Tokenized shares are often described as conventional stocks placed on a blockchain. That description is attractive, but frequently incomplete. A token bearing the name or ticker of a public company may provide economic exposure to its shares without giving the holder ownership of those shares. This distinction is becoming increasingly important as tokenized equities move from experimental products into mainstream investment platforms. BlackRock has now designed three model portfolios that Ondo Finance plans to offer as digital tokens. Robinhood provides European customers with tokens linked to more than 2,000 stocks and exchange traded products. Other platforms, including xStocks, offer blockchain based exposure to US equities across multiple networks.
These products may look similar in a digital wallet, but their legal structures can be very different. The clearest form of tokenized equity is an issuer sponsored security. In this structure, a company issues its own shares as blockchain tokens or appoints an agent to do so. The blockchain is integrated with the company’s official shareholder record, meaning that transferring the token also transfers the security. The investor owns the actual share and generally retains the associated rights, including voting, dividends and access to shareholder information.
The Securities and Exchange Commission distinguishes these issuer sponsored securities from tokens created by independent third parties. In the latter case, the company whose name appears on the token may have no involvement in its issuance. Ondo illustrates one common third party structure. Its tokenized stocks are structured as notes issued by Ondo Global Markets, a British Virgin Islands special purpose vehicle. When an investor buys a token, the issuer purchases the corresponding securities and holds them through a regulated custodian. A security agent holds a first priority claim over those assets for the benefit of token holders.
The investor, however, does not own the underlying shares. The investor owns a debt instrument whose value is designed to follow them. Ondo’s documentation states that tokenholders can redeem their tokens for the value of the underlying assets but do not receive shareholder voting, information or other ownership rights. The new BlackRock model portfolio tokens appear to follow this general architecture. BlackRock designs the investment strategy and provides the underlying ETFs, while Ondo issues the token and purchases the assets supporting it. The buyer therefore receives a collateralized Ondo obligation tracking a BlackRock designed portfolio, not a BlackRock fund interest held directly in the buyer’s name.
Robinhood offers another variation. Its European stock tokens are over the counter derivative contracts between the investor and Robinhood Europe. Although Robinhood holds underlying securities through a US custodian, the customer owns neither those securities nor a claim that can be redeemed for them. Robinhood passes through equivalent economic returns, including amounts corresponding to dividends, but the investor remains exposed to Robinhood’s ability to meet its obligations. This does not necessarily make such products unattractive. A well structured token can provide fractional access, continuous transferability, integration with digital wallets and the ability to use an investment as collateral in decentralized finance. For investors outside the United States, it may also provide access to securities that are otherwise difficult or expensive to purchase.
But “fully backed” is not the same as “directly owned.” Investors must understand who holds the underlying securities, whether the assets are segregated, what happens if the token issuer becomes insolvent and whether a security agent can enforce claims against the collateral. They should also determine whether dividends are received as dividends or merely replicated through a contractual payment, since the distinction may affect taxation. Liquidity presents another complication. A token may trade around the clock while the underlying stock trades only during conventional market hours. When the reference market is closed, token prices may reflect limited liquidity, wider spreads and expectations about where the stock will open. Blockchain availability does not create continuous liquidity in the underlying asset.
Before buying any tokenized share, the investor should answer several basic questions: Who issued the token? Is it the actual share, a custodial entitlement, a secured note or a derivative? What legal rights accompany it? Can it be redeemed for the underlying security or only for cash? Who controls the collateral? What happens during an insolvency, blockchain failure or market suspension? Tokenization can improve how securities are held, transferred and used. It does not eliminate the legal structure surrounding them. In many cases, the most important information is not contained in the token’s ticker or smart contract. It is found in the prospectus, custody agreement and insolvency provisions behind it.
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