Sun. Jun 16th, 2024

Tokenized equity: What is it?

The process of creating and issuing virtual tokens, often known as “coins,” which stand in for equity shares in a company or organization is known as tokenized equity.

Read More: Equity Tokenization

Businesses are finding it easier to adjust to the digitalized crypto-version of equity shares as blockchain use grows. Tokenized equity, in which a company offers shares in the form of digital assets like cryptocurrency coins or tokens, is becoming a popular and practical way to acquire funds.

Comprehending Tokenized Equity

Tokenized equity may be thought of as regular shares acquired in a publicly traded corporation, with the exception that the shares take the form of cryptocurrency tokens.

Let’s use the example of buying shares of a listed firm during its initial public offering (IPO) or on the stock exchange to illustrate how equity share ownership works in the modern day. Your Demat account is subsequently credited with these shares. Tokenized equity shares function similarly, however they are credited to your blockchain-hosted account rather than your Demat account as they are digital cryptocurrency coins or tokens.

There are several operational challenges with the traditional techniques of acquiring funds. They include bank and other financial institutions’ reluctance to grant credit, the difficulties faced by business owners in persuading private investors to purchase portions of their company, and regulatory requirements such as the regular upkeep of books and accounts and adherence to the stringent rules of stock exchanges.

On the other hand, tokenizing firm ownership on a blockchain through equity shares provides a great deal of fundraising flexibility. The low-cost approach makes it possible to determine the business’s true worth in a more democratic manner, contingent upon the active involvement of interested investors. Rather than relying on a small number of sponsors or angel investors, the valuation is mostly determined by market forces.

Tokenized Equity Examples

Initial coin offerings, or ICOs, are becoming a popular way for new companies to acquire money by giving investors token shares. For example, Quadrant Biosciences Inc., a biotechnology business situated in the United States, tokenized all of its stock in the form of Quadrant Token and held a token sale for 17% of its diluted equity.

It was able to generate more than $13 million by issuing digital common shares at a price of $1.25 each. Traditional stock is represented by the Quadrant token, which is stored on its local blockchain.

The tokenized equity shares can be used for any essential actions supported by the underlying blockchain technology. For instance, the required blockchain system manages all common corporate operations such as dividends, mergers, and acquisitions, as well as additional activities like shareholder voting and follow-on equity sale offers.

One such blockchain-based platform, called Templum, for example, aims to become the industry leader in tokenized asset offers and secondary trading that complies with regulations.

Additional Things to Think About

Concerns regarding investor protection and the business model’s sustainability still exist, though. The infancy of initial coin offerings (ICOs) and cryptocurrency transactions is further compounded by the issuing and trade of tokenized stock. The practicality and widespread acceptance of such innovative solutions have been called into doubt due to unclear legislation around cryptocurrencies, frequent incidents of digital asset theft and hacking efforts, and the anonymous nature of their operation.