Shares on the Blockchain: What Are Tokenised Shares and How Could They Change Investing?

Alongside traditional shares, there are now also blockchain tokens linked to their value. On screen they may look similar, but their holders do not necessarily acquire the same rights. Tokenisation thus opens up new investment opportunities, while also requiring an understanding of what the investor is actually buying.

What tokenising a share means

Tokenisation means that we represent an asset or a certain right with a digital token on a blockchain. In the case of shares, this may be an actual security issued in tokenised form, a third-party token backed by shares, or a synthetic product that merely replicates their price.

Neither the company name itself nor the existence of a token on a blockchain therefore determines what rights the investor acquires. What is decisive is the specific legal structure of the product.

Apple as an example of the difference between a share and a token

A traditional Apple share with the ticker AAPL represents an ownership stake in the company. The AAPLx token offered by xStocks provides economic exposure to its value, that is, the opportunity to participate in its price performance.

According to the xStocks documentation, it is a tracker certificate backed 1:1 by underlying shares. Its holder, however, does not become a direct shareholder of Apple and does not acquire voting rights. Similar products also exist for other shares and exchange-traded funds (ETF).

How dividends are handled

With a traditional share, the investor may receive a dividend via their broker if the company pays one. With a token, it depends on the provider’s rules.

In the case of xStocks, according to the product documentation, dividends are reinvested in additional underlying shares after deduction of the relevant withholding taxes. Their economic effect is reflected in the token position through a mechanism referred to as rebasing. The investor therefore may not receive a cash dividend in their account.

What tokenisation can simplify

Blockchain can connect record-keeping, transfers and trade settlement. Smart contracts, that is, programs that execute predefined rules, can automate some of these processes and shorten the time needed to complete a transaction.

Tokenisation does not, however, automatically eliminate intermediaries or the need for custody of the underlying assets. Nor is the ability to buy a fraction of a share a novelty in itself, as traditional brokers offer it too.

Trading outside exchange hours

Blockchain operates continuously, so some tokenised products can, depending on the platform, be traded in the evening or at the weekend. The investor can react to news at a time when the traditional exchange is closed.

This does not, however, guarantee a better price. Outside the main trading hours, there may be lower liquidity, a wider difference between the buying and selling price and a more pronounced deviation from the value of the underlying share.

Your own wallet and use in DeFi

Some tokens can be transferred to your own blockchain wallet. If they are supported by a relevant decentralised finance application, or DeFi, they can serve, for example, as collateral for obtaining a loan.

These options add responsibility for protecting the wallet as well as risks associated with smart contracts and the protocol in question. Loss of access, an incorrect transfer or approval of a malicious transaction may cause a financial loss that cannot easily be remedied.

Backing and provider risk

A token linked to a share carries ordinary market risk: if the price of the underlying share falls, its value usually falls too. In addition, risks may arise relating to the token issuer, the asset custodian, the blockchain network or insufficient liquidity.

Information about 1:1 backing is therefore not sufficient on its own. What matters is who holds the underlying shares, whether they are segregated from the provider’s assets and what claim the investor has if the provider becomes insolvent. Blockchain can prove the existence and transfers of a token, but it does not in itself guarantee the enforceability of rights to assets held off-chain.

Regulation and the future of tokenised shares

Using blockchain does not automatically change the legal nature of a financial product. In the European Union, tokens that qualify as financial instruments under MiFID II do not fall under the MiCA Regulation, but under the relevant financial market rules.

Tokenisation may gradually change mainly the infrastructure behind investing. Banks, exchanges and brokers can use it for record-keeping and settlement, while clients continue to buy through a familiar app. Its development may thus take place within the traditional financial system.

Conclusion

Tokenised shares connect capital markets with blockchain. They can bring faster transfers, automation and new ways of using assets. For the investor, however, it remains essential to distinguish between owning a share and holding a product linked to its value, and to understand the rights and risks of the specific token.

This text serves informational and educational purposes only and does not constitute investment advice. Crypto assets are volatile, and you may lose the entire amount invested.