Digital stocks are more deliberate than disruptive

By Neil UnmackIf something ain’t broke, is it worth fixing? The multi-trillion-dollar market for equities may be a case in point. New technology that allows stocks to be tokenised and traded on distributed ledgers such as ethereum brings benefits, but also challenges. The increasing presence of old-school stock exchanges in the arena may help.On the face of it, equities are among the least promising assets for tokenisation. Some $27 trillion worth of shares change hands every month through stock markets and so-called dark pools. Turning these successful products into tokens means putting securities into a special purpose vehicle, which in turn issues an IOU that can then be traded on the blockchain. With an estimated market value of around $3 billion, and monthly transfer volume of less than $30 billion, they seem like a curiosity.Trading stocks in the same way as digital currencies like bitcoin does, however, have benefits. By side-stepping the traditional process of clearing and settling a transaction, transactions can be completed instantaneously, rather than the next-day settlement typical of most bourses. That in turn makes it easier to use stocks as collateral for loans. The tokens can be sliced up and sold in smaller quantities, and traded anywhere in the world at any time. This allows, say, an Uzbek trader to buy a Canadian stock without opening an overseas brokerage account.Those selling points are driving rapid growth. XStocks, run by Payward, reckons it has transacted over $40 billion of tokens representing shares of companies such as Nvidia or Amazon . Traders used to buying and selling cryptocurrencies on their smartphones may never want to buy ordinary stocks.Yet the technology also brings risks. Most digital equities don’t pay traditional dividends, or have voting rights. Always-on blockchain trading also bypasses regular trading hours and may make it harder to enforce securities rules. More trading off-exchange through different blockchain networks may fragment liquidity, impairing price discovery. AMC Entertainment CEO Adam Aron has described tokenised stocks as "contemptible, outrageous, disgusting, detestable, inexcusable, vile".These concerns have not deterred bourse operators such as Deutsche Boerse, Nasdaq and London Stock Exchange. Wary of being disintermediated, these traditional middlemen are enabling trading of tokens, and forging alliances with specialists like xStocks. The ultimate aim is to create a hybrid market where customers can choose whether to trade traditional or digital equities, and where transactions can shift between the two worlds. That could create deeper pools of liquidity and attract more investors and issuers.That will require a lot of work: contracts will need to be standardised to enable frictionless trading, and stock issuers will need to get comfortable with the technology. The investment will need a critical mass of investors to make it worthwhile. Traders used to transacting at the speed of light will probably be less interested in slower blockchain technology. Digital stocks will be more deliberate than disruptive.Follow @Unmack1 on X.CONTEXT NEWSLondon Stock Exchange Group on September 1 announced a partnership with Payward, the developer of the xStocks digital equity product.The move means that xStocks linked to UK companies will be available for UK trades. The two groups will also work on developing new digital equities issued through the London Stock Exchange, which carry similar voting rights as ordinary shares.