Tokenisation of Shares

A New Frontier in Equity Markets

The idea of tokenising shares—the process of converting equity or ownership rights into digital tokens on a blockchain or distributed ledger—has in recent years garnered increasing interest from investors, innovators, issuers and regulators. At its core, tokenisation promises to modernise the mechanics of ownership, transfer, settlement and fractionalisation of equity, but doing so requires navigating a wide range of legal, technological and market obstacles.

This article explores some aspects of what is involved in share tokenisation, describes some of the upsides and some pitfalls.

What Is Share Tokenisation?

Tokenisation means creating a digital representation, or “token,” that corresponds to ownership rights in an underlying asset, for example a share. In the case of equity, a token effectively represents a share (or fraction of a share) in a company, recorded on a blockchain or similar ledger. These are often called “tokenised equities” or “equity tokens.” Unlike mere digital certificates, the tokens are programmable: rules can be embedded (via smart contracts) to automate corporate actions such as distributions, voting, transfers, or lockups.

In practice, a share tokenisation system involves three intertwined layers: the legal layer, the technical layer and the custody and registry layer.

• • In the legal layer, the issuer must ensure that the tokens properly map to legal rights (i.e. the tokens are backed by legally enforceable equity rights).

• • In the technical layer, a blockchain or ledger must securely support token issuance, transfers, and settlement, with integrated governance logic.

• • In the custody/registry layer, there must be clarity about where the “real” share register sits (or whether the token itself is the register) and how token holders’ rights interface with securities law and regulatory frameworks

Tokenisation is not just replicating existing share mechanisms onchain, rather, it rethinks the processes and infrastructure. For example, in a traditional share transfer, multiple intermediaries (broker, custodian, registry, clearing house) coordinate with each other however with tokens, much of that can be collapsed into a chain of signed transfers validated by consensus mechanisms or designated permissioned nodes. A good example in Australia is the DeFi (decentralised finance) ecosystem being built by Openmarkets, a leading broker and trading infrastructure provider, with RedBelly Networks and other blockchain / digital assets experts.

The efficiency gains include reduced reconciliation needs, error and fraud risk, fewer manual processes and accelerated settlement times (potentially near instant). Tokenisation can reduce operational friction, enable composability (i.e. token-to-token interactions) and unlock new revenue and cost savings in capital markets.

Some Upsides: What Makes Tokenisation Attractive

Fractional ownership and democratisation. Because tokens can be fine-grained, a company’s a high-value shares can be divided into many micro-shares that individual investors can afford. This expands access to equity ownership. For example, a single Commonwealth Bank share priced at say $160 could be fractionalised into 160 tokenised shares at $1.00 each.

Enhanced liquidity and secondary markets. A central promise is converting illiquid unlisted shares in private companies into a more tradable form. By enabling 24/7 trading, shorter settlement cycles and peer-to-peer transfer, tokenised shares are expected to foster secondary trading. Tokenising fund units can offer more freedom of exit, compared to redemption, by transforming “units” into tradable tokens.

Lower cost and operational efficiency. By reducing the number and role of intermediaries and automating settlement, tokenisation can materially reduce administrative, custody and reconciliation time and costs.

Programmability and automation. Smart contracts allow embedding of business logic, for example, auto-distribution of dividends, automated vesting or lock-ups, corporate action triggers, or even escrowed releases. With tokenised shares, a company can automate much of its securities lifecycle.

Global reach and capital access. Tokenised shares can reach investors worldwide (subject to regulatory eligibility and compliance), not restricted by domestic custodial or broker networks.

Faster settlement, improved capital efficiency. Traditional settlement lags (T+2 or more) mean capital is tied up and at risk. Token settlement can be near-instant, freeing up capital and reducing counterparty risk.

Interoperability. Because tokens operate on shared ledger infrastructure, they can interact with other tokenised assets or smart contract systems, enabling integrated financial products or automated collateral arrangements.

Taken together, these advantages promise to remodel the cost, reach and structure of equity markets, particularly in private and alternative domains.

Pitfalls and Risks: What’s Not So Easy

Despite the promise, tokenisation of shares is not without serious challenges and risks.

Regulatory uncertainty and securities law complexity. In many jurisdictions, tokens representing shares are treated as securities, meaning they must comply with securities regulation (registration, disclosure, licensing, investor protection rules). In Australia, for instance, tokenised private funds fall within the regulatory perimeter and may require an Australian Financial Services Licence (AFSL).

The policy environment in Australia is still evolving: The “Key Policy Reforms for Tokenisation” initiative underscores that Australia must clarify taxation, licensing and sandbox regimes to support tokenised real-world assets.

If the legal linkage between the token and the underlying share is weak or unclear, token holders may lack enforceable shareholder rights. Some tokenised share offerings in certain jurisdictions are synthetic or derivative exposures, not actual equity and therefore some tokenised products do not confer real shareholder rights, creating risk of investor misunderstanding.

Custody, key loss and security vulnerabilities. Token ownership often depends on cryptographic keys. Loss or breach of private keys can mean permanent loss of shares. Hacks are well documented in other digital asset domains and applying ledger systems to equity demands extremely robust security and audit processes.

