No. There will always be government regulators (like the CFTC/SEC; Senate Banking/House Financial Services, FINCEN, Fed, Treasury, etc) Clearing will go through the DTCC or OCC on the stock side. There will be other exchanges, like Binance for example, which offer tokenized securities. I don't know who they will clear, but they will be subject to the same regulatory structure everyone else is. That's where the innovation will come in-given the three types of tokens I illustrated above.
Thanks for posting this, very interesting stuff. Like others have said, will need to do a deep dive to understand it better.
I anticipate a lot of demand from investors outside of the US. In Australia, I need to transfer money from AUD to USD at a fee of .55% both ways. $3 USD per trade. I do get fractional shares for what it’s worth. Would love to cut my transaction costs and settlement times.
Tokenization takes those fees to about 0. You still have currency risk but truth be told, you can use a stablecoin like USDC or USDT....course, there is still currency risk between those and AUD too but it eliminates friction.
At the time (things may have changed) for most of them they were all done on paper. It had to go through a couple of different chokepoints to clear the trades (not the DTCC or OCC). Sort of like commodity trading in the 1950s or 60s. OpenFinance (now INX) would have changed it, had the SEC let them. https://www.finextra.com/pressarticle/84688/inx-buys-openfinance
I understood the Bitcoin argument being that ownership is proved by the network and not by a single entity. Some say this model is superior. I'm not convinced. I can accept the argument that for the unbanked crypto has advantages, but for those with access to a credit card, I fail to see what legal service crypto offers that the credit card network does not match or exceed.
For securities trading and in fact for all property transactions, you have the challenge of verifying property ownership (is the person selling the real owner) and also verifying payment (is the person buying providing proper collateral). I can see how tokenization would solve this. I also struggle to see how tokenization would be superior to, or otherwise replace, proprietary databases & clearing houses.
The reason for my skepticism is that at the end of the day, people will lean on corporate providers to handle their accounts. So at the retail customer level, I don't see tokenization being a thing. A retail customer doesn't care about technology, but rather the service experience.
The internal plumbing for financial exchanges could be different. Technical innovation should make the financial & property transactions faster. Tokenization could matter here. But I still don't see how the internal plumbing for securities and financial transactions would be on a "open network". I see this happening on a controlled network - a network where ownership of every node is identified and vetted and meets certain criteria.
Another twist on this question is my understanding of Bitcoin is the blockchain contains a history of every block transaction. Since traders are not keen on having their trading being visible to others, I see this as a great obstacle to tokenizing security trades. Imagine how it would be if at any moment of the day, one could inspect the MICROSFT blockchain and list now only the owners of the security but the trades in and out of the security!
Obviously anybody who has seen my comments regarding Gary Gensler is aware of my utter disdain for his incompetency and arrogance and you hit the nail on the head that getting rid of that guy allowed us to move into the present day century in the world of crypto and other technology.
Four and a half years ago I was in discussions with some of the folks overseas affiliated with Crypto.com because that's where I did the most volume at the time, along with Kraken, Gemini and Binance.US, and Kris Marszalek of Crypto.com (and some of the folks in Hong Kong and Singapore) was and is a very forward-thinking guy with regard to the future of crypto and its impact on markets, especially in America.
We had multiple interactions you and I about the possible future uses of crypto and this will become a very impactful one. Just like Main Street Americans' initial reluctance to use the internet for financial transactions is almost laughable to look back on now a couple decades later, a decade from now people will just dismiss offhandedly any reticence people have had with regard to tokenization and utilization of crypto.
Although a subject matter for another time I will touch on education through experience is one of the best ways to learn and in March of 2021 I opened my first crypto account and by April I had minimal positions in 125 to 135 coins and followed every one of them daily. It was a relatively speaking inexpensive self-taught lesson and led to a remarkable 26.4 ROI that year in two and a half quarters. The learning curve for everyone is different, but it is much quicker than it was just a decade ago. The rapid growth of so many crypto ETFs and the attention it has drawn contributed greatly to more people paying attention and educating themselves.
There has been some discussion about a blockchain effort for voter registration and I haven't the foggiest notion how in the world that would work, but it's been discussed at higher levels than my pay grade.
I’m going to have to spend some time understanding this🤪🤪!!
Does "tokenized" mean "transaction without government?" That may have a certain appeal, but limited impact...
