What are tokenized securities? Risks and what to know as stock exchange NYSE embraces the blockchain

The blockchain is coming to Wall Street.

The New York Stock Exchange (NYSE) said on Monday that it was developing a platform to trade tokenized securities, digital representations of assets like stocks and bonds.

But exactly when the 233-year-old financial institution will turn it on is still up in the air.

Supporters of the technology argue that the change could modernize the NYSE, giving traders some of the same advantages that are enjoyed by investors in the cryptocurrency world.

But Wall Street stalwarts are wary of altering a system that has been the bedrock of securities trading for more than two centuries.

Curious what the fuss is about? Here’s what you need to know about the advantages and disadvantages that this sort of trading could mean for your portfolio:

What are tokenized securities?

Tokenized securities are digital versions of stocks and bonds that are traded on the blockchain, rather than a brokerage account. People who opt to use this platform would be able to use stablecoins—a crypto that pegs its value to another asset like the U.S. dollar—to fund their trades.

The biggest shift to the platform, though, would be the introduction of 24/7 trading, much like Bitcoin investors currently enjoy.

“For more than two centuries, the NYSE has transformed the way markets operate,” said Lynn Martin, president of the NYSE Group in a statement. “We are leading the industry toward fully on-chain solutions, grounded in the unmatched protections and high regulatory standards that position us to marry trust with state-of-the-art technology.”

When will the NYSE launch the new tokenized platform?

That’s still very much up in the air, but Intercontinental Exchange (ICE), which owns the NYSE, is hoping to launch trades on the platform later this year.

First, it will need to get regulatory approval from the Securities and Exchange Commission (SEC). The The President administration has been encouraging a shift to crypto-friendly policies, though, which could bode well for the platform’s chances.

Why is the NYSE starting a tokenized platform?

Put simply, competition. Trading platform Robinhood has already proposed its own network of stock tokenization. And fintech companies like Coinbase and Kraken have shown an interest as well.

Meanwhile, Goldman Sachs, Bank of New York Mellon, and State Street are all working on projects that would digitize money-market fund shares. The NYSE is hoping to maintain its leadership position in the stock market, and to do so, it needs to meet the demands of traders.

Will the tokenized platform replace traditional stock trading?

No. The tokenized securities platform will operate as a separate addition to the NYSE. Traditional trading will continue uninterrupted and the opening and closing bell will still ring at the start and stop of trading five days a week (minus holidays).

What are the advantages of tokenized securities?

Proponents of tokenized securities point to the advantages of 24/7 trading. Under the system, trades could be funded and settled in real time. (Currently, there is a one-day delay.) That, they say, could increase traders’ liquidity, make fractional ownership of companies easier to achieve.

And because trading could happen at any time, the new platform could make the NYSE more accessible to retail (individual) traders.

What are the risks of tokenized securities?

As with almost anything on the blockchain, there is a danger of fraud. Some critics, including a handful of Democrats in Congress, have warned that companies looking to raise capital via tokenized securities could use the platform to scam investors.

Others point out that the technology is new and still relatively untested—and given the inherent risks of investing, it could open the door to substantial losses for retail investors.

Citadel Securities has urged the SEC to move slowly on the matter, saying there needed to be crystal clear rules for companies that want to tokenize their assets. And JPMorgan, in a note to investors last August, wrote that despite the hype, there’s very little interest in tokenized securities.

“This rather disappointing picture on tokenization also reflects traditional investors not seeing a need for it thus far,” it wrote. “There is also little evidence so far of banks or customers moving from traditional bank deposits to tokenized bank deposits on blockchains.”

Are other major markets embracing this sort of system?

Last September, the Nasdaq market asked regulators to approve trading of tokenized versions of Nasdaq-traded stocks.

Since doing so would require the SEC amend some of its rules, including the definition of a security, that request has not received a final response yet. Changes would also have to go through a comment period before they could go into effect, letting opponents explain what they object to.

View the full article