[seanhunter]

One thing to note for people who don't have a securities background is that exchanges have offered "depositary receipts" which is essentially the same thing for some time - the innovation here is making the depositary receipt into a crypto token. Depositary receipts are used typically to provide a secondary listing for a stock outside the country of its primary listing. So for example on Nasdaq I can trade a "Vodaphone depositary receipt", which will be denominated in USD but relate to 1 share of Vodaphone, which is listed in GBp in the UK. Somewhere in the pipeline a depositary institution has the actual shares and keeps track of who is the beneficial owner of each share for which a receipt has been issued.

This is an easy way for large companies to generate more liquidity (from foreign investors) and often has tax or other advantages for investors in that they don't need to report an FX pnl- they can just hold the stock in their main currency even though its primary listing is actually in a different currency.

These are usually called ADRs (American Depositary Receipts) and EDRs (European depositary receipts) based on whether the instrument is listed in the US or Europe. So the Vodaphone example above of a UK public company trading a depositary receipt on Nasdaq would be an ADR.

https://www.investopedia.com/terms/d/depositaryreceipt.asp

[lxgr]

ADRs are largely a US thing, as far as I know. For example, many US companies list on European exchanges as a secondary listing using their US ISIN, not as an EDR.

[seanhunter]

Yes, although without getting too deep in the weeds, in the UK and Europe, asset-backed bonds are often issued using a similar process. The actual bonds are often held by a depositary and the holder just gets a depositary receipt rather than the bond itself. This is done largely for ease of settlement I believe.

The point is the mechanism here is reasonably well-established in normal finance.

[matthewaveryusa]

Would tokenized shares remove the need for VIEs and contractual custodians in the Cayman islands for Chinese ADRs?

[seanhunter]

I don’t actually know but my guess is that this wouldn’t change the actual legal requirement but it may make it possible for people to buy the exposure while legally not being qualified to own the underlying security.