No. There will always be government regulators (like the CFTC/SEC; Senate Banking/House Financial Services, FINCEN, Fed, Treasury, etc) Clearing will go through the DTCC or OCC on the stock side. There will be other exchanges, like Binance for example, which offer tokenized securities. I don't know who they will clear, but they will be subject to the same regulatory structure everyone else is. That's where the innovation will come in-given the three types of tokens I illustrated above.
Thanks for posting this, very interesting stuff. Like others have said, will need to do a deep dive to understand it better.
I anticipate a lot of demand from investors outside of the US. In Australia, I need to transfer money from AUD to USD at a fee of .55% both ways. $3 USD per trade. I do get fractional shares for what it’s worth. Would love to cut my transaction costs and settlement times.
Tokenization takes those fees to about 0. You still have currency risk but truth be told, you can use a stablecoin like USDC or USDT....course, there is still currency risk between those and AUD too but it eliminates friction.
What are the issues that make trading REITs such a pain?
At the time (things may have changed) for most of them they were all done on paper. It had to go through a couple of different chokepoints to clear the trades (not the DTCC or OCC). Sort of like commodity trading in the 1950s or 60s. OpenFinance (now INX) would have changed it, had the SEC let them. https://www.finextra.com/pressarticle/84688/inx-buys-openfinance
Jeffrey,
I understood the Bitcoin argument being that ownership is proved by the network and not by a single entity. Some say this model is superior. I'm not convinced. I can accept the argument that for the unbanked crypto has advantages, but for those with access to a credit card, I fail to see what legal service crypto offers that the credit card network does not match or exceed.
For securities trading and in fact for all property transactions, you have the challenge of verifying property ownership (is the person selling the real owner) and also verifying payment (is the person buying providing proper collateral). I can see how tokenization would solve this. I also struggle to see how tokenization would be superior to, or otherwise replace, proprietary databases & clearing houses.
The reason for my skepticism is that at the end of the day, people will lean on corporate providers to handle their accounts. So at the retail customer level, I don't see tokenization being a thing. A retail customer doesn't care about technology, but rather the service experience.
The internal plumbing for financial exchanges could be different. Technical innovation should make the financial & property transactions faster. Tokenization could matter here. But I still don't see how the internal plumbing for securities and financial transactions would be on a "open network". I see this happening on a controlled network - a network where ownership of every node is identified and vetted and meets certain criteria.
Another twist on this question is my understanding of Bitcoin is the blockchain contains a history of every block transaction. Since traders are not keen on having their trading being visible to others, I see this as a great obstacle to tokenizing security trades. Imagine how it would be if at any moment of the day, one could inspect the MICROSFT blockchain and list now only the owners of the security but the trades in and out of the security!
I’ve got a lot of studying to do on this before I understand it….
Yep.💯
Obviously anybody who has seen my comments regarding Gary Gensler is aware of my utter disdain for his incompetency and arrogance and you hit the nail on the head that getting rid of that guy allowed us to move into the present day century in the world of crypto and other technology.
Four and a half years ago I was in discussions with some of the folks overseas affiliated with Crypto.com because that's where I did the most volume at the time, along with Kraken, Gemini and Binance.US, and Kris Marszalek of Crypto.com (and some of the folks in Hong Kong and Singapore) was and is a very forward-thinking guy with regard to the future of crypto and its impact on markets, especially in America.
We had multiple interactions you and I about the possible future uses of crypto and this will become a very impactful one. Just like Main Street Americans' initial reluctance to use the internet for financial transactions is almost laughable to look back on now a couple decades later, a decade from now people will just dismiss offhandedly any reticence people have had with regard to tokenization and utilization of crypto.
Although a subject matter for another time I will touch on education through experience is one of the best ways to learn and in March of 2021 I opened my first crypto account and by April I had minimal positions in 125 to 135 coins and followed every one of them daily. It was a relatively speaking inexpensive self-taught lesson and led to a remarkable 26.4 ROI that year in two and a half quarters. The learning curve for everyone is different, but it is much quicker than it was just a decade ago. The rapid growth of so many crypto ETFs and the attention it has drawn contributed greatly to more people paying attention and educating themselves.
There has been some discussion about a blockchain effort for voter registration and I haven't the foggiest notion how in the world that would work, but it's been discussed at higher levels than my pay grade.
Great article and thank you.
Wahoo!