Canadian investors curious about trading stock tokens – digital versions of stocks that are based on blockchain technology – must have a high appetite for risk in the current climate of regulatory uncertainty, caution some crypto industry experts.
Last week, the cryptocurrency exchange Binance, based in the Cayman Islands and run by Chinese-Canadian businessman Changpeng Zhao, abruptly announced it would stop selling stock tokens after warnings from securities regulators in multiple countries that it was not authorized to sell these products.
Regulators in Hong Kong and Germany say Binance cannot sell stock tokens because they are considered securities, and Binance is not registered as a regulated securities dealer in those jurisdictions.
“Regulators in various countries are still trying to figure out how to approach different aspects of the cryptocurrency industry – stock tokens is one of them. So one of the risks in trading stock tokens is that it can just be taken off an exchange,” said Jonathan Ip, a blockchain and cryptocurrency lawyer at Toronto-based Iterative Law.
Several Canadian companies, including Canopy Growth Corp. , Aurora Cannabis Inc. and BlackBerry Ltd. , have tokenized versions of their stock trading on foreign cryptocurrency platforms such as Binance and Hong Kong-based FTX, one of the largest and most popular crypto exchanges in the world.
Investors can buy and sell fractional amounts of a stock through owning a tokenized version of a security. The price of the stock token is pegged to the value of the share itself.
There are currently no regulated crypto platforms in Canada that facilitate the trading of stock tokens, but Canadian investors can still trade stock tokens on unregulated platforms such as FTX.
“I think the main concern with investing in stock tokens in Canada is that because there is no regulated platform, if something happens to the platform you use, you’re done. Even if the exchange backs your stock token with collateral, they don’t have regulatory oversight so retrieving your investment will be tricky,” said Eric Richmond, CEO of Tetra Trust Co., a Canadian company that offers custody services for crypto assets.
Canadian regulators have still not explicitly taken a position on stock tokens as a product, but a March, 2021, bulletin released by the Canadian Securities Administrators, the umbrella group for provincial and territorial regulators, said companies that offer “security tokens” have to register as securities dealers.
This presumably means that once a crypto platform is registered and regulated by Canadian authorities, it can offer stock tokens, said Mr. Ip. “It’s not the product itself that is an issue, from the point of view of regulators. It’s the fact that if you want to sell a stock token, it is a security, so you have to compile a prospectus report and go through all the necessary steps to become a regulated securities dealer first,” he added.
Investing in stock tokens is not the same as buying an actual stock partly because you do not own any company shares. And only in certain cases do stock token holders receive dividends.
“You don’t have shareholder rights. You’re basically making money from trading on the movement in the company’s stock,” said Mr. Richmond.
Proponents of stock tokens, however, argue it is one of the easiest ways to acquire fractional shares of a stock. Tesla Inc.’s share price, for example, has soared over the past few years to well over US$600 recently, which is very expensive for many investors. There are also limited options for trading fractions of shares – the service is only available through a few online brokerages and trading apps such as Robinhood, Wealthsimple and Interactive Brokers.
“You’re creating a digital version of a traditional stock and making that digital version tradable. It’s a whole new way of raising money,” said Alan Wunsche, CEO of Token Funder Inc., a crypto company that facilitates the trading of digitized securities linked to private companies. The company recently received approval from the Ontario Securities Commission to begin selling securities tokens linked to specific private companies looking to raise money.
Mr. Wunsche believes one reason why the crypto exchange FTX was recently valued at US$18-billion in a US$900-million funding round led by SoftBank Group Corp., Silicon Valley venture capital firm Sequoia Capital and hedge fund billionaire Daniel Loeb is because of the variety of products offered on its platform, including at least 20 different stock tokens.
“Many people might not see it right now, but I think this is really the future of capital markets,” he said.
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