Written by: Xiao Za Legal Team
Is it feasible to treat the stocks of a listed company as underlying assets to issue RWA? The Za Jie team has observed that many companies are currently attempting or are willing to explore financial innovations in this area, with varying practical outcomes.
At present, several successful stock tokenization projects differ from RWA; they are more inclined to use tokenized stocks as a high-quality tool for facilitating trading, reducing transaction costs, and increasing liquidity.
Today, the Za Jie team will provide an in-depth analysis of the advantages and compliance of stock tokenization.
01 What is Stock Tokenization?
(1) The Concept of Stock Tokenization
Stock tokenization refers to the process of mapping certain rights of traditional stocks (such as economic rights, ownership, etc.) onto a blockchain as digital tokens, which can be quickly, peer-to-peer, fragmented, and transferred, traded, and settled 24/7.
The concept and basic technical path of stock tokenization are quite simple and do not differ significantly from the concept and path of putting traditional assets on-chain as RWA; it is merely transforming underlying assets into the stocks of listed companies.
Currently, there are two main cases for reference.
One is Sisram Medical, a Hong Kong-listed company in the Israeli medical industry, which is controlled by a well-known investment institution in China. It has tokenized its stocks listed in Hong Kong, issuing them on several public chains including Ethereum, Solana, Sonic, and Vaulta.
The other is the American platform Ondo Global Markets, which has created a relatively open market for tokenized stocks, aiming to allow non-U.S. investors to trade U.S. stocks, ETFs, and other securities directly. Currently, the tokens it has minted are primarily issued on Ethereum, with plans to expand to BNB, Solana, and Ondo's own chain in the future.
(2) What Does Stock Tokenization Mean for Listed Companies?
What significance does stock tokenization hold for listed companies? The Za Jie team believes that the purpose of stock tokenization differs from that of RWA; the former aims to enhance the liquidity of its stocks, while the latter seeks to activate physical assets. At this stage, for listed companies that have completed their IPOs, we believe the most reliable enhancements are as follows:
Stock tokenization can facilitate instant settlement. Currently, due to the relatively mature infrastructure of public chains like Ethereum and Solana, the data response speed is very fast, allowing token settlements anchored to stocks to achieve T+0 speed and trade at any time, significantly breaking through the time constraints of traditional stock markets.
Increased liquidity. Token trading can effectively bypass a large number of traditional regulatory norms and significantly lower the investment threshold for global investors, thereby attracting more investors and capital to participate. For some listed companies with average market capitalization, the increase in liquidity is quite evident.
02 The Basic Path and Practical Methods of Stock Tokenization
The basic path of stock tokenization is not complex. From the operational process of Ondo Global Markets, the practical methods for general stock tokenization projects are:
Select a brokerage to hold/custody the physical stocks + select an accounting firm to regularly audit the stocks held by the brokerage and related transactions;
Select a technical service provider to perform the on-chain work for the stocks held by the brokerage;
Use smart contracts to facilitate user transactions and settlements of tokenized stocks.
The model of having brokerages hold/custody physical stocks does not actually break through the existing financial regulatory provisions in most countries. In other words, this path is essentially building a more convenient trading framework on top of existing regulatory norms.
03 Are There Legal Risks Associated with Stock Tokenization?
Having discussed many advantages of stock tokenization, the most critical question arises—can this be done in our country? Can listed companies in our country follow suit?
To provide a conclusion: Whether tokenized stocks can be traded (especially for retail trading aimed at a specific country) depends on whether the relevant legal provisions in the investor's country substantively allow investors to directly invest in stocks and financial products issued by foreign entities.
This is mainly because, as mentioned earlier, stock tokenization for listed companies essentially expands their investor base from a fixed range to an unrestricted one, allowing global investors to buy and sell stocks at low cost and convenience, thereby significantly enhancing the liquidity of their stocks.
In our country, the current paths for mainland investors and funds to invest in U.S. stocks or stocks and financial products from other foreign countries are very limited. Practically, it is generally done through QDII funds for indirect investment, cross-border ETF investments, indirect account openings through brokerages, or through Hong Kong insurance products to indirectly allocate such financial products.
According to Article 26, Paragraph 2 of the "Regulations on the Supervision and Administration of Securities Companies (2014 Revision)": "The business operated by securities companies and their domestic branches shall be approved by the State Council's securities regulatory authority and shall not operate unapproved businesses." In recent years, after tightening regulatory policies, the path of indirect account opening through brokerages has basically been cut off.
Therefore, if foreign listed companies use stock tokenization to enable residents in our country to conveniently trade stocks issued by foreign companies, it would actually constitute an unapproved operation of related businesses, which may touch upon criminal red lines.
For example, our "Securities Law" clearly stipulates that securities underwriting, proprietary trading, securities brokerage, securities investment consulting, financial advisory, and asset management are businesses that require approval to operate with a license. If Ondo, as an intermediary, intentionally provides tokenized trading services for foreign company stocks to Chinese users (for instance, offering Chinese services, not blocking KYC for mainland residents, etc.), it could likely be deemed a violation of relevant provisions of our "Securities Law," potentially infringing upon Article 225 of the "Criminal Law" regarding "operating specific financial businesses without approval," which constitutes illegal business operations.
In Conclusion
We understand that stock tokenization holds vast prospects for listed companies, but due to the lack of clear regulatory provisions governing this behavior in currently economically active countries and jurisdictions, there are both advantages and disadvantages to engaging in this business at present.
On the positive side, the earlier stock tokenization is implemented, the more it allows listed companies to access global financing, significantly enhancing their stock liquidity, and enabling related funds to better serve the company's main business, creating a virtuous cycle. It also allows companies to better embrace financial technology and gain goodwill.
On the downside, the current regulatory norms are still unclear. In the context of intense international competition, stock tokenization may raise concerns about the potential for siphoning off funds from a country's investors. If the investment thresholds for related financial products are excessively relaxed, it could seriously jeopardize national financial security, causing the national financial system to passively accept more financial risks transferred from other capital markets. Furthermore, for investors, if investment disputes arise, the costs of safeguarding rights will be significantly high in the absence of sufficient investment norms and legal practices.
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