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“The next generation for the markets…will be the tokenization of securities.”

— Larry Fink

DAS NYC Preview: Tokenization 

The Dutch East India Company (VOC) issued the world’s first stock in 1602, but buyers did not receive physical certificates.

Instead, their names were written into a ledger (pictured above), changes to which required a visit by both buyer and seller to the company’s bookkeeper and with not one, but two company directors in attendance to approve the transfer of ownership.

Just a few years later, the VOC did away with the ledger and began issuing physical shares, which had the immense benefit of allowing trades to occur without a visit to the company bookkeeper and required zero directors as witness.

That system of exchanging paper claims of ownership prevailed for about 400 years, only beginning to cause problems when the exchanges occurred over long distances and in high volumes. 

In 1901, for example, London holders of Northern Pacific stock, having telegraphed sell orders to their New York brokers to take advantage of the railroad’s soaring share price, were "bought in" at a huge loss when their physical shares, traveling by ship, failed to arrive in time to make delivery.

Things only really came to a head, however, in the 1960s when a surge in trading activity (12 million shares a day!) caused such a backlog of certificate deliveries that the New York Stock Exchange went to a four-day trading week, closing on Wednesdays to give brokers time to clear it.

A combination of lost and stolen certificates is estimated to have cost Wall Street brokers as much as $400 million between 1967 and 1970.

The paperwork crisis led to the “dematerialization” of stock certificates in the 1970s, and in 1973, the establishment of the DTC (predecessor to today’s DTCC), which acts as a centralized ledger (like the VOCs!) for US shares.

The most recent innovation in the movement of ownership rights came in 1993 with the invention of ETFs, which allow bundles of shares to trade as a single security.

That is where things still stand and it’s been hard to imagine any additional improvements — until recently, when the ease of moving crypto tokens around got people thinking that we could move stocks and bonds that way, too.

Blockchains are ledgers, much like the VOCs, but with the advantage of being distributed — this could, in theory, allow banks, brokers and investors to all use the same ledger, instead of entrusting the world’s wealth to a hodgepodge of siloed spreadsheets.

What that might look like will be a featured theme at the Blockworks’ upcoming Digital Asset Summit in NYC, where crypto people will gather to determine how the financial system should be rebooted.

It’s not just crypto people calling for a reboot, however.

BlackRock CEO Larry Fink believes that blockchains are the next great innovation in moving investors’ claims on assets: “I want the SEC to rapidly approve the tokenization of bonds and stocks,” he told CNBC.

What he mostly seems to have in mind is the capital efficiency that blockchains promise — lowering the cost of owning securities for investors and of processing them for banks and brokers. 

Robinhood may already be realizing some of those efficiencies: In its most recent earnings call, management said they’re using stablecoins “to power a lot of our weekend settlements.”

Tokenized dollars are probably the only way to settle anything on a weekend, so that already seems like a significant advance. 

But tokenization could do a lot more.

Moving tokenized dollars on weekends might be a first step toward an “intermediate stage of tokenization,” as Blockworks’ Dan Shapiro describes it, “in which each bank creates their own permissioned chain or chains to tokenize their assets.”

Once they do, they might also be inclined to issue new debt and equity directly on their chains — and, for better distribution, maybe even on public chains too. 

(Prometheum, for example, is working on a venue that would allow KYC’d investors to trade securities issued on public blockchains like Ethereum.)

Larry Fink is also thinking bigger than just cost cutting: “If we can tokenize bonds and stocks…it will democratize investing in ways we can’t imagine.” 

Personally, I can imagine that tokenization would democratize access to corporate bonds, international stocks, private equity and structured products, all of which are difficult for even accredited investors to access.

If you held those assets in a KYC’d digital wallet, I could also imagine that you wouldn’t have to open multiple accounts with the varying brokers and asset managers that offer them — the brokers would simply come to you.

If so, those hard-to-access products might also become more liquid by trading on automated market makers (AMMs), which have proven so effective for illiquid crypto tokens.

But this is probably still not imaginative enough, so I’ll be asking around at DAS NYC for more creative ideas — like putting uranium onchain.

Because, even more than VOC shares, uranium is something you won’t want to transfer in person.

— Byron Gilliam

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