When Jesse Knutson first raised the idea of a Bitcoin exchange-traded fund nine years ago he got a hard no from his bosses at an Australian banking firm.
Now, 18 months after BlackRock, Fidelity, and other Wall Street firms introduced Bitcoin ETFs and amassed more than $128 billion in assets, Knutson is focusing on the next big crypto product — tokenised stocks.
But this time the challenge isn’t sceptical managers — it’s investors. Do they actually want onchain stocks?
Faster and easier
That’s a fair question, said Knutson, the head of operations at Bitfinex Securities, an arm of the crypto exchange that handles around $233 million in daily trading volume.
“That bridge is still being built.”
Converting stocks into blockchain-based assets that can be traded faster and easier than traditional securities has been a buzzy idea for a few years now.
Swarm, a German platform that pioneered real world assets, offers tokenised versions of Nvidia, Apple, and Tesla shares.
On Tuesday, Coinbase, the top US crypto exchange, applied to the Securities and Exchange Commission for approval to offer tokenised stocks, according to media reports.
Thanks to blockchain technology, it’s relatively straightforward to create and trade digital versions of widely held stocks such as Apple, Microsoft and Tesla.
But the market capitalisation of tokenised stocks is a paltry $16 million, according to a report released last month by the World Economic Forum, which cited data from Blockworks.
Why so tiny?
For starters, investors, especially institutions, still aren’t sold on the need for tokenised equities. When entering the crypto market, it’s simpler to tap widely-held products such as ETFs, or the tokens themselves.
‘Why can’t I trade Apple off-exchange?’
— Jesse Knutson
“They still like to come in with structures they are familiar with,” said Knutson, a seasoned sales professional who used to work at Adam Back’s Blockstream.
Bitcoin, for instance, took years to catch on with retail investors before drawing high net-worth individuals and ultimately institutions.
“The big asset managers were the last to come in,” he said.
Even so, Knutson said the value of tokenised equities utility is clear.
In addition, Knutson said tokenised shares are “portable assets” that can be traded on multiple platforms and on a peer-to-peer basis. This means investors can execute their own transactions anywhere, including Telegram chats.
White lists
“Why can’t I trade Apple off-exchange?” Knutson said. “Why can’t we do that?”
As for background checks, Bitfinex admits clients who have already fulfilled know-your-customer and anti-money laundering requirements to “white lists.”
This makes it way easier for investors to trade with one another.
The most encouraging sign he sees is coming out of the fixed income market.
Bonds tend to be less volatile than stocks because many investors hold them until they mature. Sovereign bonds tend to be far less risky, as well.
More than $7 billion in tokenised US Treasury bonds have been issued worldwide, Knutson said, and Bifinex’s own offering, USTBL, has attracted $30 million in assets.
In its May report, the World Economic Forum said there have been “notable advances” in the issuance of tokenised sovereign, corporate, and municipal bonds since 2021.
Indeed, the European Investment Bank, an arm of the European Union, has issued five tokenised bonds on Ethereum as well as HSBC’s Orion platform and the Banque de France’s DL3S system.
Still, the biggest boost for tokenisation may come from Bitcoin. Or more precisely, from Michael Saylor’s increasingly popular approach of stockpiling the cryptocurrency to juice financial performance.
Strategy, the software firm formerly known as MicroStrategy, has been issuing convertible debt to acquire Bitcoin; its trove is now worth $62 billion. Convertible bonds are designed to transform into equity stakes.
The idea comes right out of the Wall Street financial engineering playbook and sceptics say it poses a new set of risks for investors.
But Saylor’s treasury strategy, and his fundraising mechanism, is catching on and even, perhaps, legitimising crypto as an instrument in corporate finance.
And that acceptance just might make tokenised stocks look equally attractive.
“As companies get more comfortable holding Bitcoin on their balance sheets, companies may ask, ‘Why don’t I just raise capital in Bitcoin and then pay coupons and dividends in Bitcoin’,” Knutson said.
“Maybe we’ll see more of that, and as Bitcoin grows, we get a bit of that tailwind.”
