Digital exchange Fusang has received the go-ahead from its securities regulator in Labuan, Malaysia, to list itself in a fully digital format, with its stock to issue, trade, and settle as a token and with no paper or PDFs involved.
If successful, the deal will represent a breakthrough in the development of securities tokens – the idea of issuing stocks, bonds, or other licensed instruments in purely digital form via blockchain infrastructure.
“All the world’s value and ownership is represented on paper,” said Henry Chong, Fusang’s founder and CEO. “Even with dematerialization, the industry relies on PDFs of shares, which are not structured to interact with machines.”
Crypto exchanges such as Coinbase and OSL have listed on public markets, either via IPO or through reverse mergers. They are listed and trade in traditional, paper-based ways. Chong reckons this is a nonsense for an industry that purports to be based on blockchain. But those other companies didn’t have a regulatory framework to list in tokenized form. Fusang does.
“We’re eating our own cooking,” he told DigFin.
IPO green light
Labuan Financial Services Authority approved Fusang’s IPO of FSC equity tokens, which directly represent shares in Fusang Corp. The company will issue 2.5 million equity tokens valued at $10 million to both institutional and retail investors.
This represents shares in Fusang Corp., which operates Fusang Exchange, a stock exchange regulated for security tokens with ambitions to host a range of other IPOs in digital form. FSC tokens are due to complete listing by the end of the first quarter of 2022. The tokens represent legal equities, but recorded on the Ethereum blockchain rather than on a traditional share register.
Chong emphasized these are stocks, unlike crypto assets such as bitcoin. Therefore they require the same infrastructure and regulation as any public company – including stock exchanges that are also listed, from NYSE and Nasdaq to the main bourses of London, Australia, Hong Kong, Singapore, and beyond.
Fusang will also allow private companies to issue equity tokens.
“There will continue to be a role for banks, brokers, and exchanges, but in a different format,” Chong said. “By tokenizing shares in both private and public companies, we expand the pool of available shares, making it easier to transfer and trade them.”
Legal shares
This includes the same level of compliance, know-your-customer and anti-money-laundering checks, and a digital identity system built into Fusang Exchange.
Because tokens are legal shares, holders enjoy the rights of ownership – if, say, Fusang goes out of business, shareholders are entitled to whatever assets survive a liquidation.
Beyond the IPO
This is different to other tokenization models that have been attempted as derivatives, offering holders fractionalized economic benefits of, say, Apple shares, but without any legal protections.
Fusang’s IPO is modestly sized, which hints at the challenge of educating the market about its business model. It’s not a traditional exchange using blockchain for back-end settlement (as ASX is attempting), but it’s also not like the unregulated crypto venues, be they public markets such as Binance or private-market operators such iStox or tZero.
Chong says Fusang will be able to list both private and public companies, in both fiat and token form, and it will manage retail investors as well as institutions. “It’s like the Coinbase model but applied to securities tokens,” Chong said. “We’ll tokenize and trade stocks and bonds like they trade bitcoin.”
This could lead to other market opportunities. In the (different) world of decentralized finance, users of networks or a network’s service can also own projects via governance tokens. Fusang’s model could allow companies to issue shares to their consumers; because their stock is now digitized, it can be parsed into low-value allotments.
Given the labor shortages striking many countries today, companies could also use digital shares as a more efficient means of providing employees with equity.
Companies don’t necessarily need a blockchain to do any of this – they can do it already – but the technology could make such transactions instant, audited, and easy to do. Because these are securities, companies wouldn’t need to dance around the question of whether their token needs to be regulated; it already will be.
Labuan legacy
Fusang benefited from a longstanding relationship with the authorities in Labuan. Obtaining such a license from another regulator would be difficult, which may be why other digital venues haven’t been able to conduct their own digital IPO.
Chong’s family operates a family-office trust and advisory business, Portcullis, which operates from Labuan, and his father, David, helped Labuan draft its securities laws. Those laws are also designed to enable Labuan to regulate tokens at the asset level, rather than at the level of the exchange’s tech layer.
Henry Chong stresses that Labuan is a credible jurisdiction. “Labuan is like Malaysia’s version of Hong Kong,” he said. While it may not have the bona fides of Singapore or Hong Kong, Labuan is part of a bigger country rather than just a lone offshore-jurisdiction island, such as Mauritius or Cayman. There are 56 banks operating in Labuan, giving it an international financial undergirding.
One of those local banks is the arm of China Construction Bank – which had initially agreed to list a token on Fusang in the form of a stablecoin drawing on CCB deposits, to create a financial product for wealthy investors. CCB got cold feet and withdrew from the program just before the token was scheduled to trade – a humiliating moment for Fusang.
But Chong says the experience proved the tokenization model, which had regulatory backing. It showed how sensitive traditional financial institutions are to taking risk on an innovation, especially in public.
Gordian Knot
Confident that the infrastructure of tokenization was sound, Chong had to work out how to create a market.
This problem bedevils other crypto exchanges around the world. Many of them are eager to attract institutional money by creating securities that can enjoy all the efficiencies of pure digitalization, as well as the potential for new business models that tokenization could enable.
But creating both a supply and a demand has so far made tokenization impossible, be it for stocks or for real-estate or other illiquid assets.
Asset owners so far have simply not seen the value of tokenization – only the costs and the risks. And without supply, it’s impossible to create demand and the intermediaries to enrich the marketplace, including brokers and market-makers.
Chong aims to cut this Gordian Knot by listing his own business. A $10 million float suggests an experimental size. Initially investors won’t be able to trade these tokens on other venues, unless they also obtain a Labuan license. But if it draws enough investor demand, Fusang might be able to kickstart both sides of a new marketplace.
“Tokenization is Fusang’s core business,” Chong said. “If I can’t do this with our own stock, how can I ask it from others?”
