In simple terms, tokenization is a means of recording ownership of an asset and representing that asset on a blockchain. Zeus Exchange is a Singapore-based startup that is building a hybrid environment where you can trade financial and crypto securities.
From Equity Stocks to Crypto-Stocks?
I asked Olga if we were seeing the early stages of disruption in the conventional stock markets. Would all equity stocks be represented as crypto-stocks in the future? To her, it’s still an unknown.
Zeus plans on providing a platform to offer trading tokenized stocks, or more correctly, depository receipts based on conventional stocks, or – crypto stocks.
“There is the idea that if we have the blockchain layer, we will be able to move the trading itself on the blockchain and tokenize various financial instruments, while letting underlying stocks sit in the country of origin,” stated Olga.
What’s important, is that tokenization breaks down several barriers. Oftentimes, stocks can only be purchased through a broker in lots of 100. This can make it difficult for some investors to gain exposure to certain stocks due to cost. With tokenization, this needn’t be an issue. Some investors don’t have direct access to international markets, and asset tokenization may help with that. It may also cut down the costs of settlement for all trading operations, as well as allow simpler and cheaper cross-border asset transfers.
Blockchain offers new opportunities when it comes to settlement and accessibility for investors. From a legal perspective, tokens backed by stocks are analogous to American Depository Receipts (ADR’s) or Global Depository Receipts (GDR’s). Essentially, ADR’s/GDR’s are certificates issued for shares in a foreign company. Additionally, a comparison could be drawn between Exchange Traded Funds (ETF’s) or options and tokens backed by stocks. Either way, it’s a well known legal form, even if the blockchain-specific legislation is lagging behind at the moment.
There is scope to consider facilitating a similar proposal when it comes to other assets such as industrial assets or real estate. We recently reported on developments within Europe in relation to the tokenization of real estate. Whilst there are examples of moves in that direction, in Olga’s opinion, it’s a matter of how cryptocurrencies and crypto investment instruments unfold in the future, their usage generally and leading on from that, what the market can support.
Classic financial markets offer a limited scope from a profitability perspective. With that, investors are looking for new opportunities. This, in turn, has led to a renewed interest in new investment classes. That said, as it stands it is very much at an embryonic stage of development.
Crypto-Stocks and Regulation
Whilst crypto by its nature facilitates purchase and sale anywhere in principal, in the case of crypto-stock, there is a question of regulation. For example, If a crypto-stock is purchased in the U.S. and sold in Singapore, and the actual underlying stock is held in European depository, all regulators need to be on-board with the understanding of the nature of such a trade – and that they are happy with it. Obviously, brokers and exchanges have to act in compliance with the applicable regulations, but at the moment the market has to wait while the regulators would issue an actual policy.
Zeus is a Singaporean-registered company and it’s making relationships with international brokers. It aspires to work with U.S. markets. However, the company does not expect to offer services to U.S. citizens for some time – until there is further regulatory clarity in the U.S.
What’s the place of blockchain in the financial markets?
We broadened the outlook towards a consideration of the role of blockchain generally in financial markets. Blockchain in the future may allow much easier money operations, investments, settlements, and clearing between different counter-parties – especially between different countries. Olga believes that whilst the technology side of it is important – and that it will eventually get there in terms of mass adoption, Zeus expects to see legislators around the world synchronize their approach to blockchain in the financial context. “But there are too many obstacles right now to say that yes, we’re going in that direction, too early a stage and too complicated a task to tackle”.
Blockchain in the future may allow much easier money operations, investments, settlements, and clearing between different counter-parties – especially between different countries.
Meanwhile, the Zeus CEO is looking forward to seeing the application of blockchain technology by depositories, banks and major financial exchanges to prove the concept for the future mass adoption in the financial sector. In this context, the immediate use case would be to facilitate and improve upon clearing and settlement processes, for example. Certainly, in the case of global central securities depositories, movement has been slow albeit with some exceptions.
Crypto-Stocks in Europe
Whilst Zeus caters towards Asia, Europeans can access crypto-stocks too. Estonia’s DX Exchange claims to be the first EU-regulated platform to facilitate the trading of U.S. stocks in the form of tokenized securities. It’s of equal relevance to Europeans as equity stock tokenization facilitates greater access.
It’s early days for crypto-stocks but it certainly seems like we will be hearing more about this tradable instrument in the near future.