The consensus from most experts in traditional finance in the early days of crypto was that they couldn’t see the value of bitcoin and other cryptocurrencies, but man, that blockchain technology, that’s where the real potential was.
A decade later, bitcoin is trading above R2m, and the world’s largest asset manager, BlackRock, is tokenising US bonds on ethereum, the second-largest cryptocurrency after bitcoin. That same asset manager launched the crypto ETF boom when it introduced its bitcoin ETF last year. The latest argument for crypto’s real-world utility and value is the launch of major US stocks on blockchain technology. So, in the end, the experts were both very wrong and very right.
Tokenised stocks were introduced in the US in May this year, and more than 40 US stocks and ETFs are now available to South Africans on Luno. Materially, the token and the stock are identical; technically, they differ in how they are traded, but it all happens on the backend.
Tokenised stocks are blockchain-based tokens that represent ownership in traditional company shares, such as Apple or Tesla. Each token is backed by actual shares held in custody, and its price tracks the real-time value of the underlying stock.
Tokenised stocks work on the same principle as stablecoins, crypto’s other “killer application”. A stablecoin such as USDC is a tokenised version of the US dollar. If there are 1-million USDC in circulation, there must be $1-million held in custody by a regulated entity backing these tokens. That balance must be maintained at all times.
Blockchains don’t sleep, which means trading is open day and night
The same goes for tokenised stocks. If investors globally own 1,000 token shares in Amazon, the company creating these tokens must hold an equal amount of actual Amazon shares in custody at all times.
So why own tokenised shares if there are perfectly fine real shares to buy? The short answer is that there is friction in today’s stock market that can be cleared by tokenising stocks. These tokenised investments give investors the same market exposure as buying the actual shares, but with the benefits of crypto technology.
Token versions of stocks can be split into fractions, meaning investors can buy R20 worth of Apple equity instead of paying more than R3,500 for an entire share. Blockchains are borderless by design, which means there’s no need for currency conversion. Plus, blockchains don’t sleep, which means trading is open day and night. It’s a big step forward from the old way of doing things. It’s also less scary for investors who can buy shares in the biggest companies in the world with just a few taps on an app.
The big question that’s always surrounded cryptocurrency is: what is its function? The industry and the creators of this technology have spent more than a decade justifying its existence and proving that it belongs inside the traditional financial system.
Bitcoin was the first technology that allowed global value transfer on the internet without requiring anyone in the middle to validate the transaction. Ethereum built on this by allowing contracts to be built into this value transfer system.
Bonds and dollars are now being traded on these systems by the biggest traditional financial institutions in the world. The same applies to stocks, and soon every other asset imaginable will be included.
De Wit is the country manager at Luno South Africa
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