Use Case: Tokenizing Public Equity Markets

Written by TJ

On October 13, 2022

Public equity markets are one of the largest sectors of the global economy. As of 2022, the total market capitalization of domestic companies listed on stock exchanges worldwide is 105 trillion dollars, with US equities representing about 41% of this figure, and China representing about 11%.

Yet, despite the massive size of these markets, public equities remain heavily siloed to their specific regions, making it challenging for individual and institutional investors to access certain high-value markets and invest in international companies. 

One of the primary objectives of blockchain technology is the ability to leverage permissionless networks to create open and transparent capital markets. Thus far this has been achieved in the market for tokens, where 20,000+ tokens are tradable by anyone around the world who has access to an internet connection and digital wallet. 

However the same cannot be said for stocks, which are more regulated and in many ways are tied to the strength and accessibility of their host countries’ national currencies. 

This explains why countries with heavy capital controls like China also limit access to international investments in domestic public equities.  

The siloing of international equity markets has led to investors migrating their capital to markets that are more open and accessible. As a result, there is a high concentration of investments in the US stock market, which is the most open and capital efficient in the world. 

In our efforts to become a universal identity and communication layer for the web3 and traditional economy, Accumulate can create a bridge that connects all public equity markets in the world under a single distributed network. 

On this network, companies, stocks, regulators, audits and both Individual and institutional investors would be represented as ADIs. institutional investors could create sub-identities to represent different entities that each hold a different basket of stocks from a particular country. This would help make tax compliance and auditing more efficient, as each country may have different compliance and filing standards.

Similarly, all participants in the network would be represented as ADIs and have their identities authenticated for KYC and tax purposes. This is particularly important as equity markets are highly regulated and companies require certain disclosures from shareholders to adhere to regulations. 

Using Managed Transactions to Enforce Limits on Foreign Investments 

We’ve created systems for enforcing certain types of transactions using authorization schemes that could potentially enable capital to flow into more restrictive public equities markets while their governments can still maintain control. 

For example, certain ADIs could be designated to international investors, which, through managed transactions, would restrict the amount of capital that they could invest in tokenized stocks from a particular country, thereby enabling that country to maintain a target ratio of foreign-to-domestic investments in local public equities. 

Auditing Tokenized Stocks 

Tokenized stocks are actually just another form of real-world assets (RWAs) since they represent certificates of ownership of a company that operates in the traditional economy.  

Like other RWAs such as real estate, commodities, machinery, or accounts receivables, there is a significant need for auditing solutions to verify that the metadata embedded within these tokens accurately reflects the current state of the real-world asset, and that this data is frequently updated as the state changes. 

This task requires an immense amount of coordination between the off-chain physical world and the on-chain protocols that will support these tokens. 

Auditing firms such as PWC, Deloitte, E&Y, and KPMG  could be introduced to the Accumulate network to ensure that the metadata for tokenized stocks are frequently updated with accurate information. We can think about this structure like a network of auditing teams operating like oracle nodes, where each node would be delegated the responsibility of verifying and periodically updating data for a particular set of stocks, including earnings, outstanding shares, employee headcount, etc.

Auditors could earn ACME in the process, which would be generated from the transaction fees of tokenized stocks that are traded on the Accumulate network.

Increasing Liquidity 

The barriers to entry that currently exist in international equities markets lead to fragmented liquidity. This is because the wealthiest investors gravitate towards markets like the US and Europe because they are more open. As a result, the majority of the liquidity also ends up residing in those markets. 

On the other hand, most emerging markets suffer from poor liquidity because foreign capital is restricted in its ability to invest. This leads to poor price discovery for stocks and limited ability for business owners to fundraise from a well-capitalized network of public investors. 

A unified global equities market would enable liquidity to be more dispersed to different markets, enabling greater price discovery and stronger financial support for local companies with sustainable business models. 

Liquidity could be managed via decentralized liquidity pools or LPs. Entities who own stocks could partner with exchanges or banks to provide liquidity for niche markets, using ADIs as the core infrastructure for representing liquidity providers, tokenized stocks, and shares in the LP.  

Improving Verification of Underlying Assets

In using Accumulate ADIs to represent individuals, entities and assets on-chain, we would eliminate the need for unregulated decentralized protocols to offer tokenized stocks, a practice that has led to problems for token holders unable to redeem their tokenized stocks for their full value due to under-collateralization. 

Tokenizing stocks in a regulatory-compliant way ensures that the stocks are collateralized with real stock certificates and that there are qualified auditors who can update the metadata with the latest information about the stocks being traded.

Ultimately, Accumulate has the potential to connect several of the world’s disparate equity markets under a unified identity and communication and audit layer. 

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