New digital exchange heralds age of tokenising securities

London

A DIGITAL exchange opening next week will enable investors to trade in companies including Apple Inc, Facebook Inc and Tesla Inc outside of the US even when the stock markets are closed.

DX.Exchange, which has offices in Estonia and Israel, will offer digital tokens based on shares of 10 Nasdaq-listed companies with plans to expand to the New York Stock Exchange as well as in Tokyo and Hong Kong. Each digital security is backed by one regular share and holders will be entitled to the same cash dividends, even though the companies themselves aren't involved.

The exchange's virtual stock offering will provide a test of investor appetite for products that seek to improve upon mainstream financial markets by using technology from the world of cryptocurrencies. DX will offer digital stocks, or tokens, based on actual shares bought and held by partner MPS MarketPlace Securities Ltd. The tokens will be based on the Ethereum network, with the amount corresponding to demand on the DX exchange.

Digital stocks could hold advantages over traditional shares because they can be traded even when exchanges are closed, and traders can choose to buy fractions of a share. They could also give foreign investors the ability to buy and sell US shares they might otherwise struggle to access.

Even though US regulators oversee trading of DX's initial roster of stocks, chief executive officer Daniel Skowronski said he doesn't need permission from the Americans to offer this service because DX doesn't operate there. The company says it's licensed by the Estonian Financial Intelligence Unit with full authorisation to operate in the European Union.

"We saw a huge market opportunity in tokenising existing securities," the CEO said by e-mail. "We believe that this is the beginning of the traditional market's merge with blockchain technology. This is going to open a whole new world of trading securities old and new alike." The US Securities and Exchange Commission, which regulates trading of US stocks, declined to comment.

Tokenisation is an increasingly talked-about development among cryptocurrency enthusiasts that involves the transformation of real-world assets into digital contracts that use blockchain technology.

While security tokens have been discussed for a few years, they could be a key area of growth in 2019 as entrepreneurs seek to tokenise everything from fine art and real estate to stocks and bonds.

MPS MarketPlace which is licensed by Cyprus's financial regulator, will hold the stocks on behalf of the token owners and will keep them in a segregated account, Mr Skowronski said. DX's offering is compliant with Europe's Mifid II directive, he said. BLOOMBERG