Fragmented infrastructure and interoperability gaps. If tokenisation is done on isolated or proprietary blockchains, integration with traditional capital markets infrastructure (exchanges, custodians, registries) may be difficult. Interoperability between systems or across jurisdictions is not yet mature.

Liquidity is not guaranteed. Tokenisation does not magically create buyers or sellers. Even though a share is tokenised, if there is no active secondary market, liquidity will remain weak. Liquidity is a function of market depth and trading interest, not merely having been tokenised.

Legal fragmentation and cross-jurisdiction complexity. For global investors, different jurisdictions may treat tokens differently in relation to securities law, taxation, foreign investment and anti-money laundering regimes. Complying with KYC/AML rules across borders is nontrivial, especially where tokens are freely transferable.

Corporate governance and voting complexity. Properly handling voting rights, proxy mechanics and changes in share class structure via tokens is delicate. In hybrid systems (some shares tokenised, some not), reconciling token votes with corporate law can be a challenging issue.

Operational and audit risk. If token issuance, transfers, reconciliation (including linking off-chain legal records to on-chain tokens) are flawed, discrepancies or disputes may emerge. Legal challenges might arise over a wide range of potential irregularities.

Regulatory enforcement and liability risk. In absence of clear precedents, regulators may hold issuers or intermediaries liable for misstatements, fraud, or errors. Because tokenisation is still emerging, liability frameworks are uncertain.

Risks for Existing Shareholders

For companies considering tokenisation, it is not only new investors who face risks. Existing shareholders can also be exposed if the process is poorly structured. One danger lies in dilution. If tokenised shares are introduced alongside traditional equity rather than as a direct one-to-one representation, the balance of voting power and dividend entitlements may shift. Unless the corporate and registry practices are aligned, shareholders may find themselves holding instruments with different rights than originally expected.

Another challenge is enforceability. In most jurisdictions, including Australia, shareholder rights are determined by an official company register. If a blockchain ledger is treated as the definitive record but the law still recognises an off-chain registry, disputes may arise over who is the rightful owner. Similarly, if tokens are structured as synthetic instruments rather than as legal shares, existing investors may find that their rights to vote, receive information or participate in statutory protections are weakened.

Tokenisation also introduces operational and security risks. Shareholders who are issued tokens may be required to safeguard their holdings through digital wallets. Unlike traditional registries, where lost share certificates can be re-issued, the loss of private keys or a cyber breach may result in permanent loss of control and ownership.

Finally, there are regulatory and tax uncertainties. Converting paper or electronic registry entries into blockchain tokens may, in some jurisdictions, be treated as a disposal event, triggering tax consequences. If tokenisation does not deliver real secondary market liquidity, shareholders may also find themselves with a new digital format of ownership but no easier path to exit.

The conclusion is clear: tokenisation is not inherently harmful to existing shareholders, but poor design and weak legal alignment can erode their rights and protections. For shareholders to be safeguarded, companies must ensure that tokenisation is implemented within existing corporate law frameworks, with full clarity on enforceability, governance and investor protections.

Strategic Considerations for Issuers and Investors

Issuers considering tokenising shares should think carefully. First, they must decide whether the token is direct (the token is the share) or indirect (the token is backed by off-chain equity held by a custodian). They must create legal wrappers so token holders have enforceable rights. They must build or adopt secure smart contract infrastructure, integrate processes where off-chain ↔ on-chain linkage is needed and ensure robust audit and security design.

Choosing the ledger architecture (public, permissioned, hybrid) is critical: permissioned systems may offer better regulatory compliance and privacy, while public systems may offer wider interoperability and liquidity. They will need to partner with compliant exchanges or trading platforms for token secondary markets and establish custody and wallet services that are secure, compliant and user-friendly.

Investors must evaluate not only the underlying business proposition, but the robustness of the token structure: whether the token truly conveys legal rights, the security of custody, clarity of governance and voting, liquidity assumptions, regulatory compliance and whether the token is backed 1:1 or uses synthetic exposure.

Another strategic dimension is the timing and market adoption curve: early movers may gain advantage in branding and innovation, but they also carry heightened regulatory and execution risk.

Potential Paradigm Shift, But Not a Panacea

Tokenising shares is an ambitious reimagination of equity markets which, if successfully implemented, can lower costs, democratise access, improve liquidity and automate many manual or opaque processes. However, the path is fraught with legal, technical, operational and market risks. For tokenisation to mature, issuers and investors must navigate the mapping of onchain tokens to offchain rights, regulatory compliance in multiple jurisdictions, robust security and custody and the creation of liquid secondary markets.

Australian policy is in development, but full adoption will depend on sustained infrastructure, regulation and market confidence.

For any company or investor contemplating tokenisation, the advice is simple, proceed deliberately, engage legal and regulatory counsel early, run pilots, ensure transparency of token rights and focus on building an ecosystem of trading, custody and investor confidence. Tokenisation is not a silver bullet, but it may well form part of the next evolution in capital markets.

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