Are tokenized stocks a new threat to the FX/CFD industry?

Binance has listed a tokenized version of Tesla Inc. stock which can be traded by non-U.S. based users. They will now gain access to the country’s $47 trillion stock market with no particular regulatory hurdles.

Changpeng Zhao, Chief Executive Officer at Binance, said: “Binance serves many users around the world and we are very pleased to be able to help them participate in the equity market.

“Stock tokens demonstrate how we can democratize value transfer more seamlessly, reduce friction and costs to accessibility, without compromising on compliance or security. Through connecting traditional and crypto markets, we are building another technological bridge for a more inclusive financial future.”

The zero-commission, tradable stock token was responsible for $10 million in traded volume on its first day, according to the firm, which is not significant compared to the TSLA stock AVD of nearly $57 million. Still, $10 million AVD would be among the 100 most liquid coins.

Binance’s Tesla token is backed by a share of the underlying stock through a partnership with German financial firm CM Equity AG, a BaFin-regulated investment firm that operates proprietary trading and brokerage services.

Other way to go at it is with synthetic stand-ins for the stocks, which is the modus operandi of Terraform Labs’ Mirror Protocol. This method uses an oracle system that cross-references the token price against its real counterpart.

Synthetic assets are able to circumvent onerous regulatory barriers, including capital gains taxes on foreign equities, capital controls, as well as provide access to global markets in financially disenfranchised regions or politically dislocated areas.

Coinbase, which doesn’t offer stock tokens at least not yet, is about to go public today. The arrival of IPOs onto the crypto market is a significant development. Coinbase plans to post its shares straight on the Nasdaq stock exchange via a direct listing.

Andrew Bull, founding legal partner at Bull Blockchain Law, told Bloomberg it’s only a matter of time until U.S. regulators approve tokenized stocks.

“The U.S. will undoubtedly allow for tokenized stocks to trade at some point in the future, but like the current Bitcoin ETF situation going on in the U.S., the transactional timeline for where funds come from in the token context is not yet satisfactory,” said Bull. “Adoption will most likely take significantly longer due to regulatory hurdles that may simply boil down to a desire to stick with the current infrastructure.”

Stephen Leahy, Director of Business Development for the Trading Markets department at Circle, commented on these recent developments on Twitter.

“The Retail FX/CFD industry got burned offering CFD’s on #Crypto in late 2017. Then shied away from Crypto. Now the crypto exchanges are offering synthetic equities and indexes. Retail #CFD brokers can not compete”, said Mr.Leahy, who once was a leader within the CFD trading industry, including top roles at oneZero Financial Systems and FX Primus.

In October 2020, Mr. Leahy provided valuable insights into the world of digital assets, crypto CFDs, and its ban in the UK.

“I believe a few of the major DA (and some that have yet to be created) are the future of finance and will be the assets and platforms that are used by the finance sector in coming years to facilitate frictionless transactions for consumers, and instant settlement of payments between financial firms and their clients. So I believe wholeheartedly in Digital Assets. But I want CFD’s banned too” explained Mr Leahy.

“Why?, well I want to speed the move to Digital Assets by all. I do not want legacy financial service firms to get in the way of adoption. And while trading and liquidity of DA is important, I want people to experience being “un-banked”. Buy some DA and hold it yourself on your mobile wallet, transfer value instantaneously to anyone you choose in seconds with almost zero costs ($1 or $1million), access your wealth from anywhere on the planet with an internet connection” he said.

“Digital Asset CFD’s just add layers of service providers between an individual and their property. I get that speculators want to speculate. But for those who have a legitimate interest in the future of finance, CFD’s add risk and put a financial entity between you and your digital asset. Get educated, buy the actuals, and hold in your own wallet” he concluded.