tokenized shares are recent, but they immediately gained recognition as a reliable way to leverage investment capital. This is the process when a business issues crypto coins or tokens as stocks.
World Comparative Perspective Chart from BlockState.com
Recently, the Binance blog posted a message that shares of major global companies, such as Microsoft, Apple, and MicroStrategy, will be presented on the platform as tokenized shares. MicroStrategy tokenized shares arrived on the platform on Monday, and Apple shares became available on April 28th. Microsoft tokenized shares went online on April 30th.
The meaning is that the Binance users will be able to claim economic returns on the underlying stock, including possible dividends.
According to the platform’s official announcement, the tokens will only be available for trading during traditional trading hours. Residents of China, Turkey, the United States, and other limited jurisdictions can’t buy or own it.
Security Tokens (STO) can uniquely benefit investors and companies. The main advantages for companies and private investors are:
Companies can raise funds for a specific project or division, so there’s no need for investors to place a bet on the whole company at once;
- Firms are more flexible as STOs allow them to define the rights and conditions of token ownership. STO has a low investment entry because tokens can be split into pieces. This will help companies attract many global investors, including risk-averse individuals.
- So, individuals can only buy part of a share instead of buying a whole share.
What are the benefits of tokenizing assets?
Tokenization is a method that converts the rights to a traded asset into a digital token. That token is managed as a part of distributed ledger or blockchain.
This is an extremely powerful security concept. We, in turn, highlight the following advantages:
1. The risk of leakage is reduced and the problems of red tape are minimized. The technologies behind popular payment services such as mobile wallets are also being applied.
2. There is a saving in transaction costs by reducing intermediaries. Funds transfers can be done without a centralized intermediary due to the efficient automation of the process using smart contracts. This approach leads to lower costs of issuing and servicing securities, which reduces operating costs throughout the life of the securities. Issuers and investors benefit at the same time and commissions are reduced.
Comparison Chart from BlockState.com
3. The ability to purchase only a part of the share increases liquidity by making banking and non-banking assets available to a much wider range of investors. That new approach increases trading volumes in secondary markets, as well as liquidity premiums for sellers.
4. Using blockchain to create tokenized assets ensures the immutability, transparency, and efficiency of distributed ledgers.
5. Broad market presence. Most investments today have no access to the global investor base due to the boundaries that make it difficult to trade stocks in a wider range of markets.
Infrastructure and Asset Type Comparison Chart from BlockState.com
Tokenized shares will help increase the flow of private funding from equity holders to small and medium-sized enterprises. The retail trader’s ability to diversify will become more visible by investing in new funds and fractal property ownership at the same time.
Tokenized Shares are one of the newest digital assets available worldwide today. This is the idea that can lead to several positive consequences at once in terms of efficiency, transparency, speed, and capital flow.
Thus, tokenized assets and securities can improve efficiency in traditional financial markets by providing faster solutions to active participation by a wider number of companies.