Tokenized shares: Trade like stocks, but aren’t shares

The London Stock Exchange Group announced on Sept. 1 that it is working with Payward to explore tokenized shares and expects to list Kraken’s xStocks on its LSE 24 venue in 2027, both plans pending regulatory approval. The group described two distinct token structures under review: one that would preserve traditional shareholder rights and a separate trading product that would provide stock-linked exposure.

Tokenized shares are digital units recorded on a blockchain. In issuer-sponsored models, a company records its own shares on a blockchain and links token transfers to the company’s legal share register. In that setup, sending a token can transfer the underlying share and maintain voting and dividend entitlements if the legal records recognize the change.

A different model is offered by third-party providers. Those firms buy shares, place them with a custodian and issue tokens that track the price of the underlying equities. Kraken’s xStocks follow this approach: documentation for xStocks states the tokens are backed by equities but do not grant holders voting rights in the companies named on the platform. Dividends for xStocks are reflected through adjustments to a holder’s effective balance rather than separate cash payments, and the tokens cannot be transferred into ordinary brokerage accounts.

Legal contracts and custody arrangements determine what token holders can claim if a provider fails. Evidence that assets backing a token exist does not, by itself, guarantee that token holders will be able to access those assets in an insolvency. Holding tokens in a private blockchain wallet allows control over on-chain transfers, but the underlying shares remain subject to the custodian’s records and the legal framework that governs them. Some token products restrict sales to particular jurisdictions; Kraken excludes several countries, including the United States, from its xStocks offering.

Tokenization can change how investors access foreign equities. Issuer-sponsored tokens could make ownership transfers easier when legal records are integrated. Third-party tokens can enable smaller or fractional positions and let users trade outside normal exchange hours, including nights and weekends. Platforms may automate settlement steps and offer alternative ways to buy and redeem exposure.

Extended trading hours and easier entry create operational and market risks. Tokens trading while the underlying exchange is closed can show prices that differ from the last quoted market price for the stock. Fees and spreads tied to purchase and redemption methods can reduce any cost advantage. Tokenized positions can be pledged as collateral across applications, and borrowed funds used to buy more exposure can increase losses if prices fall and trigger automated liquidations.

Regulators have issued guidance on token structures and investor rights. The Financial Stability Board in 2024 assessed that tokenization’s scale at the time was too small to pose a systemic risk but warned that broader adoption and increased interconnections could change that finding. LSE Group’s parallel work presents two design choices for tokenized equities: a structure aiming to maintain the investor-company legal relationship and a separate product that expands where stock-linked exposure can be bought and sold.