In recent weeks there has been a vigorous debate among investors over the trend toward trading tokenized equities – and how Robinhood cast itself as a pioneer, only to ultimately deliver little more than a façade. What CEO Vlad Tenev presented at an event in Cannes were merely tokens tracking the value of a stock that Robinhood would subsequently buy in the regular market to back the token. In the closed-shop structure presented, the token itself was the only element residing on a blockchain.

This, however, fails to capture the advantages of distributed-ledger technology (DLT) as market infrastructure, says Markus Fehn, Head of Strategy & Innovation at Chartered Investment, in an interview with Börsen-Zeitung. „One can indeed proceed in a way that securities fully confer ownership rights and exist entirely on-chain as crypto-securities. That, after all, is the classic understanding of tokenized equities and their benefits: consolidating all processes within a single ledger“, he adds. Moreover, this can be fully implemented under Germany’s Electronic Securities Act (eWpG).

Fehn joined Chartered Investment eight years ago after stints at financial portals and in consulting. The Düsseldorf-based firm specialises in complex capital markets projects, and uses blockchain technology to make investment products both compliant and investable: Capital Markets as a Service. As early as the end of 2021, its subsidiary E-Sec launched operations as a licensed crypto-securities registrar to set up such issuances under the eWpG.

Other crypto platforms such as Kraken have also begun offering tokenized equities, at least to a limited extent. The aim, Fehn states, is primarily to keep users engaged with equities trading inside their ecosystem. „But brokers must decide whether they want to take an interim step, or build a full-fledged solution that enables genuine secondary-market trading in crypto-securities.", he says.

Fehn is not alone in his stance. Trading giant Citadel recently turned to the SEC, criticising providers of tokenized equities for engaging in regulatory arbitrage. They were trading only „look-a-like securities“, it argued – hardly innovation. Citadel also raised concerns that tokenized assets could siphon liquidity away from traditional markets.

Fehn shares that concern. There must be a clear and binding regulatory framework for all players, he notes. He also views skeptically the proliferating initiatives to extend trading hours up to 24/7. The pros and cons need to be weighed carefully. Whether there really are many investors eager to trade at 3 a.m. is something the market will determine. For institutional investors, exposure to foreign markets outside regular hours (Xetra plus pre- and post-trading on Tradegate or L&S Exchange) is already available via futures.

According to Fehn, traditional exchanges such as Nasdaq and NYSE are already under pressure to move toward 24-hour trading, given that crypto-traders are used to such access on their platforms. „Crypto-traders, incidentally, are starting to feed orders globally into a central order book, wherever regulation allows“, he says. „In that sense, something is brewing here that could prove disruptive for the established markets.“

Fehn sees particular potential in applying DLT infrastructure to proxy voting. BlackRock has begun moving in this direction, he says, having long been criticised for how it exercises voting rights tied to its many Exchange Traded Fund vehicles. The idea is to let investors use their ETF holdings managed by BlackRock to cast votes themselves at shareholder meetings. This could be implemented via a DLT register with smart contracts. With BlackRock’s weight, Fehn believes such a model could be rolled out in three to five years.

At Chartered Investment, the DLT specialist is also exploring how to link stablecoins with tokenized money-market funds. „That would address a problem created by the EU ban on interest-bearing stablecoins: How can stablecoins be deployed in an investment-oriented way without violating European rules?“, he explains. A neat and legal solution could be to park stablecoins inside money-market funds.

„The other priority on our agenda is integrating tokenized gold“, reveals Fehn. Chartered Investment is currently reviewing structuring options. So far, offerings have only represented gold as a token, without securitizing it as an electronic security.

Overall, Fehn sees strong momentum in the space. „The rise of stablecoins bridges the gap between traditional and crypto-securities“, he states. „That is creating powerful momentum for DLT as financial-market infrastructure. At the same time, it now takes us only two weeks to set up a new security.“