What Is Tokenized Equity?
Tokenized equity is a digital token or “coin” that represents shares in a corporation or organization.
With the growing adoption of blockchain, businesses find it convenient to use digitized crypto-versions of equity. Tokenized shares are emerging as a means for raising capital in which a business issues shares in the form of digital assets such as crypto coins or tokens.
Key Takeaways
- Tokenized equity is the creation of equity ownership units represented by digital tokens or “coins.”
- Equity tokenization became popular with the dawn of decentralized blockchain systems, which allowed for the easy and affordable creation, issuance, and transfer of digital tokens.
- Tokenized equity has been used in the form of initial coin offerings (ICOs) for blockchain-based projects, although its legal and regulatory status as a traded security remains uncertain.
Understanding Tokenized Equity
Tokenized equity is like any standard share purchased in a listed company, except those shares are crypto tokens.
To draw a parallel with equity share ownership, say you bought shares of a listed company during its initial public offering on the stock exchange. These shares would then be credited to your Demat account—an electronic account that holds financial securities, such as stocks and bonds, in digital form for online trading and investment. Tokenized equity shares work the same way, except those shares are in digital crypto coins or tokens. Instead of going into your Demat account, you are credited to your blockchain-hosted account.
Traditional methods of raising capital have a few operational hurdles. They include regulations about regular bookkeeping and account maintenance, adherence to stock exchanges’ strict rules, bank and other financial institutions’ reluctance to issue credit, and business owners’ challenges in convincing private investors to buy parts of a business.
In contrast, tokenizing business ownership of equity shares on a blockchain offers flexibility in fundraising. The low-cost method allows for an accessible way to value the business depending on the direct participation of the interested investors. The valuation mainly depends on market forces rather than a group of sponsors or angel investors.
Tokenized Equity in Practice
Tokenized equity represents ownership rights in a company or enterprise using digital tokens on a blockchain network. In other words, it converts traditional equity, such as shares in a company, into crypto that can be bought, sold, and traded on a blockchain platform. This allows for decentralized, peer-to-peer exchanges rather than relying on centralized stock exchanges or private placement markets. Tokenization also divides equity into smaller, more affordable units, enabling fractional ownership and potentially increasing liquidity. The terms and conditions of the equity, such as voting rights and dividend distributions, can be programmed into smart contracts, automating the enforcement of these rules.
However, the laws and regulations for tokenized equity are still evolving, and challenges related to compliance, security, and investor protection still need to be fully addressed.