Tokenization of securities – Comparing different structures

In the rapidly evolving capital markets, public company ownership itself is changing form. Digital assets, tokenization, and evolving market structures are expanding what it means to hold a share, and as the forms of ownership multiply, the question of who owns a company, provably and securely, becomes more important.

The regulatory framework surrounding digital assets and tokenization is also evolving, with the SEC’s pending Innovation Exemption which signals growing regulatory support for bringing securities and shareholder ownership onto blockchain networks. 

At Computershare, we recognize that ownership matters and are committed to helping our clients safeguard their securities, while supporting innovation and choice. Enabling ownership is at our core, and as we advocate for issuers and their shareholders, we have created an innovative new tokenization structure – Issuer-Sponsored Tokens (ISTs).

As token ownership structures evolve, it is critical for issuers to understand the implications of different structures for their organization and their shareholders. Here we outline three types of tokenized securities and considerations for issuers.

What are Third-Party Tokenized Securities?

As the name suggests, Third-Party Tokenized Securities (also known as an equity wrapper or synthetic) are products created by a third-party, usually a financial institution, that is based on a company’s stock. The institution creates a special purpose vehicle (“SPV”) which buys and holds real shares, then issues shares in the SPV in token form which gives investors economic exposure to the underlying shares.

These products are not new, but they may become more common as investors look for additional tokenized ways to trade and own stock. If a company does not offer its own tokenized shares, outside firms may step in.  

Wrappers are created without the involvement of the company that issued the underlying shares. This means the company usually does not know who owns them, does not control how the tokens operate, and does not necessarily enjoy any benefit from a relationship with these investors. Also, the wrapper may not correspond to the underlying shares on a one-for-one basis and may not carry the voting or dividend rights of the underlying shares. At the same time, some wrappers use the company’s name or ticker and logo, which can imply the company has approved or endorsed the token issue, when it did not. 

Because the underlying shares are held by the SPV, lower liquidity may exist. If a wrapper holder wants to sell, they must find a buyer for the SPV shares in token form which may be limited even though the underlying security is very liquid. 

Investors may want to consider the legal, operational, governance and reputational implications of wrappers. They can create confusion in shareholder records, complicate voting and corporate actions, and even affect how the market understands the company’s stock price. In tokenized form, there is a risk that investors may not clearly understand the difference between real tokenized shares and a version of them created by a third party.

What are Issuer-Sponsored Tokenized Securities?

An Issuer-Sponsored Token (IST) is the actual share in a digital format administered on a distributed ledger. It is the same share issued in a directly registered form represented by a DRS statement or stock certificate. Tokenization only changes the holding format, not the shareholder rights or issuer visibility. As indicated by the name, the company issuing the shares is directly responsible for their securities that are represented by ISTs.

One clear benefit of ISTs is that a company, supported by its transfer agent, maintains full control over the securities issued and maintained as part of the official shareholder records. Issuers can preserve a direct relationship with their shareholders, with direct issuer-to-shareholder interactions for communications, voting and corporate actions.

For shareholders, ISTs sit alongside existing holding formats (including Direct Registration System (DRS) and certificates). An IST gives shareholders the choice of how they prefer to hold their shares, and with one IST token representing one share*, avoids confusion about their holdings.

What are Custodized Tokens?

Custodized tokens are not the security itself. Under this model, a custodian holds a nominee position on the transfer agent register (or in the depositary) and issues tokens that represent the beneficial interest ‘entitlement’ in the underlying shares held in that nominee position. This is the model DTCC is planning for its participant members.

Custodized tokens do not require issuer permission and have many of the drawbacks of beneficial ownership today – issuers are generally unable to routinely gain access to records or platforms to know the owners of their stock. In the unlikely event they can gain access, the cost may be prohibitive. Further, issuers generally have no say in who tabulates the proxy votes for the custodized beneficial holders even though the issuer may be expected to pay for that service.

Custodized positions also lend themselves to be short sold by other clients of the nominee operator.

As tokenization of securities becomes more prevalent in the financial industry, companies navigating this complexity will want to work with an advocate and service partner that has safeguarded ownership through every market evolution of the last five decades – Computershare is here to help.

*Except where a company's charter expressly permits fractional share holdings

Computershare is not providing, and does not intend to provide, any legal, tax or investment advice.

Let’s talk

If you have questions about tokenization, want to further explore ISTs or discuss the potential impact of other token structures, please reach out to your Relationship Manager or contact us.