Wrappers, Records, and Prices: The Crux of Tokenized Securities

Wrappers, Records, and Prices: The Crux of Tokenized Securities We need a new framework to understand “tokenized securities.” Tokenized securities refer to the general concept of representing a security (a subset of real world assets (RWA)) onchain as a token. This could be in relation to a fund structure, like WisdomTree’s tokenized funds, but, in many cases, people use the term to refer to public or private company stock. There are a range of models for this in the market, many offshore of the U.S. The details matter here! To better evaluate the different models, stakeholders should think about wrappers, records and prices. Wrappers Key Question: What claim do I really own? There are different models for onchain securities – wrappers of offchain shares, solely onchain shares, tokenized cash flows. When accessing onchain something that otherwise exists offchain (like U.S. Treasuries or a private company’s common stock), we’re generally talking about a spectrum of different wrapper models. Wrappers are common in financial services. Modern finance is ledgers sitting in parallel or on top of other ledgers. Wrappers, like ETFs or ADRs, allow a market participant to access assets on one ledger that are otherwise tracked on another. Tokenized securities are meeting a similar need, bringing securities from one ledger onto a blockchain to enable new distribution or create a new user experience. That convenience is distinct from an investor’s legal claim and rights. It’s easy for an issuer to say that it is providing exposure to an offchain asset in a convenient way, but the legal enforceability of this claim can vary widely across different dimensions like distributions and voting rights. In the example of 1940-Act funds like WisdomTree’s tokenized funds, fund shareholders have a full rights stack codified in U.S. law – independent board oversight, voting, pro-rata distributions, and assets held in bankruptcy-remote custody. Other tokenized security or fund models may strip out some of these protections depending on the jurisdiction and wrapper design. Records Key Question: How is my ownership tracked? Tokens are records on public blockchains. Assets in crypto markets – like bitcoin or stablecoins – are generally bearer instruments. Ownership of a bearer instrument is determined by who physically holds the instrument. A bearer instrument differs from a registered instrument. Ownership of a registered instrument is determined by a record of ownership (i.e., a share registry), not merely the physical holding – this is how “traditional” securities work. In many cases, a transfer agent or centralized security depository (CSD) keeps this record to the entity or person level. Onchain does not equate to bearer by default. Many tokenized securities are still registered instruments, and the issuer or its service providers might implement wallet verification requirements to comply with relevant laws. For example, WisdomTree implements wallet verification requirements for tokenized funds on EVM (Ethereum Virtual Machine) chains using a soulbound NFT model (Non-Fungible Token), allowing a holder to transfer onchain to other wallets that hold the NFT (through a simple call of the transfer function). Through this model, transfers can only occur via verified, permissioned wallets while investors benefit from features that tokens provide, like real-time peer-to-peer settlement, collateral mobility and self-custody. PricesKey Question: What price can I exit at? Ownership in a wrapped asset is only as good as the price you can get for it – either in the secondary market or via primary market redemption. Tokenizing a security does not magically bring it liquidity in the secondary market – just because something can be traded does not mean it will be traded. The token is no better (and no worse) at generating bid and ask prices for an illiquid asset. Assets that have deep markets – like U.S. Treasuries or large cap U.S. stocks – port their liquidity onchain more easily. Still, it requires a well structured market to ensure this is the case. Beyond the secondary market, the tokenholder could have a redemption right with the issuer for cash or the underlying asset. The utility of that right depends on the holder’s ability to accept delivery of the underlying asset and, also, sell that asset. The cash redemption depends on a price of the underlying asset, i.e. a net asset value (NAV). As open-ended mutual funds, WisdomTree’s tokenized funds do not have a secondary market, but do allow for cash redemptions at the next calculated NAV after receipt of a transaction request in good order. The NAV is calculated by the fund administrator in accordance with the fund’s valuation policies, which rely on independent pricing sources where available. This structure provides investors with confidence in their ability to redeem at fair value. It's easy to imagine how things can go wrong for an investor on either of these dimensions. In the secondary market, a huge bid-ask spread or prints at widely different prices signal that something might not be working in the market structure around the asset. Further, without the right of redemption by an investor or arbitrageur, the prices run the risk of deviating significantly from the underlying, similar to what can happen with closed-end funds. Summary WisdomTree’s tokenized funds, like WTGXX or SPXUX, represent just one model for providing exposure to a basket of securities – RWAs - onchain. There are other models aiming to provide exposure to other assets onchain. Across all of these models though, the details matter greatly to an investor’s experience. Definitions:Onchain: "Onchain" refers to any data or activity, such as cryptocurrency transactions or smart contract executions, that is directly recorded, processed, and verified on the main blockchain ledger. On-chain activities are characterized by their transparency, security, and permanence, as they are validated by the decentralized network and become immutable once added to the blockchain. Examples include sending Bitcoin between wallets or deploying a smart contract on a platform like Ethereum. Offchain: In the context of blockchain and cryptocurrency, off-chain refers to transactions or processes that occur outside the main blockchain network. These transactions are not recorded directly on the blockchain's public ledger, often utilizing secondary networks or layers to facilitate faster and cheaper transactions. Wrappers: In finance, "wrappers" refer to investment products or legal structures that enclose underlying assets to provide specific benefits, most often related to taxes or administration. The term can describe two distinct concepts: tax-efficient products and wrap accounts. Tokens: In blockchain and crypto, a token is a digital asset created and managed on an existing blockchain (like Ethereum) using smart contracts, rather than having its own independent blockchain like a native cryptocurrency (e.g., Bitcoin). Tokens can represent a wide range of things, including ownership rights, access to a service, a specific asset (digital or real-world), or value, enabling various functions within blockchain ecosystems. Blockchain: A blockchain is an open, distributed ledger that digitally records transactions in a verifiable and immutable (i.e., permanent) way using cryptography. Cryptography is a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it. A blockchain stores transaction data in “blocks” that are cryptographically linked together to form a “chain” that grows as new blocks of data are added. Blockchain technology is the underlying technology of cryptocurrencies and allows tokenized assets to be accessed in a digital wallet. Tokenized: The process of representing ownership of an asset on a blockchain. Tokenization does not change the underlying asset itself (such as U.S. dollars or a money market fund), but provides a digital record of ownership that can be transferred and settled using blockchain technology in addition to traditional recordkeeping systems. Soulbound NFT: A soulbound NFT is a non-transferable token permanently tied to a wallet, used to represent identity, credentials, or achievements onchain. Unlike regular NFTs, it can’t be sold or traded, making it a verifiable and enduring marker of reputation or membership.