Tokenized Equities Require ADR Structure for Enhanced Investor Protection
Tokenization has the potential to revolutionize capital markets by enabling real-time settlement and wider investor access. However, current tokenized equity models are fragmented and lack alignment with traditional market safeguards.
Two main approaches are prevalent:
- Wrapper model: This involves tokenized IOUs providing synthetic exposure to equities without granting governance rights or enforceable claims. Liquidity is often limited to private ecosystems.
- On-chain issuance model: Involves creating native digital shares via blockchain, aligning more closely with legal definitions of securities but facing operational complexities and fragmented liquidity.
A more effective tokenization model could be based on depository receipts (DRs), which have historically facilitated foreign equity trading in the U.S. through a regulated structure.
Benefits of tokenized DRs include:
- Preservation of shareholder rights, including dividends and voting.
- Clear segregation of duties with regulated custodians maintaining underlying shares for ADR holders' benefit.
- Regulatory recognition under U.S. law, allowing fractional ownership of U.S. shares.
- Full fungibility and market access, enabling same-day conversions and catering to both retail and institutional investors.
- Scalability for stock issuers and secondary market participants.
Applying the ADR structure to tokenized equities can bridge traditional finance and digital infrastructure effectively. Regulatory mechanisms similar to SEC Rule 12g3-2(b) could facilitate broader access to tokenized share offerings for U.S. investors.