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Stock tokens, Binance's checkmate to the stock exchanges


When all eyes were on the IPO of Coinbase, the American crypto exchange and multiplatform, another exchange, Binance, made a strategic move that same day: it announced that its offering to its users would include a COIN (Coinbase's ticker on Nasdaq) stock token.

Each digital stock token represents an equity share, and is fully backed by a portfolio of underlying securities representing stocks, bonds, options, warrants, futures and mutual fund shares.

Unlike traditional stocks, users can purchase fractional shares of fractional shares of listed companies with stock tokens. These tokens closely track the performance of traditional financial securities, as they are backed by physical shares. This implies that a movement in the price of the underlying asset generates an identical movement in the price of the derivative. Ownership of equity tokens does not transfer any shareholder rights, such as voting rights, but does transfer the economic performance of the underlying, including the payment of dividends.

COIN is not the only Binance token, the exchange initially of Chinese origin that today is based in Malta due to restrictions in the Asian country, had earlier announced Tesla stock tokens. Binance is the world's largest crypto exchange platform in terms of transaction volume (about $39 billion in 24 hours and trades 3.7 times more than the next largest, Huobi Global. Currently, it also offers stock tokens of MicroStrategy and Apple (the most traded and today reaching a volume of BUSD 969,020.48).

Binance stock tokens are backed by CM-Equity AG, a licensed and fully regulated asset management company in Germany, which derives its custody from a third party company. Moreover, these equity tokens denominate, settle and collateralize in BUSD (a stablecoin, issued in conjunction with Paxos, which tracks 1:1 to the US dollar). In turn, BUSD is approved by the New York State Department of Financial Services (NYDFS). This type of procedures, through the stablecoin, makes the calculation of returns easier and faster than in fiat.

Tokenized shares, had previously been launched on the derivatives exchange FTX in October 2020, allowing its users to trade shares of the most popular US firms such as Netflix, Facebook, Amazon and Tesla.

In general, stock tokens are ideal for users who cannot acquire a brokerage account or who prefer a more simplified system, where they can also manage a portfolio of cryptocurrencies. While it is true that today the supply of stock tokens is limited, the trend will be to add more and more stocks attractive to the tech and crypto world, particularly those traded on the New York Stock Exchange or NASDAQ.

This definitely challenges traditional exchanges to adapt and innovate and -why not- include coins and tokens such as Bitcoin, Ether, Litecoin, and others. Fintechs like eToro have already adapted in terms of supply. However, the biggest challenge will be in terms of the technological infrastructure and the sophistication of digital identities to be adopted.

Given the existence of different regulations regarding the trading of token shares, digital identities need to fulfill not only the role of privacy and security, but also the role of authentication of the same. On the one hand, there is the KYC process (acronym for "know your client") which in financial services fulfills the role of verifying the identity, suitability and risks of a business relationship with a customer. It is part of the anti-money laundering policy. In the particular case of Binance, users who wish to access to acquire stock tokens must undergo an additional level of security than those who only trade cryptos. In this extra layer of authentication, they must include identity verification and face biometrics authentication mechanisms are used. German users, on the other hand, require a third layer of verification (proof of address, more advanced identity checks, full risk assessment and suitability questionnaire). And due to regulatory issues, users from mainland China, Turkey, the United States and other restricted jurisdictions are prohibited from trading stock tokens.

The issue of authentication processes for digital identities and the fragmentation of their attributes is once again evidence of an unresolved issue in the internet age, even though the technology has been around for a couple of years now and Estonia is proof of this. This point will become increasingly evident as we continue to move from the "internet of information" to the "internet of value" enabled by blockchain technology, through the tokenization of assets of different kinds that are giving way to the crypto economy.

With this, it is clear that even though innovative companies have the spirit to carry out asset tokenization processes in the most regulated way possible, we can only aspire to a solid tokenized economy when we have a single sovereign digital identity - that is to say, one that contains all our information that today is disintegrated and that we have control over - and that is cryptographed to increase the layers of security.

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