How Tokenised Stocks Work

What Are Tokenised Stocks?

A tokenised stock is a blockchain token that provides economic exposure to a traditional equity — a share of Apple, Tesla, the S&P 500 — without requiring the holder to interact with a traditional brokerage. The token tracks the stock's price, passes through dividends, and in some implementations reflects stock splits and other corporate actions.

The core value proposition is access. Traditional equity markets are fragmented by jurisdiction, brokerage relationships, and settlement infrastructure. A South American investor who wants exposure to US tech stocks must open a foreign brokerage account, navigate currency controls, and deal with T+2 settlement. A tokenised stock on Ethereum or Base can be purchased with USDC in minutes, held in a self-custody wallet, and transferred globally without a brokerage intermediary.

Tokenised stocks also enable fractional ownership at a granular level. A single share of Berkshire Hathaway Class A trades above $600,000 — an effective barrier for retail investors. A tokenised version can be purchased for $1 worth of exposure. Combined with DeFi composability — using tokenised stocks as collateral, trading them 24/7, or including them in automated strategies — this creates financial infrastructure that traditional markets cannot replicate.

The concept is not new. Crypto exchange FTX launched tokenised stocks in 2021 — which collapsed with the exchange in 2022, illustrating the central risk: the token is only as good as the issuer behind it. The current generation of tokenised stocks is built on regulated foundations with segregated custody, but the risks remain fundamentally different from holding equity directly.

Asset-Backed vs Synthetic

Every tokenised stock falls into one of two fundamental models: the asset-backed model, where real shares are held in custody and tokens represent a claim on them, and the synthetic model, where a token tracks price via a derivative contract with no underlying shares.

The asset-backed model is the dominant approach among regulated issuers. An issuer — Backed Finance, Dinari, Swarm Markets — purchases actual shares through a licensed broker, holds them in a segregated custodial account at a regulated custodian, wraps the position in a Special Purpose Vehicle (SPV), and mints ERC-20 tokens representing fractional beneficial interests in the SPV. To redeem, a token holder sends tokens to a burn address and receives the cash proceeds after the underlying shares are sold.

The synthetic model — used by Synthetix in its earlier iterations — creates derivative tokens backed by crypto collateral rather than real shares. The token tracks price via an oracle, with the collateral pool absorbing gains and losses. No shares are ever purchased; the token is a pure on-chain financial instrument. Synthetix delisted individual US equity synths (sAAPL, sTSLA) in 2021 under regulatory pressure, but the model lives on in perpetual futures protocols.

Issuance & Redemption Mechanics

Understanding exactly how tokens are created and destroyed is essential for evaluating any tokenised stock. The minting and redemption cycle determines liquidity, pricing accuracy, and what happens when you want to exit.

In the asset-backed model, issuance begins when an investor sends stablecoin (typically USDC) to the issuer's platform. The issuer converts that to fiat, executes a share purchase at the exchange, and — once T+2 settlement confirms the shares are in custody — mints the corresponding tokens. This means there is an inherent lag between payment and token receipt: typically 1–3 business days depending on the platform and the fiat conversion step.

Redemption is the reverse. The holder sends tokens to a redemption contract (tokens are burned), the issuer sells the underlying shares at market, waits for T+2 settlement, converts proceeds to stablecoin, and sends to the holder's wallet. Total round-trip time from burning token to receiving stablecoin is typically 3–5 business days under normal conditions.

This lag creates an arbitrage mechanism: if the token trades at a discount to NAV on a DEX, authorised participants (or the issuer itself) can buy the cheap token and redeem it for full NAV, pocketing the spread. If the token trades at a premium, the issuer can mint new tokens and sell them. This arbitrage keeps the token price close to the underlying's price — in theory.

Primary market (direct mint/redeem with the issuer) is only available to KYC-verified, eligible investors. The secondary market — trading tokenised stocks on DEXs like Uniswap — is open to anyone who can receive the token, but liquidity is thin for most assets. Wide bid-ask spreads on DEX pools and low liquidity mean market prices can deviate from NAV meaningfully intraday.

Trading & Settlement

Tokenised stocks settle on-chain in seconds — but final economic settlement is still anchored to the T+2 cycle of the underlying equity market. The two settlement layers operate in parallel and create important nuances for traders.

