Will DX.Exchange model become the next trend for STO?

DX.Exchange will enable non-US investors trading of Nasdaq-Listed Companies next week, but will it succeed?

DX.Exchange is launching in Estonia next week which, according to Bloomberg, aims to revolutionize traditional stock marketplaces. While DX.Exchange will offer cryptocurrency purchase and exchange capabilities, and it will also enable users to acquire shares of 10 renowned NASDAQ-listed companies, in the form of tokenized securities.

DX. Exchange will enable non-American investors to conveniently buy the shares of Apple Inc., Facebook Inc., and Tesla Inc. among others, as the assets are held by MPS MarketPlace Securities Ltd., a company that operates under the umbrella of the Cypriot financial regulators. As the tokens are backed by the traditional stocks, their holders will be entitled to the same rights as in traditional stockholders.

We think this is a very interesting model, and we love to share some analysis on DX.Exchange:

1. The product will initially offer digital tokens backed by shares of ten companies listed on Nasdaq. Each digital token is backed one-to-one by a single share of one company and the traditional stocks are purchased by DX Exchange’s partner MPS MarketPlace Securities Ltd. DX Exchange is using Nasdaq’s Financial Information exchange (FIX) protocol which should lend credibility and peace of mind to both investors and regulators. The token-specific work is being built on Ethereum, an open-source, public blockchain best known for its smart contract functionality.
2. The digital tokens will allow investors in DX.Exchange to gain exposure to Tesla, Apple, Google, Facebook, Amazon, and others. The digital token holders will also be entitled to all cash dividends, similar to an investor who invests directly into the stock.
3. DX Exchange is licensed by Estonia’s Financial Intelligence Unit and MPS MarketPlace is licensed in Cyprus. And News are saying DX Exchange is backed by NASDAQ. But interestingly, Both SEC and NASDAQ has not commented publicly about this product. Most lawyers seem to believe the US regulator will have a hard time laying claim to any oversight for non-US businesses.
4. The successful launch of tokenized stocks will be a major win for investors. It increases access to public equities for individuals globally by removing many of the barriers of setting up US-based bank and brokerage accounts, while also allowing stocks to trade 24/7/365. Additionally, after tokenization, investors will even be allowed to purchase fractional shares of each stock, which was previously not possible.
5. Since each digital token is backed one-to-one by a traditional stock, it will be important to see if the tokens trade at a premium, a discount, or flat to the price of the underlying stock. This could create positive or negative investment opportunities depending on where the market initially shakes out. Price differences are likely to be affected by liquidity as well. We know these particular popular stocks have deep liquidity in traditional markets, but don’t yet know what liquidity looks like for a tokenized version.

This is the first time a company will offer tokenized shares of public companies in a fully regulatory compliant environment. While exciting, there are many unanswered questions in the tokenized security area:

Website Picture Date: 5/15/2018

1. DX.Exchange is not really a new exchange. We remember that at the New York Consensus Conference May, 2018, they attracted some attention by hanging the NASDAQ logo on their website. But later people found out that the only connection is that DX is using NASDAQ trading protocol, along with many other exchanges. So the news could just be a new marketing campaign?
2. How will US regulators react to this product? STO was widely discussed months earlier, and it stands out partly because it will enable cross-border investment. However, the regulatory barriers in different jurisdictions are very difficult to break through. If the DX model works out, then can it be used as a reference for STO?
3. Can the publicly traded companies do anything to stop this? Will there be different rules for US investors compared to non-US investors?
4. How much investor demand is present for tokenized shares of publicly traded companies? Will there be enough liquidity? Are there problems with accepting both fiat currencies and cryptocurrencies?
5. How will investment platforms like Robinhood, eToro, TD Ameritrade, eTrade, Coinbase, Gemini react? Will they also include tokenized securities on their platform?
6. DX Exchange claims that each token is backed by one share of stock. What’s the mechanism like? Will MPS MarketPlace purchased them from Nasdaq in advance? If so, DX Exchange will face huge market risk. If MPS MarketPlace will get the stock after there’s demand, will the whole process, including tokenization, be completed before there’s any price change?
7. Whether MPS MarketPlace is publicly audited to ensure tokens are backed by the actual stocks.

The launch of DX Exchange will bring positive effects to the market if works well:

● It smooth the process for investors to start constructing a portfolio with both cryptocurrency and other asset classes. Investors no longer need to go through process like opening accounts, transfer, or the fiat channel like Coinbase to allocate their capital between cryptocurrency and traditional securities

● This model might allow 24/7 trading for U.S. stocks

● Global access to global asset. Currently it’s hard for non-U.S. residents to invest in the U.S. stocks, and DX. Exchange will provide such access to them. This will potential increase buying power to U.S. stocks and made another use case for cryptocurrencies. Which should bring positive effects to both market.

Due to limited disclosed information, the result for these questions may not be fully answered before the project goes live. The emergence of the DX project has brought a new model that may become a direction for the future, and we will continue to pay attention to the development in this field.

Reference:

1.Anthony Pompliano — Tokenized securities are coming fast

2. A digital exchange opening next week will enable investors to trade in companies even when the stock markets are closed https://www.bloomberg.com/news/articles/2019-01-03/tesla-stock-on-a-blockchain-offers-hint-of-where-crypto-s-headed

3. Token Exchange to Enable Trading of Nasdaq-Listed Companies https://www.coindesk.com/nasdaq-powered-security-token-exchange-will-launch-next-week

4. https://baijiahao.baidu.com/s?id=1600500839936855090&wfr=spider&for=pc

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