DX Exchange is not offering tokenized securities, it’s just an innovative derivative product

The launch of DX Exchange has generated a lot of enthusiasm in the cryptocurrency world. A lot of the people are excited about the fact that they can trade in US companies like Apple, Amazon and Tesla, among others, from any corner of the globe. Even Bloomberg has written an article on the exchange.

While, in theory, the idea of tokenizing securities is indeed fascinating, we do believe that this will be a trend which will play out more slowly. Putting US stocks as tokens on the blockchain will require explicit consent from the US Securities and Exchange Commission (SEC) and indeed the companies which are trading on exchanges. The regulations will have to be carefully drafted taking into account the concerns of all the stakeholders.

In our crypto trends for 2019 blog, we did mention that we will see the groundwork being laid for tokenized securities but did not expect it to come into its own this year. So, when we heard news about the DX exchange, we thought of checking out what’s under the hood.

So, what is DX Exchange offering?

Crypto Twitter is going crazy about the fact that they can now buy shares of mainstream companies from anywhere across the globe and trade them 24/7. DX Exchange, which is registered in Estonia, is currently offering tokens based on shares of 10 Nasdaq listed companies. DX exchange will offer the tokens whereas the actual shares will be bought and held by its partner MPS Marketplace Securities Limited. So, what’s really happening?

Turns out that these are not security tokens which represent ownership in any company. Instead, DX Exchange has devised a clever and innovative derivative financial instrument called Digital Share/Digital Stock. This is essentially a ‘mirror’ token issued by DX Exchange on the Ethereum Blockchain network which is backed by a traditional share on a 1:1 basis, held under custody by broker firms that will actually purchase the shares from US stock exchanges.

So, in essence, the DX tokens mirror the price movements of US-based stocks and do not represent the actual stock itself. This is an important differentiator, and a key point many people have not noticed. Ownership of these tokens does not grant any ownership, governance or voting rights with the said companies. While the MPS Exchange website does say that the holders will be paid dividends, it is not clear whether the dividends will be paid out in the same proportion as announced by the companies as MPS will take the final call on these dividends.

Seven things to keep in mind while trading on DX Exchange

It should be fairly clear to you that you are not buying security tokens when you buy these tokens from DX Exchange. Instead, it is just an ERC20 token (presumably) that will reflect the price movements of the underlying stocks. You need to keep the following things in mind if you decide to trade these tokens with DX:

Ownership – You should know that you do not own the shares. It is MPS which is holding the share on your behalf. You just have a representative token. Also, you cannot challenge any rights or dividends since these are not actual securities.

Regulatory Hurdle – DX Exchange is registered in Estonia, but its actually allowing people to trade on a derivatives product based of US stocks. Will SEC really allow this to happen if this gains traction? If SEC comes down strongly on this, there may or may not be any legal repercussions for DX Exchange, but the US-based brokers might stop supporting them.

Liquidity – These are essentially new tokens where supply and demand will come from the market players itself. In the absence of liquidity, you will be not be able to get out of your position and may be stuck with your tokens. You won’t even have access to liquidity from other cryptocurrency exchanges since these are limited to DX Exchange.

Storage – We are not sure whether you can store these tokens in your own wallets, since many software/hardware wallets will not support these tokens. In theory, it should be easy to build support for an ERC20 token, but we doubt it will happen with these tokens.

The Nasdaq Connection – This Reddit thread reveals that they are only using the Nasdaq matching technology, through an API that matches orders with each other. While we could not independently verify this, it does raise a red flag!

Subscription Fee – DX Exchange also charges a $10 monthly membership fee. While we do not see a problem with subscriptions, it is not an accepted model for crypto exchanges. So, why should users pay?

Do investors know the US market well enough? – While retail investors are extremely excited by the DX offering, they need to realise that, at the end of the day, they are trying to trade share price movements which are subject to the various push and pulls of the market. Are they really tracking the US stock market to know when to take a position? Or is it just the lure of part-ownership of Apple and Amazon that’s driving them to the market?

Our Take on DX Exchange

We view DX Exchange as another new crypto exchange with a super innovative derivative offering. It’s just that users need to know that they are buying digital shares/mirror tokens and not actual tokenized securities itself, as the marketing and PR suggest!

Have we missed out on anything? Please feel free to drop a comment below or get in touch with us on Twitter.

Leave a Reply

Your email address will not be published. Required fields are marked *