Introducing tokenized stocks
For over ten years now, crypto has been building a new financial system onchain that lowers barriers to entry, transcends geographic limitations, allows for financial product innovation, and generally makes finance more efficient, more powerful, and more accessible.
The advantages offered by blockchain were not immediately or equally apparent to everyone. In places where banking, investment, and a wide variety of financial products were readily available to everyone, crypto seemed like a niche fad.
On the other hand, elsewhere in the world, people who face extreme currency depreciation, government corruption, persecution, or no access to banking – due to their location or their identity – could immediately understand how crypto and blockchain can bring financial freedom.
Historically, traditional finance has been focused on the highly banked users and deeply entrenched in existing slow and rigid financial structures. It took a while to come around to onchain finance, but the benefits and the upside of opening access to investors worldwide have become fully apparent.
We are at the very start of a huge shift in how asset ownership is perceived, both onchain and in traditional finance. It began with stablecoins, opening access to the US dollar. Now comes the next step with tokenized real world assets (RWAs), specifically tokenized stocks. The tokenized RWA market is valued at billions of dollars currently, and projected to grow thousands of times in the next decade. Now tokenized stocks are available directly in MEW, your favorite crypto wallet.
What are tokenized stocks?
Tokenized stocks are digital tokens on the blockchain that represent traditional shares of publicly traded companies and exchange traded funds (ETFs). These tokens give economic exposure to the underlying asset, with the additional benefits of 24/5 trading, faster settlement, low fees, global accessibility, DeFi compatibility, transparency, and self-custody.
Tokenization can make the publicly traded assets on a traditional exchange available to anyone in the world, to be used and transferred freely like any other crypto token.
Currently, most tokenization efforts focus on US stocks, but can potentially open any global market to users outside of that market’s jurisdiction. The experience of trading tokenized stock features significant upgrades on traditional finance:
- Global access. You don’t need to be in the US to invest in US equities. All you need is a crypto wallet.
- Invest any amount. Fractional ownership and low fees mean that you can start investing with very low amounts.
- 24/5 trading. No need to wait for opening bell, pause for holidays, or plan ahead several days for a trade to settle.
- Self custody. You always have full ownership and full control of your assets. They are not stuck on a centralized exchange or brokerage account.
- DeFi compatiblity. Tokenized stocks work like any other onchain token –freely transferable and can be used in DeFi instruments to amplify the economic benefits of the stock.
How tokenized stocks work
Recently, more and more platforms are starting to offer tokenized RWAs, but it’s important to know that not all tokenization is the same. Some approaches to tokenizing stock can be significantly more secure, user-friendly, and economically advantageous than others.
MEW supports tokenized stock issued by Ondo Global Markets. Each Ondo token is fully backed by the corresponding stock or ETF, held by licensed U.S. custodial broker-dealers. The tokenized stocks are issued using bankruptcy-remote, battle-tested practices and are overcollateralized at all times.
When users trade for tokenized stock, Ondo Global Markets instantly mints tokens, benefitting directly from the liquidity of traditional markets instead of relying on decentralized liquidity pools. When holders sell tokenized stock, the tokens are burned and users redeem the value of the stock to USDon (the Ondo Global Markets stablecoin) or USDC.
Ondo Global Markets feature all of the benefits investors should be looking for when considering tokenized stock:
- Fully backed by the underlying stock or ETF, overcollateralized at all times.
- Secure. Transparent attestations of holdings, independently audited smart contracts, and bankcruptcy-remote legal structure, guaranteed funds to cover obligations to holders.
- Total return tracking. Tokens don't just track price, but the full economic benefit of the underlying asset. Dividends are automatically reinvested compounding returns without additional transactions or fees.
- Reliable liquidity. When you trade, tokens are minted instantly, tapping directly into the liquidity of traditional markets.
- Seamless redemption. Tokens are burned and value is redeemed to stablecoins immediately.
- Permissionless. In supported jurisdictions, tokens are freely transferrable onchain and can be used in compatible DeFi structures.
How dividends work with tokenized stocks
Ondo tokenized stocks are total-return trackers of underlying securities. What does that mean for investors holding those tokens?
Total-return trackers reflect not only the price movements, but the economic value of the underlying stock, including dividends and corporate actions. As stock dividends are reinvested back into the asset, or stocks go through other corporate actions like stock splits, the price of the Ondo token is likely to diverge from being 1:1 with the stock price.
For example, if you are holding tokenized stock that pays dividends, Ondo Global Markets will automatically reinvest those dividends back into the underlying asset to compound returns, net of applicable withholding tax (30% for non-U.S. persons in accordance with U.S. tax regulations). Over time, the Ondo token will increasingly represent more than just 1 share of the underlying asset and its value will grow to reflect the total-return value of the stock.
Stock splits are handled in a similar way to other corporate actions. If the underlying stock undergoes a 10-for-1 split, one Ondo token will now represent ten shares of this stock. The economic value of a user’s holdings of the stock will remain the same, while the price of the token will diverge from matching the asset price 1:1.
To help you keep track of your investment, MEW and Ondo clearly show the information about shares per token for all tokenized stocks in your wallet.
Crypto and stocks in one secure self-custodial wallet
Self-custody is the future of asset ownership, both for crypto and tokenized capital markets. All the security benefits of a self-custody wallet for your crypto apply to tokenized stock. You always remain in full control of your assets. As long as you keep your secret recovery phrase safe, even if you lose your phone or MEW wallet stops working, you will always be able to restore access to your assets.
Self-custody of permissionless assets also means that you can move, trade, or sell your tokenized stocks whenever you want, without being constrained by traditional trading hours and centralized platform limitations. In MEW, stock trades work in the same way as the swaps that you are used to, so combining crypto and stocks in your wallet is intuitive and seamless. There is no easier or more secure way to get started with tokenized stock.
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