Before we go through five examples of tokenized securities, let us briefly define what they are and what are their benefits.
Tokenized securities, also known as digital securities or security tokens, represent ownership in traditional assets such as equities, bonds, real estate, and funds. Unlike traditional securities, which are typically represented by paper certificates or electronic entries in centralized databases, tokenized securities are digitized and stored on a blockchain. Each token corresponds to a fraction of the underlying asset, allowing for fractional ownership and seamless transferability. When they are minted by a company that holds the required license from the regulator, such as NYALA’s Smart Registry, these tokens grant the exact same rights to investors as traditional securities.
Much has been written already about the benefits of tokenizing securities. They can broadly be summarized as follows:
Read more about the benefits of tokenization.
Which securities can be tokenized depends on the applicable legislation of the issuer’s country. In Germany, for example, bonds could be tokenized as early as 2021 under the Electronic Securities Law (eWpG) – as long as the issuer partners with a regulated crypto registrar such as NYALA’s Smart Registry. In Germany still, equities could only be tokenized starting December 2023 under the Future of Financing law (ZuFinG).
Other countries, such as Switzerland, were early to adopt a broader framework allowing for the tokenization of multiple asset classes. Nevertheless, a EU-based issuer could face legal difficulties when tokenizing under Swiss law. It is therefore important for any issuer to research the DLT legislation applicable in their countries of operation.
In any case, here are five types of securities that can be tokenized in most global jurisdictions today
A bond is an interest-bearing security where an issuer borrows money from investors and usually grants them interest payments and repayment of the capital amount at the end of the term. Corporations, both large and small, can benefit from issuing their bonds on the blockchain to increase transferability and fast settlements. These advantages can in turn lead to more favourable terms for the bonds. Automated coupon payments to bondholders are also one of the most obvious applications of smart contracts.
Shares are portions of the equity capital of a company that can be acquired by investors. A shareholder who owns shares in a company becomes a part-owner of that company and thereby has certain rights and entitlements. Tokenized shares do not need to be held at a central securities registry (CSD), thus the costs of issuance are reduced. Tokenization also makes the transfer of shares from investor to investor much more straightforward, as long as regulations permit. In Germany, NYALA was the first company to tokenize shares (their own) under the new Future of Financing act.
Treasury bills are public debt issued by governments. They are often considered one of the safest investments in the public markets. Tokenized treasury bills offer investors a secure and liquid investment option, while governments benefit from efficient fundraising mechanisms.
The tokenized U.S. treasury market on public blockchains has already reached $1 Billion, with Blackrock’s fund BUIDL contributing significantly to this milestone.
Investment funds can tokenize fund units, allowing investors to gain exposure to diversified portfolios of assets such as stocks, bonds, and real estate. Tokenized fund units offer investors increased liquidity and transparency, while fund managers benefit from reduced administrative overhead. There have been many examples of funds units being tokenized, with major players such as Wisdom Tree making the plunge.
A convertible bond is a financial instrument that, in addition to the right to interest payments and repayments, also grants the right to convert it into a predetermined number of shares in the issuing company. It is thus a combination of a bond and a possible equity participation, which offers the holder the possibility to switch from the bond into equity of the company. In contrast to option bonds, the subscription of shares is not in addition to the bond, but as an alternative. When an investor exercises their right of conversion, bond tokens are typically burned, while share tokens are minted and distributed to their wallets.
If you want to read further, this article details the different sub-categories of securities that can be tokenized.
