It is now possible to trade stocks like Tesla on a cryptocurrency exchange. Traditional finance needs a response.
Early last week, Binance announced the ability to buy and sell digital "tokens" on Tesla via its crypto asset exchange platform. The tokens will allow investors to trade fractions (up to 1/100) of Tesla stock and receive most of the benefits reserved for shareholders (dividends and transferability). However, the tokens do not carry voting rights at general meetings. Tesla Tokens are currently quoted in Binance USD (BUSD), a "stablecoin" that is pegged to the US dollar. Note that it is a Swiss company, Digital Assets AG, that has facilitated the development of these digitized shares.
Binance is not the first platform to tokenize stocks. Many equity tokens were already available from Bittrex and FTX. What is it all about? And what are the prospects for the development of this type of securitization?
Tokenization and blockchain
Binance is a platform that allows an investor to store, buy, resell and exchange cryptocurrencies against other cryptocurrencies, but alsoagainst the euro or the dollar. It currently provides access to more than 340 digital tokens and more than 1,100 currency pairs (between cryptos and cryptos/ fiat). Binance is now expanding its offer to other types of tokens by using blockchain technology to tokenize securities.
As a reminder, tokenization of an asset involves converting the rights attached to it into a digital token. The process is very similar to securitization but the difference is tokenization uses the blockchain.
The advantages of blockchain fit well with capital markets.
Blockchain has major advantages over conventional technologies. It offers greater transparency to all parties because they have access to the same documents. This technology offers enhanced security through safer record-keeping than traditional means as well as better traceability, since every transaction is recorded and stored simultaneously on the blockchain. This leads us to the other advantages of blockchain, namely flexibility, efficiency, and speed, brought about by largely eliminateing paper processes and the risk of human error. Finally, it reduces costs by streamlining processes and reducing the number of intermediaries.
Blockchain applied to financial markets
While the benefits of blockchain may seem somewhat abstract at first glance, they make perfect sense in the context of capital markets.
The mechanism is simple: a financial body buys the stock, holds it and issues a digital token that represents the security. The token can change hands an infinite number of times. Ultimately, it can be redeemed in shares at the request of the holder.
The digitization of shares offers the following advantages:
- Improved liquidity through 24/7 trading. This is the biorhythm that many traders have already become accustomed to since the advent of cryptocurrencies. Beware, however, that 24/7 for Tesla tokens is not yet available on Binance (they are aligned with Nasdaq's trading hours). However, FTX does offer 24/7 in Tesla stock and others;Fractionalization allows a larger community of investors to access the markets. Of course, this technology is already available through online banks (such as FlowBank in Switzerland). But tokenization will further expand the spectrum of opportunities. In theory, anyone with an internet connection can access a large number of markets, no matter where they are, for a very small fee;
- Lower costs due to strong disintermediation. In theory, there is no need to go through a bank or a broker, since the buyer and the seller can interact directly, from "wallet" to "wallet";
- An ultra-fast transfer, since the Blockchain reduces or even eliminates the number of intermediaries. With digital shares, the transfer is done in a few clicks and shares are transferable 24/7 with almost instantaneous settlement;
- Automated share register, allowing you to view your shareholding at any time;
- Simplified and accelerated securities transactions - for example, splits, capital increases or dividend payments;
- A significant reduction in market manipulation, as each transaction is recorded in real time and is transparent and accessible at all times to all stakeholders, including regulators
Banks are gradually opening up to cryptocurrencies.
An infinite universe of possibilities
The arrival of tokenized assets could mark the beginning of a process similar to that of the creation of joint stock companies and the opening of the first stock exchange in the 17th century.
Indeed, the process described above can potentially be applied to other liquid assets such as bonds. While it is complicated to build a bond portfolio because of the minimum size per transaction, the tokenization (and thus fractionalization) of bonds will allow investors to build a diversified portfolio with a low initial investment. The same goes for leveraged loans, which until now have been reserved for institutional clients only.
Tokenization also applies to illiquid assets, such as venture capital, private debt, real estate, works of art or collectible cars. Incidentally, it is already possible to buy "pre-IPO" securities on the crypto asset trading platform FTX. For example, many users used this platform to buy derivatives on Coinbase tokenized stocks before the IPO.
Crypto specialists vs. Traditional finance: the match
This development inevitably calls for a general reflection on the future of the financial industry.
Indeed, the "match" between crypto asset specialists and traditional players is becoming clearer. As we have just seen, crypto specialists such as Binance, Coinbase or FTX now have the opportunity to compete with banks and brokers on their own ground, i.e. the capital markets. In the case of Binance, a client wishing to reduce their cryptocurrency exposure can easily switch some of their profits to equity tokens or even other underlying securities. This can only mean a head-on collision with traditional players.
Banks are gradually opening up to cryptocurrencies. Of course, there are still some "Nay Sayers" such as this major British bank that has just excluded Microstrategy stock from its universe due to a high share of bitcoins in its balance sheet. But many banks have chosen to include bitcoin futures on their platforms as well as ETPs (soon ETFs?) whose underlying assets are cryptocurrencies.
Others are going even further by creating partnerships with crypto banks to allow their clients to trade on cryptocurrencies. Finally, the most reckless have decided to make a long-term bet on cryptocurrencies and tokenization by investing in the infrastructure, be it storage, trading and creation of crypto assets. These visionary banks have understood the very strong potential of blockchain for the finance industry. It is about giving access to a wider universe of investment possibilities to customers (whether in terms of the underlying and instruments) but also about improving the user experience.
But these initiatives also demonstrate that banks have now grasped the degree of urgency; if they are not able to offer their customers these new opportunities, it is new entrants such as Coinbase or Binance that will not only take advantage of the crypto-currency boom but also take market share in traditional trading activities. At least that is the threat posed by the possibility of trading digitized stocks on crypto asset trading platforms...