Want to invest in private companies? Tokenised shares could be the next frontier

[SINGAPORE] A longstanding barrier in capital markets is being challenged as Wall Street turns to blockchain infrastructure to broaden investor access to the trillion-dollar private markets.

The shift comes as companies remain private for longer, with investors increasingly seeking direct, transparent access to private company equity.

Citi launched the market’s first tokenised depositary receipts (TDRs) on Jun 11 to connect private companies with wealthy investors, partnering Switzerland-based blockchain infrastructure operator SIX.

It leverages the blockchain infrastructure of SIX, one of the world’s first regulated digital central securities depositories, to tokenise private market shares. These TDRs, known by their commercial name Digital Depositary Receipts, can be transacted over the counter.

This inaugural transaction was between Kaleido, an institutional tokenisation and digital asset platform, and a Citi portfolio company and investors in the private wealth business.

Beyond private wealth investors, Citi expects demand from institutional investors and financial intermediaries, with retail investors excluded from the offering.

This marks the first time a global financial services company is both issuing and acting as a custodian for TDRs representing private companies.

What’s a TDR?

A TDR is a digital security that directly represents an interest in the underlying share – in this case, shares in private companies.

To create a TDR, a private company first deposits a block of its shares with a custodian.

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Key to the future: What is digital asset custody, and how does it work?

Under the structure, a regulated financial institution acts as custodian by holding the underlying shares and issuing corresponding digital receipts on a regulated blockchain network. Each tokenised receipt is linked to a specific number of shares held in custody.

Investors can buy, sell and hold the TDR rather than the underlying shares directly.

So why are private markets looking at TDRs?

Private markets have always been synonymous with illiquidity, with a largely fragmented secondary market involving mainly only institutional investors.

Companies are also staying private significantly longer before launching an initial public offering, prolonging the length investors’ capital stays locked up.

According to Goldman Sachs, the average time for a venture company to reach an IPO right now is around 14 years today, up from four years in the 1990s.

With a growing share of corporate value accumulating outside public markets, institutional wealth platforms are facing pressure to provide investors access to private market opportunities.

What are the benefits of TDRs?

Private markets are typically accessed through structures such as third-party special purpose vehicles, which can be complex, involve multiple intermediaries and have less-transparent fees.

TDRs aim to simplify this by integrating them into existing wealth platforms, allowing wealth clients to access more offerings through a familiar investment structure.

Investors can also exit earlier, without having to wait for an IPO for example, as TDRs offer better secondary market access.

“The primary focus of this new model is accessibility,” said Dirk Jones, head of issuer services for Citi. “The TDR model makes it simpler for both issuers and investors to access private markets versus using more traditional routes.”

At the same time, there are still operational safeguards that preserve the structures and offer protection to clients.

Issuers can efficiently distribute and transfer their shares without the need for a public listing or altering underlying ownership rights.

This allows them to maintain control over voting rights and their simplified capitalisation table management structure while expanding their base of investors.

“This gives investors a clear, verifiable interest in the underlying company, issued and safeguarded by a global and regulated bank,” Jones added.

What are the risks of TDRs?

Despite the benefits that tokenised assets introduce, regulators have also highlighted several risks, noted Citi’s Tokenization 2030 report released in June.

One concern relates to settlement. The use of stablecoins or private markets to settle tokenised assets could introduce credit, liquidity and redemption risks, especially in stress scenarios where convertibility to central bank money may be impaired.

In the case where underlying assets lack liquidity, TDRs do not change the fundamentals. If the shares of the TDR are themselves illiquid, this could lead to thin trading, fragmented pools of liquidity and limited price discovery.

Where TDRs with underlying private markets exposure are presented as equivalent to traditional securities while lacking clarity on rights, risks and underlying structures, there is also an increased risk of mis-selling. This can happen especially when investors misunderstand liquidity, redemption and ownership features.

There could also be broader systemic risks in tokenised assets as control over issuance, distribution and settlement becomes more concentrated among a small set of platform and infrastructure providers. This could increase the reliance of the financial system on a limited number of participants.

What does the future hold?

As private markets continue to grow, so has the need for more options and trusted access points to gain exposure to this segment.

Proponents of tokenisation argue that blockchain-based securities can help address fundamental challenges in private markets, including limited accessibility, transparency and fragmented secondary trading.

A key feature of many tokenised securities models is interoperability – the ability to work across traditional financial infrastructures and multiple blockchain networks.

This could broaden participation by making it easier for issuers and investors to interact within a common framework.

While the technology remains nascent, momentum is building as financial institutions and regulators are increasingly exploring how tokenised securities can bridge traditional and digital capital markets.