DEFINITION of 'Tokenized Equity'

With the growing adoption of blockchain, businesses are finding it convenient to adapt to the digitized crypto-version of equity shares. Tokenized equity is emerging as a convenient way to raise capital in which a business issues shares in the form of digital assets such as cryptocoins or tokens.

BREAKING DOWN 'Tokenized Equity'

Think about tokenized equity like any standard share purchased in a listed company, except that those shares are in the form of crypto tokens.

To draw a parallel with present day equity share ownership – say, you purchased shares of a listed company during its initial public offering (IPO), or bought them on the stock exchange. These shares are then credited to your demat account. Tokenized equity shares work the same way, except that those shares are in the digital form of cryptocoins or tokens, and instead of going into your demat account, they are credited to your blockchain-hosted account.

The traditional methods of raising capital face quite a few operational hurdles. For instance, regulatory requirements like regular maintenance of books and accounts and adherence stock exchanges' strict rules, reluctance on part of banks and other financial institutions to issue credit, and challenges faced by business owners in convincing private investors to buy parts of business are a few of these problems.

In contrast, tokenizing the business ownership in the form of equity shares on a blockchain offers a lot of flexibility in fund raising. The low-cost method allows for a more democratic way to realistically value the business depending on the direct participation of the interested investors. The valuation is mainly dependent on market forces, rather than on a select group of sponsors or angel investors.

Many new startups and businesses are deciding to fund raise through initial coin offerings (ICO), and allotting token shares to investors. For instance, U.S.-based biotechnology company Quadrant Biosciences Inc. tokenized all of its equity in the form of Quadrant Token, and offered 17 percent of its diluted equity via token sale. It successfully raised over $13 million through the issuance of common shares in digitzed form at $1.25 per share. The Quadrant token that resides on its native blockchain represents traditional equity.

The underlying blockchain infrastructure also supports all necessary activities applicable on the tokenized equity shares. For example, all popular corporate actions like dividend, mergers and acquisitions, and other activities like shareholder voting and follow-on equity sale offers are also handled by the necessary blockchain system.

For instance, Templum and Stamps are two such blockchain-based platforms that are aiming to become the leading regulatory-compliant platforms for tokenized asset offerings and their secondary trading.

However, concerns remain about the viability of the business model, and around issues of investor protection. ICOs and cryptocurrency dealings are still in a nascent stage, and tokenized equity issuance and trading adds another level of complexity. Lack of clarity around crypto regulations, regular instances of theft and hacking attempts of digital assets, and anonymous nature of their working has kept the viability and mass adoption of such innovative offerings in question.

RELATED TERMS
  1. Security Token

    A security token is a portable device that authenticates a person's ...
  2. Bancor (BNT)

    Bancor blockchain protocol allows users direct zero/low fee conversion ...
  3. Bounty Programs (ICO)

    Bounty programs are rewards, usually in the form of tokens, to ...
  4. Acorn Collective

    The project aims to be the first blockchain crowdfunding platform.
  5. 0x Protocol

    0x is an open protocol for decentralized exchange on the Ethereum ...
  6. Blockchain

    A blockchain is a public ledger of all cryptocurrency transactions. ...
Related Articles
  1. Tech

    Is 2018 the Year of the Security Token?

    With its ability to demonstrate value, security tokens could roil traditional financial markets in favor of the more hybrid blockchain models.
  2. Tech

    Are ICOs Becoming Too Greedy?

    Whether ICOs are considered greedy is ultimately subjective, and it’s up to potential investors to vet the quality and intentions of any project.
  3. Tech

    Equity on Ethereum: Firm Offers Real Stock Through ICO

    Not a "utility token" in sight with this (sort of) ICO.
  4. Tech

    The Rise of 'Initial Coin Offerings'

    A growing trend sees more digital tech companies creating their own currencies. What is in store for this developing industry?
  5. Tech

    How Much Does It Cost To List An ICO Token?

    A new post states that listing an ICO token on a cryptocurrency exchange can cost anywhere between $1 million and $3 million.
  6. Tech

    Messaging Giant LINE Launches Its Own Crypto: LINK

    LINE is the first listed co. to launch a proprietary blockchain network with its own cryptocurrency.
  7. Tech

    Why Crypto Users Need to Know: The ERC20 Standard

    ERC20 dictates the standard functions that ethereum token contracts must be able to execute.
  8. Tech

    SEC Chair Says Bitcoin Is Not A Security

    SEC Chairman Jay Clayton told CNBC that bitcoin is not a security. But he was not as forgiving about ethereum's tokens.
  9. Tech

    Cryptocurrency 'Burning': Can It Manage Inflation?

    Coin burning could help to control the circulating supply of digital tokens.
  10. Investing

    Cryptocurrencies Tank As Panic Starts To Set In

    Panic is setting in among cryptocurrency investors, sending most down in trading Monday.
RELATED FAQS
  1. How Is Equity and Shareholders' Equity Different?

    A company's equity typically refers to the ownership of a public company. Shareholders' equity is the difference between ... Read Answer >>
  2. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
  3. How does additional equity financing affect existing shareholders?

    Learn about how equity financing affects existing shareholders. By issuing and selling shares on the open market, equity ... Read Answer >>
Trading Center