On-chain token transfers settle with blockchain finality — typically seconds on L2s, minutes on Ethereum mainnet. Sending a tokenised Apple share from one wallet to another is instant, cheap, and requires no intermediary. This is genuinely superior to traditional DTC-settled equity transfers, which involve multiple layers of intermediaries and can take days for cross-broker transfers.

But the token's connection to the underlying equity is mediated by the issuer's custodial infrastructure, which operates on traditional market timelines. Minting requires buying real shares (T+2 settlement). Redemption requires selling real shares (T+2 settlement). The token can move instantly on-chain, but converting between the token and cash is always gated by the equity market's settlement cycle.

Pricing on-chain typically uses the last available exchange price, updated by an oracle or by the issuer's backend when markets are open. Most platforms use a net asset value (NAV) calculated from the official closing price of the underlying for primary market transactions, with secondary market prices determined by DEX supply and demand. The spread between NAV and DEX price is the effective cost of bypassing the primary market.

Dividends & Corporate Actions

Passing corporate actions through to token holders is the most complex operational challenge in tokenised equity. Cash dividends, stock splits, rights issues, and shareholder votes each require a different translation from the traditional equity infrastructure to the on-chain world.

For cash dividends, the process is: the company pays the dividend to its registered holders (via the DTC), which flows to the broker/custodian holding shares for the SPV, which flows to the issuer, who converts to stablecoin and distributes to token holders on-chain. The whole chain adds 2–5 business days of lag on top of the company's payment date. Dividends arrive in USDC or a similar stablecoin — not in the underlying currency — which adds a small FX conversion step.

Stock splits require the issuer to either mint additional tokens (matching the split ratio) or adjust the token's internal NAV-per-token ratio. Both approaches work; the minting approach is more transparent (you see more tokens in your wallet) while the ratio approach requires no on-chain distribution transaction. Most major platforms have handled splits (NVDA 10:1 in June 2024) without incident.

Shareholder voting is the most underdeveloped area. Because the shares sit in an SPV, the SPV (controlled by the issuer) holds the voting rights — not individual token holders. Most issuers currently either vote on behalf of all holders (following management recommendations) or abstain. Pass-through voting — where token holders vote on-chain and the issuer aggregates those votes into a single DTC instruction — is being developed by several platforms but is not yet widely available.

Rights issues and tender offers are rare events but the most complex. If a company issues a rights offering (existing shareholders can buy new shares at a discount), the issuer must decide whether to pass the rights through to token holders, exercise them on behalf of all holders, or let them lapse. This decision has significant value implications and is handled case-by-case with varying degrees of transparency.

Major Platforms

The tokenised stock market is still early but growing rapidly. A small number of regulated issuers dominate the asset-backed market; the synthetic model has retreated from equities under regulatory pressure. Platform choice matters enormously — it determines which assets are available, who can access them, and what happens to your tokens if the issuer fails.

Backed Finance (Switzerland, FINMA-registered) is the most active issuer of individual tokenised stocks and ETFs, with products covering the S&P 500 (bCSPX), individual US tech names, and European indices. Their tokens are transferable ERC-20s available on Ethereum and Base, with secondary market liquidity on Uniswap. Backed explicitly excludes US persons and targets European and Asian institutional and professional investors.

Dinari is the most ambitious US-facing platform, targeting retail investors with KYC-gated access to tokenised versions of over 100 US stocks and ETFs (dAAPL, dTSLA, dSPY). Dinari is exploring broker-dealer registration, which would make it the first SEC-regulated tokenised equity platform in the US — a significant milestone if achieved. Settlement is on Arbitrum and Base.

Swarm Markets (Germany, BaFin-licensed as an investment firm) operates a regulated DEX for tokenised securities on Polygon. Its German regulatory status gives it strong standing in European markets and makes it one of the few platforms operating under MiFID II-equivalent regulation for on-chain securities.

Ondo Finance is primarily focused on tokenised short-duration Treasury products (OUSG, USDY) rather than equities, but its institutional-grade infrastructure and growing DeFi integration make it the reference point for how tokenised financial products scale in composable DeFi environments.

