(Kitco News) - The tokenization of stocks and other traditional assets has long been touted as one of the top use cases for blockchain technology in modern finance, and the trend is starting to pick up steam. BlackRock's iShares Core S&P 500 ETF(CSPX) has now been turned into a token on the Ethereum network, which can be traded on Uniswap, the top decentralized exchange (DEX).
According to a report from TrustNodes, the decentralized finance (DeFi) platform Backed Finance is responsible for tokenizing shares of the ETF, which is legally classified as a certificate. For every bCSPX that is created, a share of CSPX is purchased and deposited with Maerki Baumann & Co, a regulated custodian.
“Permissionless tokenized securities are here thanks to Backed Finance,” said Sébastien Derivaux, an Asset-Liability Manager for MakerDao. Backed Finance launched in early 2021, receiving funding from multiple firms including Gnosis, Semantic Ventures, and Stratos Technologies. The company is based in Zug, Switzerland, and has been approved to operate in both Switzerland and Liechtenstein.
Tokenization offers a variety of benefits, especially when it comes to transparency, as tokenized securities can be tracked and accounted for using the public blockchain ledger.
“Crypto markets run 24/7, settlement can take less than five minutes, and asset transfers are seamless,” said Adam Levi, Co-founder of Backed. “Backed is committed to realizing these benefits securely and transparently, and Chainlink Proof of Reserve is a core tool that will help provide our clients with unmatched transparency.”
As more products available on traditional markets get tokenized and ported into DeFi and investors are able to tap into the value held in other assets and put it to work in the crypto ecosystem, the number of funds locked in the growing sector is sure to increase.
“Users will be able to integrate new assets to their DeFi strategy,” Backed says. “Lend Google tokens on Compound, use Apple as collateral for Maker’s DAI, include ETFs into a Yearn strategy, and create new DeFi derivatives based on Tesla, among countless other options.”
Tokenized shares also let users bypass the need to sign up and get verified by a broker, enabling one-click purchases and the ability to self-custody. While the token is available for all to trade on secondary markets like Uniswap, holders wishing to redeem the tokens for the underlying asset will be required to complete Know Your Customer (KYC) identity verification since it's a regulated product.
Currently, there are only 100 tokenized shares that have been minted, and demand remains low, partially due to the fact that the token hasn’t been widely integrated across the DeFi ecosystem yet, the report said. Many platforms are cautious about running afoul of regulators in the U.S. who might not view the tokens as properly regulated.
Backed is also a new and relatively small player on the DeFi scene and has not yet gained a large user base that can help spread the news of its new offering.
Tokenized shares like bCSPX offer crypto traders a valid hedging strategy, and they can also be used as collateral in lending, allowing investors to borrow against the tokenized ETF and use the funds received to earn an extra yield in DeFi.
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The ability to tokenize all manner of stocks, bonds, and other investment products also helps to expand their reach beyond the market they are listed on in the U.S. or Europe, giving the global community access to assets they were previously unable to acquire. Many tokenized securities like this one will eventually be available to DeFi users as blockchain technology and the traditional financial system become increasingly interconnected.
Earlier this week, British multinational bank HSBC took part in a project with the European Investment Bank (EIB) which saw the launch of the first-ever pound sterling-denominated digital bond using blockchain technology. The firm’s “HSBC Orion” tokenization platform was used in the creation of the bonds, and HSBC will serve as the central account keeper and record transactions in the digital bond on the HSBC Orion platform.
And last month, the independent Swiss private bank Cité Gestion became the first private bank to tokenize its own shares under Swiss law as part of a collaboration with Taurus technology.
