Tokenization of Stocks: Opportunities and Challenges Coexist

With the changing policy environment, the concept of tokenized stocks has once again attracted market attention. This article will review the development history of tokenized stocks, analyze the current market situation, and explore the opportunities and challenges it faces.

The Development History of Tokenization of Stocks

The concept of tokenization of stocks can be traced back to the rise of STO in 2017. STO, as a method of digitizing and putting traditional securities rights on the blockchain for financing, combines the compliance of traditional securities with the efficiency of blockchain technology. Prior to this, ICO was the mainstream financing method in the blockchain field, but due to a lack of regulation and real asset support, it led to numerous issues.

In 2017, the U.S. Securities and Exchange Commission issued a statement regarding the DAO incident, marking the formal emergence of the STO concept. In 2018, STO began to attract attention as a "compliant ICO," but its development was slow due to various reasons.

After the rise of the DeFi craze in 2020, some projects began to attempt to create derivatives linked to stock prices in a decentralized manner, such as Synthetix and Mirror Protocol. These projects allowed market makers to mint synthetic US stocks through over-collateralization, and traders could trade these assets on DEXs. However, due to insufficient demand and other reasons, these projects ultimately failed to achieve success.

At the same time, some well-known centralized exchanges also attempted to launch tokenized stock trading services, such as FTX and a certain trading platform. However, due to regulatory pressure, these services were soon halted.

With the changing regulatory environment, tokenized stocks are regaining attention in the form of RWAs. This model emphasizes issuing tokens backed 1:1 by real-world assets through compliance-oriented architecture design, while strictly adhering to regulatory requirements.

Current Status of the Stock RWA Market

Currently, the stock RWA market is still in its early stages, primarily focused on the US stock market. According to the data, the total issuance in the current stock RWA market has reached $445.4 million, of which $429.84 million comes from EXOD, which is the on-chain stock issued by Exodus Movement, Inc.

Exodus is a software company focused on developing self-custody cryptocurrency wallets, with its stock listed on the NYSE, allowing users to migrate Class A common stock to manage on the Algorand blockchain. It is worth noting that the on-chain EXOD serves only as a digital identifier of the stock, does not include voting, governance, or other rights, and cannot be directly traded on-chain.

The successful tokenization of common stock by Exodus is of great significance, marking a shift in regulators' attitudes toward on-chain stock assets. Although the company's initial application for on-chain approval was rejected, it was ultimately approved after continuous improvements, which has made its stock highly sought after in the market.

Aside from EXOD, the remaining market share of approximately $16 million mainly comes from the Backed Finance project. This Swiss company allows users who comply with KYC to mint on-chain stock tokens using USDC in the primary market through a compliant structure. After receiving crypto assets, Backed converts them into USD and purchases stocks in the secondary market, managed by a Swiss custodian bank, and then mints bSTOCK tokens 1:1 to send to users. Investors can directly purchase these on-chain stock assets through DEX.

The issuance of Backed is mainly concentrated in two assets: CSPX and COIN, with the former being approximately 10 million USD and the latter about 3 million USD. On-chain liquidity is primarily distributed across two blockchains, with bCSPX liquidity around 6 million USD and wbCOIN approximately 1 million USD. However, the trading volume is relatively low; for example, the cumulative trading volume of the largest liquidity pool for bCSPX since deployment is about 3.8 million USD, with approximately 400 transactions.

Another noteworthy development is from a fintech company. The company recently announced its overall strategy, positioning tokenized stocks as the core trading target of its global market business. With broader traditional financial resources and a technological background, the company is expected to accelerate development in this field.

Opportunities and Challenges of Stock RWA

Stock RWA is generally considered to have the following advantages:

1. 24/7 Trading: Blockchain technology enables tokenized stocks to break through the time limitations of traditional exchanges, meeting more trading demands.

2. Reduce the cost for non-U.S. users to invest in U.S. assets: Using stablecoins can reduce the transaction fees and time costs of cross-border transactions.

3. Financial Innovation Potential: The programmable features enable tokenized stocks to integrate with the DeFi ecosystem, creating more financial innovation scenarios.

However, tokenized stocks still face two major uncertainties:

1. Speed of Regulatory Policy Advancement: Currently, regulatory policies have not fully addressed the "same rights for stocks and tokens" issue, which restricts certain trading scenarios and financial innovations. The speed of policy advancement may be delayed due to other government priorities.

2. Stablecoin Adoption: The primary target users for tokenized stocks may be traditional non-U.S. investors, and their adoption depends on the policies regarding stablecoins in various countries. For investors in certain countries, the cost of obtaining stablecoins through unofficial channels may be higher than traditional investment channels.

Based on the above analysis, there may be two market opportunities for stocks RWA in the short term:

1. Listed companies can refer to the EXOD case to issue on-chain stock tokens. Although the actual application scenarios are limited in the short term, the potential financial innovation capability may enhance investors' valuation expectations for the company.

2. For high-dividend U.S. stocks that are tokenized, some income-generating DeFi protocols may become potential users. As market sentiment improves, these protocols may seek high-dividend blue-chip stocks as a new source of income to enhance overall yield and market competitiveness.