Regulatory Landscape

Tokenised stocks exist in a complex, jurisdiction-by-jurisdiction regulatory patchwork. Whether a tokenised Apple share is a security, a derivative, or a commodity depends on where you are and how the token is structured — and regulators are still developing definitive positions.

In the United States, the SEC has historically viewed any token representing economic exposure to an equity as a security subject to registration or exemption requirements. This is why most tokenised stock platforms explicitly exclude US persons — they cannot legally offer unregistered securities to US investors. The collapse of FTX's tokenised stock programme (which had no custody whatsoever) prompted additional SEC scrutiny. Dinari's pursuit of broker-dealer registration represents the most serious attempt to operate legally within the US framework.

In Europe, the regulatory environment is more permissive under certain conditions. Switzerland's FINMA and Germany's BaFin have both issued licences to tokenised equity issuers under existing securities frameworks rather than waiting for crypto-specific regulation. The EU's DLT Pilot Regime (live since March 2023) creates a sandbox for tokenised securities trading with relaxed requirements for issuers and trading venues — enabling experimentation that may inform permanent regulation.

MiCA (Markets in Crypto-Assets Regulation), fully in effect across the EU from December 2024, does not directly cover tokenised securities — these remain under existing MiFID II / Prospectus Regulation frameworks. However, MiCA creates a clear framework for the stablecoins used to purchase tokenised stocks, potentially improving the regulatory certainty of the on-ramp/off-ramp infrastructure.

In Asia, Singapore's MAS has been the most proactive regulator, running Project Guardian — a collaborative exploration of tokenised asset markets involving major financial institutions. Hong Kong's SFC has similarly run pilots for tokenised securities under its existing regulatory framework.

Risks & Limitations

Tokenised stocks carry all the risks of the underlying equity plus a layer of additional risks introduced by the token structure, the issuer, and the on-chain infrastructure. Understanding each risk layer is essential before investing.

Issuer risk is the most significant and most underappreciated risk. The token is only as valuable as the issuer's ability to honour redemptions. If the issuer becomes insolvent, is sanctioned, or loses its regulatory licence, your ability to redeem tokens for the underlying value may be impaired. The SPV structure is designed to insulate holder assets from issuer insolvency, but this protection depends on clean legal separation, proper custodial segregation, and jurisdiction-specific insolvency laws. It has not been stress-tested in a major issuer failure.

Custody risk sits one level below issuer risk. Even if the issuer is solvent, the custodian holding the underlying shares must also remain solvent and operationally capable. Most platforms use regulated broker-dealers (Interactive Brokers, Apex Clearing) as custodians — these are SIPC-insured in the US, which provides some protection — but SIPC coverage is capped at $500,000 per account and may not protect the SPV's aggregate holdings if losses exceed insurance limits.

Liquidity risk is particularly acute. Secondary market liquidity for tokenised stocks is thin — most Uniswap pools for tokenised equity tokens have TVL in the low millions, with wide spreads. If you need to exit a significant position quickly, you may be forced to go through the primary market (3–5 business days) rather than an instant DEX swap. In a market stress scenario where the underlying equity is also falling, the combination of thin DEX liquidity and delayed primary redemption creates meaningful execution risk.

Regulatory risk can cause platforms to shut down with limited notice. Synthetix delisted US equity synths in days. FTX's tokenised stock programme ended in hours when the exchange collapsed. Even regulated platforms can have their licences revoked or be forced to restrict access to your jurisdiction. This is not a theoretical risk — it has happened to users.

Smart contract risk applies to the token contracts themselves. While most tokenised stock token contracts are simple ERC-20 implementations with minimal attack surface, the broader DeFi ecosystem that tokenised stocks are increasingly integrated into (as collateral, in LP pools) introduces composability risk — bugs in integrated protocols can affect token holders indirectly.

Price deviation risk: during non-market hours, DEX prices for tokenised stocks can deviate significantly from the last close of the underlying. A gap open after earnings, a major macro event overnight, or a trading halt in the underlying will cause the on-chain DEX price to remain stale while the real market has moved. Users who trade at stale prices effectively trade against sophisticated arbitrageurs who are ready to correct the deviation the moment markets open.