What it means
Traditional trading involves several steps and intermediaries, and the final settlement of ownership takes time. Companies in the tokenised securities space try to record ownership on a blockchain, a shared digital ledger, so that trades can be settled faster and with fewer reconciliation errors. tZERO is one of the better-known names in this area.
It has built technology and trading venues intended for digital securities, and it has described its aim as modernising how securities are issued, traded and held. A regulated trading venue for securities, such as an alternative trading system, must follow the rules of the relevant securities regulator, including investor protections and reporting.
Anyone dealing with a firm in this field should check which of its activities are authorised in their country. The idea of tokenisation is that a share, bond or fund interest is represented by a digital token, with the rules of the security written into the token's code.
Supporters say this can reduce paperwork and allow trading outside normal hours, while critics point to uncertain regulation, limited liquidity and technology risk. For a business reader, the main takeaway is the cost and speed argument.
If a company can issue securities, track ownership and settle trades with less manual work, it may lower the cost of raising capital, especially for smaller companies that struggle to attract the attention of large markets. Details about the company, its ownership and its products have changed over time.
Any decision that depends on them needs up-to-date information from the company and from official filings.
In practice
Real-world examples.
Example
A mid-sized company wants to raise $5,000,000 from a few hundred investors. Its advisers explore issuing the shares as digital tokens on a regulated platform, since the tokens could be tracked and transferred electronically. The finance director compares the platform fees with the cost of a traditional private placement. She also asks how shareholders would later be able to sell their tokens.
Example
A fund manager is asked whether a tokenised bond could settle faster than the usual two business days. She talks to technology providers in this field and learns that near-instant settlement is possible, but liquidity may be thin. She decides to run a small test using $250,000 before committing more. The results are reported to the investment committee after three months.
Example
A compliance officer at a broker-dealer reviews a proposal to list a security on a digital asset trading venue. He confirms that the venue is registered and that the customers are eligible to trade there. He records his checks in the file before approving the project. He also asks the legal team to confirm how client assets would be held if the venue ran into difficulty.
Case study
Seen in the real world.
Lakeside Growth Partners is a fictional venture fund used in this illustrative example. It held a 4% stake in a private software company and found it hard to sell, because there was no active market for the shares.
The fund's finance team investigated whether a tokenised securities platform of the type tZERO represents could provide a trading route. They learned that the shares could be issued as tokens on a regulated venue, but that only a small group of eligible investors would be able to buy, and trades might be infrequent.
The team estimated that a sale of the 4% stake, worth $1,200,000 on its books, might take months and need a discount of perhaps 15% to attract buyers, a $180,000 reduction. They kept the shares and treated the platform as a possible future exit. The managers also agreed to revisit the question each year as the market for tokenised securities matured. The illustrative case shows that a new trading venue does not automatically create liquidity. The finance team recorded the investigation in its valuation file, noting that the stake would stay valued on the basis of its latest independent appraisal and not at a hoped-for token price.
Watch out
Common mistakes.
- Assuming tokenised securities are unregulated. Securities laws generally still apply when a token represents a share or bond.
- Expecting instant liquidity. A faster settlement process does not guarantee that buyers will be available at a good price.
- Relying on old information about a fast-changing company. Check recent filings and announcements before making any decision.
Questions
People also ask.
What does tZERO do?
It develops technology and trading systems for digital securities, with the aim of making issuance, trading and settlement faster and cheaper.
What is tokenisation?
It is the process of representing ownership of an asset, such as a share, as a digital token on a blockchain.
Is investing through such platforms risky?
Yes. Risks include limited liquidity, technology failures, regulatory change and the usual risks of the underlying investment.
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