The Head-to-Head Battle of Tokenization

This battle for market dominance is going to hit a boiling point soon. And it’s coming down to two entities.

On one side is the DTCC – the Depository Trust and Clearing Corporation. This is the entity that currently takes custody of your stock certificates any time you buy a stock.

The DTCC was the answer to a system bursting at the seams back in the 1960s and 70s. The problem was so bad we called it the Paperwork Crisis, and it resulted in the NYSE closing on Wednesdays just so it could try to keep up with transactions.

These days, the DTCC is made up of a who’s who of finance and trading. All the major names you hear each day, like the Nasdaq, New York Stock Exchange, JPMorgan Chase, Citadel, and others, are involved in its existence.

They are the gatekeepers of the current financial system… and they have a monopoly over the information they manage.

On the other side, there’s Securitize, a company that got its start in 2017 for issuing and managing digital securities. This is the entity that turns a company’s stock into tokenized assets onchain.

It got its big breakthrough earlier this year through a partnership with Computershare, the largest transfer agent in the world. It manages stock for 58% of the S&P 500.

Here’s how to think about these two differing sides…

When you hold shares in your brokerage account, they are held in name by the DTCC. This is recorded by Computershare, which acts as a master registry of where all the stock is held.

In other words, Computershare (and other stock transfer agents) sit a layer closer to the public company compared to the DTCC.

And it’s this proximity that is creating a collision course between the two organizations…

Legacy Finance Is Changing

DTCC made news this week by completing the largest live production trades of tokenized assets.

It was a live trial that saw ETFs, U.S. Treasuries, and stocks tokenized. DTCC conducted various trades, such as moving assets to secure loans or agreements… repo transactions… margin movement… and securities trades.

The event was a true demonstration of how our financial markets are about to be permanently upgraded.

Naturally, some of the biggest institutions in finance like BlackRock, JP Morgan Chase, and Goldman Sachs, among others, were involved.

The surprising part is the role played by another entity that readers of Permissionless Investor know well: the crypto-centric company Ondo Finance.

Ondo Finance owns and operates its own SEC-registered transfer agent, and it’s responsible for tokenizing the bulk of onchain stocks that exist via its platform.

It most recently began to issue U.S.-compliant tokenized equities earlier this month on the same day that Robinhood announced its stock tokens to the world. This was a major leap for Ondo, as it was geofencing Americans for its offering. Robinhood has not demoed nor mentioned immediate plans to make stock tokens available to Americans.

The latest news is that Ondo seems to be working alongside the DTCC via its tokenization service.

The move means Ondo’s stock tokens carry the same CUSIP and ticker symbol as the underlying security, so they represent a direct, traceable link to the real stock.

These tests were major milestones for DTCC to get closer to an official launch of a tokenized security platform this year in October.

More important is the fact that the DTCC is partnering up with an entity with close ties to decentralized finance (DeFi). Ondo has integrations into the onchain exchange Uniswap and lending/borrowing protocol Morpho, among others.

The DTCC-Ondo connection represents a direct pipeline from the legacy system to the permissionless DeFi ecosystem that looks poised to go live in three months.

Yet while the DTCC was busy making news on its most recent developments, its competitor was drumming up interest as well.

Undercutting the DTCC

Securitize is the other main entity working alongside Wall Street.

It has helped BlackRock, Apollo Global Management, BNY Mellon, VanEck, and others tokenize assets. The platform has also built inroads into DeFi like Ondo has done.

The main difference is its partnership with Computershare. It essentially tokenizes the asset before it hits the DTCC; it’s undercutting the DTCC’s very existence.

Instead of the stock going to DTCC for custody first, the stock moves directly onchain as a token.

The token is the stock. The public blockchain is the record of ownership. The individual holding the token is the custodian.

This process is called Issuer Sponsored Tokens, or ISTs for short. We can think of this as a digitally native form of equity or stock.

This form of token generation is arguably more suitable for onchain use since the token is the actual asset. There is no offchain sequencing that needs to occur with registry systems, which might introduce settlement delays.

And just as DTCC announced its demonstration, Securitize went ahead on the same day to announce its plans to enable onchain IPOs and follow-on offerings for public companies.

This is a significant announcement. It’s not just about tokenizing the native asset to move onchain. It’s about enabling public companies to raise capital as they go to market (or are already in the market).

This is capital allocation. It’s another new vertical that is getting ready to make its way to onchain finance.

The secondary effects will be a wave of new applications, solutions, and contracts.

Not only that, it’ll reduce the costs associated with becoming a public company. We already mentioned the other day in IPOs Are a Boom for Crypto that we’re about to have a massive year of IPOs. So this trend will likely have longer legs than the market anticipates.

Now we’ll see if the DTCC and other banks respond to this news in the coming weeks or months with their own solutions, as it represents a significant upgrade to how companies raise capital. This is an all-out race to get to market first.

For DTCC, it’s a race of survival. For Securitize, it’s about unseating the incumbent.

Only time will tell who will win.

My bet is that whatever entity leans most heavily into public and permissionless solutions in the months and years to come will be the winner as we upgrade our financial system.

Your Pulse on Crypto,

Ben Lilly
Editor, Chain of Thought