In the latest effort to bring real-world assets onto the blockchain, retail and institutional investors will be able to buy and borrow crypto against tokenized stocks and bond ETFs this week.
The issuer, a subsidiary of the Berlin-based, regulated exchange Swarm, calls its products the “first tradable stocks and bonds on DeFi.”
Tokenized Apple and Tesla stock will be available for purchase on Polygon beginning Thursday, according to the company, as will a pair of tokenized bond ETFs representing U.S. treasuries.
Crypto boosters have long sought to bring the benefits of blockchain technology to traditional finance. They envision a new financial order in which securities can be infinitely fractionalized and traded 24/7, without middlemen.
Real World Assets
That vision took a big leap forward in 2022. Maker, the second-largest protocol in decentralized finance, with more than $6.5B in total value locked, led the charge.
Last year, Maker’s exposure to real world assets grew from $17 million to $640 million; in an end-of-year review, it said it had begun a transition away from exposure to crypto-backed lending.
Coinbase flagged the adoption of real-world assets as a trend to keep an eye on in 2023. And Ethereum founder Vitalik Buterin said in December it was among the most interesting developments in crypto.
Tokenized stocks and bonds can help stabilize an industry prone to boom and bust cycles, according to Swarm co-founders Timo Lehes and Philipp Pieper.
“Part of the issue that we saw [in 2022] was that most of the crypto assets were super highly correlated, except for stablecoins,” Lehes told The Defiant. “You have this whole ecosystem …where everything seems to be more or less connected, and by bringing outside, non-crypto assets on-chain, it kind of creates a different asset universe. That basically offsets some of those behaviors in the market.”
Apple stock is a case in point.
“The cool thing about Apple is that its market cap is bigger than crypto’s market cap,” Lehes said. “That’s going to actually overshadow everything else, including Bitcoin, that’s already on-chain.”
Tokenized stocks and bonds can give investors access to traditional investment opportunities and DeFi opportunities. An investor can go long on Tesla, for example, betting on the future success of the world’s largest electric car manufacturer, while using a tokenized version of Tesla stock as collateral when borrowing DAI from Maker.
But bringing securities on-chain has been a challenge. Mindful of their mandate to protect retail investors, regulators have looked askance at the deepening relationship between crypto and traditional markets.
It took Swarm the better part of a year to get a green light from regulators and to build its tokenized stocks and bonds.
“It took a lot of work on our side,” Pieper said, “to build technology that manages to develop toward the expectation of the regulators, of what’s needed to actually make [the product] compatible with how they think.”
As such, Swarm’s tokenized Apple and Tesla stocks and bond ETFs won’t be available in the United States, where regulators have been steadfast in their refusal to lay out clear and consistent guidelines.
“America has had a very difficult situation coming up with holistic guidance and stipulations — so what regulators, you know, expect from certain aspects of a system like this,” Pieper added. In Europe, regulators have made clear they think digital assets “are financial instruments, and [digital assets] are treated as financial instruments.”
Mobilizing an Asset
Adding new stocks is simple and will be driven by demand, according to the company.
Tokenizing securities isn’t just about bringing traditional financial assets onto the blockchain, Pieper said. It’s also about bringing DeFi to traditional financial assets.
“You’re basically mobilizing an asset by making it more flexible, more agile, more fractionalize-able, more price discovery,” he said. “You’re democratizing the way that people can build markets around that in different shapes and forms. And that is going to be the exciting piece, which is left to discovery.”