Experts say the theft of a token representing a stock, fund, or bond does not always extinguish an investor’s ownership rights; how the asset is structured determines whether it can be recovered.
CoinDesk’s Tokenization Weekly analysis examined the security and liquidity risks that have emerged as traditional financial assets move onto blockchains in the wake of the Binance hack. At the heart of the analysis is the distinction between the person who controls a token and the legal owner of the underlying asset, who may not always be the same person.
Tokens representing shares can be reissued
Adam Popat, CEO of tokenization technology company SettleMint, says the share tokens supported by the company can be linked to the official shareholder register. In this setup, the issuer can halt transfers of stolen tokens, invalidate them, and issue new tokens to the verified owner.
Joris Delanoue, CEO of transfer agent Fairmint, also stresses that while the blockchain verifies who signed a transaction, the transfer agent is responsible for determining who legally owns the shares. As a result, the theft of a private key does not necessarily mean the shareholder’s rights are erased as well.
With synthetic tokens, however, the investor’s rights are based on a claim against the third party that created the token. Whether such an asset can be recovered depends on the intermediary’s terms and the controls in the smart contract.
The speed of intervention also matters. According to Popat, in open markets without identity checks, a thief can sell tokens to other buyers before the issuer or a court steps in. Being technically able to halt a transfer and having the legal authority to do so immediately are two different issues.
Selling during a crisis can be more difficult
Anthony DeMartino, co-founder and CEO of Sentora, says another key question is whether an investor can find a buyer when they need one. Many tokenized assets that do not yet have deep trading markets rely on market makers and over-the-counter trading desks.
In the example DeMartino described, a large holder of tokenized real-world assets (RWA) who needed cash during the Binance hack found that market makers were backing out of their agreements. This account from a single participant shows why the ability to trade continuously may not, by itself, be enough to ensure an asset can be sold during times of stress.
Why did the Binance hack spark this debate?
The fact that some stablecoins could be frozen through issuer intervention during the Binance hack raised questions about how recovery options vary by asset type. For stock and fund tokens, legal rights to the underlying asset are an additional consideration.
Unlike the tracking of funds stolen from Binance, this analysis examines how a similar incident could affect holders of stock and fund tokens.
Not investment advice.