Tokenized Stocks: What's the Innovation?

Author: Dogan, Cyber ​​Fund Researcher; Translator: Shaw, Jinse Finance

US stock exchanges manage approximately $69 trillion in assets, providing investors and traders with access to financial markets. However, this system has not always operated at the speed and efficiency it does today. In the past, trading relied on telephones, paper ledgers, and a great deal of manual operation. To understand where we are today, it is necessary to briefly review the history of trading.

The Evolution of US Stock Exchanges

In the early days, information was difficult to disseminate widely, so trading could only take place in physical locations, namely stock exchanges. With the advancement of communication technology, trading was no longer confined to trading floors but began to be conducted via telephone between brokers.

However, by the 1960s, the system still relied primarily on manual operation.

Brokerage firms' back-offices were overwhelmed by piles of paper documents, resulting in slow and error-prone settlement processes. This vulnerability led to the back-office crisis of 1967-1970, when trading volume far exceeded the industry's processing capacity. This crisis ultimately led to the creation of the Depository Trust Company (DTC), which later merged with the National Securities Clearing Corporation (NSCC) to form the Depository Trust & Clearing Corporation (DTCC), the infrastructure that underpins today's U.S. stock market. The fundamental problem was simple: no single centralized institution could manage counterparty risk on a large scale. During periods of market stress, panic and forced liquidations led to brokerage failures. The DTCC emerged as the central clearing and settlement layer, effectively acting as a systemic risk manager and guarantor. With the rise of the internet, exchanges have gradually become **internet-native companies**, and a new layer has emerged in the market structure: **fintech applications and brokerage-as-a-Service (BAS) providers**. These platforms have significantly lowered the barriers to entry into the US stock market, enabling brokerage and consumer applications to offer global market access via APIs. Today, US stocks are traded globally through this technology platform, and its application continues to expand. This trend has spawned several unicorn companies, including **Robinhood**, **Revolut**, **Midas** (providing US stock trading services to users in Turkey), and **GetBaraka** (focused on the UAE market), among others.

It needs to be clear that DTCC's clients are brokers, not end users, and this is unlikely to change. The reason is simple: DTCC does not process millions of trades in real time. Instead, it receives executed trades from brokers, nets them, and ultimately handles the resulting debt. This design allows the system to operate efficiently in large-scale market environments. Even for a highly optimized database, directly processing millions of trades per second is impractical.

Why is this so important when discussing tokenized shares rather than exchange history?

