Tokenized Stocks: Same Rights, New Technology

Introduction to Tokenized Stocks

Tokenized stocks are a new and emerging trend in the financial world, allowing for the trading of traditional stocks on blockchain platforms. However, with this new technology comes the need for regulation and protection of investor rights. Roshan Robert, CEO of OKX US, recently stated that tokenized stocks must carry the same shareholder rights as traditional shares.

The Securities and Exchange Commission (SEC) has begun a five-year test of blockchain-based U.S. stock trading, and as part of this, they require qualifying stock tokens to carry rights matching the equivalent traditional shares. This means that holders of tokenized National Market System stocks should receive the same rights and privileges as investors who own traditional shares of the same class.

Background and Timeline

The concept of tokenized stocks has been gaining traction in recent years, with the SEC issuing a five-year trading exemption on September 17. This exemption allows qualifying venues to use permissioned automated market makers and liquidity pools to trade tokenized versions of certain U.S. listed stocks, subject to limits and other conditions.

The SEC's decision to issue this exemption is a significant step towards regulating the tokenized stock market. The exemption is set to expire on September 17, 2031, unless the SEC changes it. During this time, the SEC will be monitoring the market and assessing the effectiveness of the exemption.

Preserving Shareholder Rights

Robert emphasized that changing the technology used to trade and settle a share should not change the investor’s claim on the company. The distinction matters under the SEC’s five-year trading exemption. Qualifying venues can use permissioned automated market makers and liquidity pools to trade tokenized versions of certain U.S. listed stocks, subject to limits and other conditions.

The SEC order requires a venue to verify that each tokenized stock provides the rights and privileges of an equivalent class of conventional stock. This includes ownership and voting rights, dividends, and a claim on remaining assets if the company is liquidated. A product that only tracks a share’s price through synthetic exposure does not qualify as tokenized NMS stock under the exemption.

Key Requirements for Tokenized Stocks

• Tokenized stocks must preserve ownership and voting rights
• Tokenized stocks must provide the same rights and privileges as traditional shares
• Qualifying venues must use permissioned automated market makers and liquidity pools
• Trading is subject to limits and other conditions

Expert Perspective

Roshan Robert, CEO of OKX US, believes that tokenized stocks must preserve the rights of traditional shares. He stated that changing the technology used to trade and settle a share should not change the investor’s claim on the company. Robert also emphasized the importance of issuer involvement in the tokenization process, saying that it can help keep tokenized shares aligned with the original stock’s shareholder rights, disclosures, and corporate actions.

Implications for Readers in India

The emergence of tokenized stocks has significant implications for readers in India. As the Indian stock market continues to grow and evolve, the introduction of tokenized stocks could provide new opportunities for investors. However, it is essential to ensure that the rights of investors are protected and that the market is regulated effectively.

Issuer Involvement and Objections

When an unaffiliated third party tokenizes a company’s stock, the venue must give the issuer written notice before trading begins. The SEC requires a wait of at least 30 calendar days after the issuer receives it. If the company objects within that period, the venue cannot offer the tokenized stock under this exemption.

Robert described written notice as a safeguard for secondary trading on public blockchains. He said issuer involvement can help keep tokenized shares aligned with the original stock’s shareholder rights, disclosures, and corporate actions. A defined way for companies to respond would also give investors more confidence in the market, according to Robert.

Liquidity Pool Prices and Market Rules

For Robert, equal ownership rights are only part of the work needed to operate tokenized stock markets at scale. He said venues must also maintain fair access, protection against front-running and manipulation, dependable market data, and records that allow trading activity to be reviewed.

Pricing presents a specific problem. An automated market maker can set a token’s price from the assets held in its liquidity pool rather than directly from bids and offers across conventional stock exchanges. The SEC said that design may make it difficult for a venue to meet Regulation NMS requirements intended to prevent trades at prices inferior to protected quotes elsewhere.

Conclusion

In conclusion, tokenized stocks must carry the same shareholder rights as traditional shares, ensuring investor protection and market integrity. The SEC’s five-year exemption provides a temporary relief from the definition of an exchange under the Securities Exchange Act, allowing for the testing of tokenized stock markets under controlled conditions. As the market develops, it is crucial to maintain fair access, protection against manipulation, and dependable market data to ensure the success of tokenized stock trading.

What to Watch Next

As the tokenized stock market continues to evolve, there are several key developments to watch. The SEC will be monitoring the market and assessing the effectiveness of the exemption. Additionally, the introduction of new technologies and innovations will likely shape the future of tokenized stock trading.