Earlier this week, Backed Finance launched over 60 tokenized stocks on major crypto exchanges and Solana-based decentralized finance (DeFi) platforms. Following the debut of its product, xStocks, crypto natives now have direct exposure to traditional equities, including Apple, Amazon, Tesla, and other blue-chip giants.

This isn’t a one-off event. There are growing talks about tokenizing stocks as part of a broader trend to bridge the gap between traditional financial instruments and blockchain tech, aka the tokenization of real-world assets. For instance, Robinhood recently voiced its intention to bring tokenized versions of around 200 U.S. equities to the European market. These tokens will represent equity held by the company, allowing investors to earn dividends, but without voting rights. Similarly, Coinbase is seeking approval from the U.S. Securities and Exchange Commission (SEC) to provide tokenized equities to its customers, the crypto exchange's chief legal officer told Reuters last month.

Seeing all the buzz around tokenized stocks, this article unpacks all you need to know about this new frontier.

What is a Tokenized Stock?

A tokenized stock is a digital representation of a company’s shares on the blockchain. By converting traditional financial assets, such as shares, bonds, or even real estate, into digital tokens on a blockchain, fractional ownership becomes possible.

In many cases, these tokens are directly backed by actual shares held by a regulated custodian. So, if you own one tokenized Apple share, there's a real Apple share sitting in a secure vault somewhere, ensuring the token's value is directly tied to the real stock. However, some "synthetic" tokenized stocks simply track the price of the underlying asset without direct ownership, using mechanisms like smart contracts and oracles to ensure their value mirrors the actual stock.

Instead of relying on a traditional stock exchange with specific trading hours and intermediaries, tokenized stocks can be bought, sold, and transferred on blockchain-based platforms. This opens up a world of possibilities that traditional markets just can't match. For example, persons in Africa may have a hard time purchasing US-based shares on traditional markets. But this is no longer the case with their tokenized counterparts.

Perks of Tokenized Stocks

1. Fractional Ownership for Everyone: Ever wished you could own a piece of a high-value stock like Berkshire Hathaway, but balked at the price tag? Tokenization makes it possible to own tiny fractions of these expensive shares. This democratizes investing, making previously inaccessible assets available to a much wider audience, even with smaller amounts of capital.
    
2. 24/7 Global Trading: Traditional stock markets have limited trading hours and geographical restrictions. Imagine being able to trade Apple shares from your couch in Amsterdam at 3 AM local time! Tokenized stocks, living on a blockchain, can be traded around the clock, anywhere in the world, breaking down geographical and time barriers.
    
3. Increased Liquidity: By making assets fractional and tradable 24/7, tokenization can significantly boost liquidity, especially for assets that are traditionally hard to buy and sell quickly.
    
4. Transparency and Security: Blockchain's inherent transparency means every transaction is recorded on an immutable ledger, enhancing trust and reducing the risk of fraud. Smart contracts, which are self-executing agreements encoded on the blockchain, automate the terms of the trade, adding another layer of security and efficiency.
    
5. Reduced Intermediaries and Costs: As someone who is actively involved in the traditional stock market, I am familiar with all the fees that come with using a stockbroker. However, by leveraging blockchain and smart contracts, tokenized stock trading can potentially reduce the need for numerous intermediaries found in traditional finance, leading to lower transaction fees and faster settlements. Instead of waiting days for a trade to settle, it could happen in minutes.