Because **directly placing stocks on the blockchain** does not automatically solve the core problems of market structure. DTCC exists to address one of the most critical issues in the stock market: **counterparty risk**. Most tokenized stock models still suffer from counterparty risk, albeit in different forms. While there are many on-chain price discovery mechanisms, none are specifically designed for stocks operating within regulated market blocks. Furthermore, permissioned mechanisms present fundamental challenges. Stocks are not apolitical assets, but permissionless blockchains are inherently neutral (or at least strive to be so). Allowing US stocks to circulate freely on a completely permissionless system could conflict with sanctions and regulatory requirements. On the other hand, while placing tokenized stocks under permissioned mechanisms could transform the blockchain into a more efficient ledger, this is highly incompatible with existing decentralized finance (DeFi) liquidity and composability. Types of Tokenized Stocks and Their Advantages and Disadvantages 1. Perpetual Exchanges In 2017, Bitfinex launched a brand-new financial instrument: **perpetual futures**. This innovation enabled **24/7 leveraged trading**, independent of the traditional financial system. This is primarily due to the fact that cryptocurrency is the only global financial market that never closes. A perpetual futures contract (hereinafter referred to as a "perpetual contract") exchange is a trading venue where users can buy and sell perpetual contracts that track the price of an underlying asset and have no expiration date. Traders can establish long or short positions by providing margin, thereby gaining leveraged exposure to price volatility. To ensure that the contract price is aligned with the spot market, the exchange employs a **funding rate mechanism**, which involves periodically transferring funds between long and short positions. Positions are continuously valued at market value, and automatic liquidation is triggered when margin requirements are no longer met. Risk management is achieved through margin rules, liquidation mechanisms, and insurance mechanisms, rather than through settlement at maturity. From a macro perspective, exchanges utilize a synthetic price discovery mechanism introduced by perpetual contracts themselves, enabling **any asset to be traded 24/7**. The core value of perpetual contracts lies in their ability to allow any trader to gain leveraged price exposure to an asset. However, as you might expect, perpetual contracts are not backed by actual shares. Therefore, they do not pay dividends, do not grant ownership, and are more susceptible to price manipulation. This makes the perpetual contract market easier to launch compared to other methods, but it also means they can only offer synthetic exposure, have limited legal protection, and no direct claim to the underlying equity. 2. Traditional Tokenization Platforms (Currently Existing Platforms) Generally, tokenization refers to converting assets into a standardized digital representation, i.e., tokens, for easy storage, transfer, and processing within a system. In the cryptocurrency space, we already have an increasingly rich array of such tokenized products. These include stablecoins (tokenized US dollars), tokenized deposits (e.g., JPM Coin), and tokenized credit (e.g., syrupUSD). In addition, there are tokenized equity products, such as xStocks from Ondo Global Markets and Backed Finance, which have secured millions of dollars in equity and facilitated millions of dollars in trading volume. These platforms typically tokenize the equity they control through special purpose entities (SPVs) or similar issuance structures, making these assets more accessible to a wider audience. In some cases, they also tokenize exchange-traded funds (ETFs) that track the underlying equity. This model often operates under regulatory constraints or overseas, frequently navigating a regulatory gray area. The main problem with this approach is the lack of a clear legal framework to protect users. Token holders typically do not enjoy enforceable rights such as dividends, voting rights, or direct ownership of the underlying shares. Instead, they **only receive economic benefits**, similar to stock trading through perpetual exchanges. While this model introduces legal and counterparty risks, it also brings significant benefits. Token holders can trade 24/7, and where applicable, these assets can be integrated into DeFi protocols, enabling combinatorial capabilities unavailable in traditional stock markets. Another interesting detail is that almost all tokenized stocks use Alpaca as their broker. Therefore, traditional tokenization simply adds a step and increases complexity compared to the traditional process. 3. Direct Tokenization Platforms So far, we've discussed **"tokenization through encapsulation"**. However, it's also possible to directly tokenize ordinary stocks while retaining the same legal rights as stocks purchased on US exchanges. How is this achieved? There aren't many examples of this currently, but the most well-known is the tokenization of GLXY through Superstate. This is possible because Superstate is a transfer agent registered with the US Securities and Exchange Commission (SEC). Any GLXY shareholder can partner with Superstate to transfer their shares on-chain. In this model, Superstate acts as a bridge between the public blockchain and the DTCC system. However, the application of on-chain tokenization remains very limited compared to encapsulated tokenization. This is primarily because the model requires both shareholders and the issuing company to actively integrate with platforms like Superstate. Currently, GLXY has only about 80 on-chain holders, representing approximately 0.0075% of the total circulating shares. The key advantage of this approach is that token holders retain full shareholder rights, including dividends, voting rights, and other benefits inherent in direct equity ownership. While this is a significant legal advancement, scaling this model to a multi-trillion dollar stock market remains a substantial challenge. From a broader perspective, the reason fintech platforms capable of trading US stocks have become mainstream is not because they offer only a few assets, but because they support almost all listed US stocks. Broad coverage, rather than limited selection, is the real driving force behind their widespread adoption. Therefore, direct tokenization is promising and is currently the hottest solution emerging in the market; however, it is a one-to-one model, requiring significant business development effort from the team. A good team might create a decent product, but I still don't see the network effect that can transfer all equity onto the blockchain. 4. DTCC is Tokenizing Stocks DTCC is responsible for custody, netting, clearing, and counterparty risk management in US stock trading. It is a non-profit organization, but it also generates revenue. If DTCC tokenizes the stocks it holds, this would undoubtedly be the most ideal direction for the US digital asset market. Two weeks ago, DTCC announced plans to tokenize the stocks it holds. This is a significant development and, on the surface, seems to resolve the debate in the US market regarding tokenized stocks. However, let's take a closer look at what was actually announced. This vision means that in the future, stocks, mutual funds, fixed-income products, and other financial instruments can be transferred on-chain as needed, at least in tokenized form. This functionality uses a voluntary participation model, and assets will not be forcibly migrated. However, DTCC is building infrastructure designed to allow participants to convert securities into tokenized formats and vice versa in as little as 15 minutes. This system allows clients to use decentralized finance strategies or 24/7 settlement channels while maintaining connectivity with traditional market liquidity. Tokenized assets will retain existing ownership, legal protection, and bankruptcy treatment. Nadine Chakar, Global Head and Managing Director of Digital Assets at DTCC, stated, “We don’t dictate which wallet or blockchain our clients should use. Everything we do is to meet their needs.” They essentially indicated that they would tokenize the custodied equity and inject it into the existing system. However, I’m not as optimistic as others, for a simple reason: Look at how long it took Galaxy to tokenize its own equity. They released a lengthy report detailing the legal implications and operational mechanisms of tokenization, even though it's just "them" tokenizing their own stock. If DTCC becomes a counterparty in tokenization transactions, they will need to handle all the anti-money laundering and "know your customer" (AML/KYC) processes for millions of clients. This becomes extremely complex at that scale. This would make DTCC more vertical, essentially turning it into a "broker," which seems unrealistic to me. Don't assume they will allow unrestricted access to US financial assets. Sanctions exist for a reason. The US is one of the superpowers; they won't give up easily. What will the future hold? I believe that in the future, we will see on-chain native brokers similar to Interactive Brokers (IBKR) or Alpaca, but built specifically for cryptocurrencies. Some platforms already support USDC deposits, but their activity has largely stopped there and hasn't truly expanded on-chain. (Even Alpaca already supports existing traditional tokenized stock infrastructure.) In this model, the system could run exchanges using order books or other price discovery mechanisms, settle trades on-chain, and retain ownership through existing market infrastructure. For this, brokers would need to integrate with institutions like the SEC and DTCC. The DTCC can provide a settlement layer for one-to-one tokenization or 24/7 operation, while the blockchain-native infrastructure handles custody, composition, and programmability. This would allow brokers to operate natively on-chain while leveraging the rapidly growing ecosystem of new on-chain banks and their underlying financial infrastructure. Nevertheless, the complexities of infrastructure and the legal framework remain the biggest challenges to overcome. This is precisely why I wrote this article.