Quo vadis tokenized shares - a benchmarking to the established intermediated securities system

In the midst of recent fluctuations in crypto markets, the concept of asset tokenization remains a hot topic. This article aims to demystify the current state of equity tokenization in Switzerland compared to intermediated securities, offering insights for Founders, CFOs, General Counsels, and Corporate Secretaries. In essence, legal and regulatory constraints confine equity tokenization to a niche market primarily suited for small enterprises. To make it appealing to larger issuers dealing with intermediated securities, there's a need for a more significant push from issuer solution providers and custodians to enable secondary trading and exchange of shareholder data.

Tokenized Equities in Switzerland: Navigating Legal Ambiguities

Tokenized equities in Switzerland hold the potential to establish a market for issuer shares. However, fewer than 100 Swiss share companies have issued tokenized shares, and it's unclear whether this process has genuinely occurred. For external observers, distinguishing between legally packaged tokenized shares and simple uncertificated securities is challenging. While most shareholders may not be concerned about this distinction, decision-makers, especially those considering introducing tokenized securities, must carefully evaluate financial, investor relations, and legal aspects simultaneously.

Financial Temptations and Market Challenges

From a financial standpoint, the idea of creating a market for shares is tempting. With the emergence of smaller marketplaces like BEKB OTC-X, BX Swiss, and the SPARKS segment at SIX, listing costs can be as low as CHF 10,000. Share tokenization providers charge similar fees, starting from CHF 10,000 for tokenization alone, with additional issuance success fees of 1.5% or more of the net raised capital. However, for equity tokenized markets to thrive, there needs to be sufficient supply and demand for the issuer's shares, a challenge that remains unaddressed.

Trading Limitations and Market Dynamics

In contrast to traditional capital markets supported by brokers and market makers, tokenized markets face limitations, primarily due to restricted secondary trading. The absence of a shared KYC'ed white space of shareholder wallets across issuers or intermediaries hampers trading among participants. For example, a direct transfer from Berner Kantonalbank to Hypothekarbank Lenzburg would not be possible because the custodians cannot share the shareholder data via traditional interfaces, limiting access to institutional investors. Moreover, smaller firms, especially, find themselves in a difficult position, needing to act as their own market makers. This situation contradicts their initial plan of using funding for growth rather than holding cash for share repurchases. Additionally, issuers reporting under IFRS aim to avoid share buybacks due to potential balance sheet implications. Finally, a dual issuance of intermediated and tokenized shares requires careful consideration. Trading on two separate marketplaces can lead to disparate prices for an illiquid stock. While tokenization may improve share transferability for privately held issuers, it does not necessarily enhance liquidity.

Tokenization Challenges: Shareholder Registry and Information Exchange

When it comes to investor relations, tokenization offers a way for companies to connect more closely with their investors. Unlike traditional systems, where investor data is heavily encrypted, tokenization provides issuers with access to shareholders' email addresses and phone numbers, enabling direct communication. In the current system, regulated by FINMA, intermediated securities follow strict rules. While the data is securely encrypted, limitations arise in exchanging personal contact details like emails and phone numbers. This is due to legal concerns from custodians and technical difficulties in handling certain symbols, like the "@" sign. Tokenization also promises direct access to shareholders by eliminating the need for an intermediary or middleman. However, there's a catch. Because there's a distinction between being a shareholder and a token holder, a transfer of tokens may not automatically update the shareholder registry. This means that the existing state, often referred to as "disponible," stays in place. Unfortunately, the traditional intermediated securities system falls short in sharing crucial shareholder information required by issuers in their day-to-day investor relations activities.

The Path Forward: Seamless Integration and Fair Treatment

Tokenization holds the promise of making things easier for shareholders and speeding up the time it takes to complete transactions. However, for it to work seamlessly, we need a system where both traditional and tokenized shares adhere to the same rules and are treated equally. Those involved in the tokenization market must keep working hard to improve how information is shared among custodians. This will allow shareholders to trade with each other, no matter where their stocks are stored—whether in the company's records, a bank's securities account, or even their own safekeeping. Those involved in the intermediated market must keep working hard to make their solution more issuer friendly for investor relations work.



Aequitec AG
Dr. Christian Wilk, CFA
Co-Founder & CEO
Mob +41 78 649 4962