• Stock tokens: Company shares generated as blockchain-based digital assets
• Stocks vs. stock tokens: Uncomplicated trading with the tokens
• Could stock tokens completely replace stocks in the future?
In 2020, a new trend emerged in the financial world with the so-called “share tokens”: Blockchain-based tokens, i.e. representatives, of shares can now be purchased. How exactly do these two assets differ?
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Smaller Units: It is possible to purchase just one share instead of a whole share token
The new concept offers investors tokens of publicly traded stocks – each stock token is non-fungible (i.e. non-exchangeable) and represents one stock. The new tokens are also called over-the-counter (OTC) derivatives. The value of derivatives and accordingly of share tokens is always linked to the underlying value, i.e. the price of the corresponding share on the stock exchange. However, stock tokens are not the same as stocks: the tokens are traded over the counter – for example, the large crypto exchange Binance or its competitor platform FTX. The latter has been offering stock tokens since October 2020, Binance only since spring 2021.
Both the shares themselves and the new share tokens have their pros and cons. Only whole shares can be traded on the stock exchange, while it is also possible to purchase only part of a token backed by a share with share tokens. At Binance, for example, the minimum trade size is currently one hundredth of a token. This can be an advantage for smaller private investors who don’t want to or can’t invest so much money in a stock that looks expensive.
With a share, the buyer usually receives so-called shareholder rights – according to the German Stock Corporation Act (AktG), for example, a dividend entitlement, subscription rights and conversion rights. The tokens, on the other hand, are not linked to shareholder rights, which is why the rights of a token investor are less extensive. However, it is possible that owners of stock tokens will still receive dividend payments.
Stock tokens can only be exchanged for crypto money
For smaller private investors and newcomers to the financial world, the stock tokens can also be advantageous because there are fewer hurdles for an investment: For example, no signature is required to trade with tokens. In the case of stock trading, on the other hand, as Portal Capital explains, current law still requires trading activities to be documented in the form of documents, which can act as a deterrent to newcomers. A share can be bought with one click, but behind it is the securitization. However, Capital also states that the securitization of shares could soon be abolished – which would mean that the advantage that share tokens have over the shares themselves in this regard would become obsolete.
Stock tokens are also not freely transferable, but are always traded through the issuer. In addition, they cannot be redeemed for share certificates, but can only be exchanged for crypto money. Binance explains this on its website – whether there will be providers in the future who will handle this differently remains to be seen.
Distributed ledger technology makes the stock tokens tamper-proof
Stock tokens are technically implemented on a blockchain basis, but in this respect they differ from so-called coins: While the latter have their own blockchain, the tokens are generated on an already existing blockchain. In December 2020, the media reported that PREOS tokens were now available – based on the Ethereum blockchain. Since the stock tokens are based on blockchain technology, according to capital.de, the so-called distributed ledger technology (DLT), which is also used for cryptocurrencies, is used for their issue. According to capital.de, the rights of disposal over material and immaterial goods can be documented in a tamper-proof manner. If the first IPO of shares is called Initial Public Offering (IPO), the comparable process for share tokens is called Initial Coin Offering (ICO).
Stock tokens could be the security class of the future
In line with the fact that stock tokens were only invented in 2020, they are not very widespread yet. Binance – as of mid-May 2021 – only offers tokens for shares in Apple, Coinbase, Microsoft, Tesla and MicroStrategy and had to defend trading in the tokens against BaFin and British authorities in spring 2021. Nevertheless, Dirk Elsner, an expert in the field, writes in an article on capital.de: “Securities law and settlement practice [stehen] before a fundamental upheaval. Until then, tokens are still considered a separate class of securities”. This implies that stock tokens could completely replace the usual stocks in the future or at least be equivalent. Whether this will actually happen and if so, when, remains to be seen for the time being.
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