The Risks and Benefits for Investors

Key Takeaways

• Stablecoins and tokenized securities come with different risks and benefits for investors.

• Together, the two blockchain-based technologies could transform how people trade and invest.

• Various products currently offer different levels of protection for investors.

Stablecoins and tokenized securities are two blockchain-based technologies that promise to transform global finance, delivering faster settlement times, expanding access for investors, and unlocking liquidity.

But although they run on the same underlying blockchain rails, each product entails different benefits and risks for users.

Today, both stablecoins and tokenized securities rely on general-purpose, fungible token standards like Ethereum’s ERC-20. These standards let issuers define factors such as the total token supply and the number of decimal places each token can be subdivided into.

Depending on their specific requirements, issuers can either mint tokens continuously as needed, or mint a predetermined amount of tokens in one go.

Although Tether first launched USDT in 2015, the stablecoin didn’t gain significant traction until it was migrated to Ethereum two years later. Compared to the previous Bitcoin Omni Layer implementation, USDT transactions were much cheaper on Ethereum, helping to ignite stablecoin adoption.

Since then, Tether and other issuers have overwhelmingly favored Ethereum-style smart contract platforms.

Around the same time stablecoins found their groove, Ethereum’s contract logic also attracted the attention of early pioneers in tokenized securities, also known as security tokens.

Platforms like Overstock’s tZERO and the tokenized hedge fund, Protos, envisaged on-chain financial assets investors could buy and sell as easily as crypto.

However, while stablecoins proliferated, early security tokens floundered in the face of insurmountable regulatory hurdles.

Over the years, everything from shares of public companies to real estate funds have been tokenized. But the permissionless nature of blockchain has often clashed with securities law, which tends to prohibit anonymous ownership and enforces strict oversight of capital markets.

To overcome this friction, security token issuers have developed novel legal frameworks that cloak securities held with a specially registered custodian in a tokenized wrapper.

This model, which uses entities known as special purpose vehicles (SPVs) to isolate financial risks, is viewed by some as a mere step in the journey toward fully on-chain securities, where assets are born digital without the need for intermediaries.

For example, Ripple Senior Vice President Markus Infanger recently wrote, “SPVs are a stepping stone to a future of seamless, natively-issued digital assets.”

However, others contest this notion.

In an interview with CCN, Ondo Finance CSO, Ian De Bode, argued that the wrapper model is ready to scale today, and stablecoins have already done so successfully.

Using platforms like Ondo, “you can put any asset you want on-chain and make it available to a global audience,” he observed.

For stocks and exchange-traded funds (ETFs), this is especially significant because it means token issuers don’t need permission from the companies whose shares they want to tokenize, he added.

“People talk about [native issuance]  as if it’s some sort of Holy Grail,” De Bode said.

But it “also contains risks that right now, quite frankly, are poorly understood,” he observed.

While stablecoins and tokenized securities both encase real-world assets in a blockchain wrapper, modern security tokens are structured very differently to stablecoins.

For instance, stablecoins are backed by the same assets as tokenized money market funds, but holders don’t have the same rights to the underlying treasuries in the event of an insolvency.

“What you’re really holding is an unsecured liability against the issuer. You don’t have a lien on the underlying assets,” De Bode stressed.

In contrast, security tokens issued under the SPV model are specifically designed so that token holders have the primary claim to any assets held in custody.

“The entity that is issuing these things is not allowed to hold anything else but the underlying, it is not allowed to issue any other debt besides the tokens.” As a result, tokenized securities like Ondo’s come with “much better investor protections than a stablecoin.”

One area where security tokens lag behind stablecoins is liquidity, especially on secondary markets.

While direct redemptions with the largest centralized issuers are generally reserved for high-value clients, a well-established network of fiat off-ramps caters to stablecoin users around the world, ensuring deep liquidity for all major currencies.

In contrast, secondary markets for tokenized real-world assets (RWA) are only just emerging.

For its part, Ondo recently launched Ondo Global Markets—a RWA marketplace that already lists more than 100 tokenized U.S. stocks and ETFs.

Ensuring deep liquidity for the new security tokens was a major priority for Ondo. As De Bode explained: “As an investor, you want to be able to get the right price […] with minimal slippage whenever you want.”

Secondary markets bring 24/7 liquidity to tokenized securities, with platforms like Ondo Global Markets supporting around-the-clock trading.

If there isn’t sufficient liquidity on the secondary market, as rival platforms like XStocks have experienced in their initial rollout, Ondo supports direct redemption for stablecoins. These are available 5 days a week to onboarded investors outside of the U.S., De Bode said.

While there is a long way to go before tokenized asset liquidity can rival large off-chain securities venues, De Bode said public equities are ideal candidates for tokenization: “At Ondo, we have always believed that the asset classes that make the most sense to tokenize are the stuff that’s already liquid in traditional markets.”

That’s why the company initially focused on Treasuries and is now branching out into stocks and ETFs, rather than other markets such as private credit – currently the largest RWA tokenization segment, valued at $14 billion.

To support further adoption, however, issuers require clear rules of the road.

Just as the stablecoin boom eventually spurred U.S. lawmakers to pass the GENIUS Act, legal frameworks will likely need to respond to rising RWA tokenization.

As things stand, most issuers have stayed clear of the U.S. market, while jurisdictions like the EU have taken the lead. Despite being the world’s largest market, at the moment, “there’s just not sufficient clarity in the U.S. on how broader market participants would be able to engage with these assets in a compliant way,” De Bode lamented.

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