Why tokenization will revolutionize financial infrastructure (2/2): buying a listed stock

At Spiko, we’re convinced that tokenization will radically transform the way financial infrastructures operate in the coming decade. The purpose of this article is to explain what tokenization is and what drives our belief. No need to be a financial plumbing expert—we’ll start from scratch!
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This article is the second in a series on tokenization. If you haven’t read our previous post on bank transfers, we recommend starting there.

How the purchase of a listed stock works

Let’s now dive into financial instruments with the following example: Alice has a “PEA” (French investment plan) with BNP Paribas and decides to buy a share of Danone. Four steps follow:

1. Alice uses BNP Paribas's website to place her buy order.
2. Once BNP Paribas receives Alice’s order, the bank forwards it to the exchange where the stock is traded. Like the other CAC 40 companies, Danone is listed on the Paris stock exchange, which is owned by the private group Euronext.
3. At Euronext, the buy order from BNP Paribas is matched with a corresponding sell order. Let’s assume the sell order comes from Bob, who holds a Danone share in his BoursoBank account. The transaction price is set, say, at 57 EUR. Euronext then informs both BNP Paribas and BoursoBank about the matched buy and sell orders.
4. BNP Paribas immediately notifies Alice that her buy order has been executed at the price of 57 EUR, and BoursoBank simultaneously informs Bob that his sell order has been executed for 57 EUR.

These four steps usually happen very quickly, potentially within less than a second. To Alice and Bob, it might seem like the transaction is done. But in reality, these steps are far from completing the deal. BNP Paribas and BoursoBank still need to exchange Alice’s 57 EUR and Bob’s Danone share to finalize the transaction. And that’s where things get complicated...

Post-market steps

The term “post-market” refers to the operations that happen after the transaction is completed on the exchange. Here’s a simplified look at how it works:

5. Euronext sends a message to an entity known as the “clearing house” with the details that BNP Paribas’s purchase of a Danone share from BoursoBank for 57 EUR has been concluded on the exchange. Historically, the clearing house used by Euronext for stocks in France was LCH, a subsidiary of the London Stock Exchange, until Euronext decided to internalize this function recently.
6. The clearing house then takes on two key roles:
   • First, it coordinates the transfer of the Danone share from Bob to BNP Paribas, and the 57 EUR from Alice to BoursoBank. These transfers don’t happen immediately but are settled 48 hours after the orders are matched. This delay is due to the complexity of the systems needed to synchronize the various databases involved in the transfer.
   • Second, the clearing house provides a guarantee mechanism. If, after 48 hours, BoursoBank and/or BNP Paribas are unable to honor the transaction (e.g., in the case of a bankruptcy), the clearing house guarantees the transaction using its reserves, which are funded by all users of the clearing house. These users, like the banks, post collateral—essentially advance money—to fund the guarantee mechanism.
7. The transfer of the Danone share between the two banks is executed in the database of the central securities depository. This is the company that keeps track of who holds the Danone shares. In France, that company is Euroclear, another private entity. The central securities depository removes a Danone share from BoursoBank’s account and adds one to BNP Paribas’s account.
8. At the same time, the transfer of 57 EUR takes place in the respective accounts of the two banks at the central bank (see the previous article for more details on this). The central bank debits 57 EUR from BNP Paribas’s account and credits 57 EUR to BoursoBank’s account.

In summary—and in very simplified terms—here’s the flow diagram that summarizes the operations we’ve discussed:

What’s the problem?

This post-market system works and facilitates economic activity by enabling billions of euros in daily transaction volumes. However, it also has some serious limitations. Specifically:

• Inefficiency: Many transactions are not even properly finalized by the 48-hour deadline. These issues, known as "settlement failures," often require special interventions.
• High Costs: Banks must pay for the insurance provided by the clearinghouse during the 48 hours between order matching and transaction finalization. Unsurprisingly, these are massive sums given the size of the financial markets, and they are indirectly passed on to Alice and Bob through account fees and charges.
• Fragmentation in the European Union: We've already outlined the various entities involved in buying a listed stock in France. But every European country has its own stock exchange, clearinghouse, and central securities depository. While there has been consolidation over the last two decades, it remains imperfect and tends to reinforce private monopolies or near-monopolies.

Several initiatives are underway to improve the situation. For example, the European regulator is attempting to reduce the post-market settlement period from 48 to 24 hours. However, it faces significant resistance from established players who are struggling to overcome the technical debt of existing systems.

A more ambitious solution: registering financial instruments on the same database as money

In our previous article, we discussed how a shared database for managing customer bank accounts would greatly simplify bank transfers. This shift in paradigm is called "tokenization" in the financial industry because it technically involves representing an euro as a token that is exchanged on a shared database, much like a blockchain.

Tokenizing financial instruments could radically simplify post-market operations. If banks used a shared database for both securities and euros, the multiple post-market steps outlined above could be reduced to two changes in the same database: transferring €57 from Alice to Bob and a Danone share from Bob to Alice.

This is a priority for the European Union. In fact, EU law was modified last year to adapt the rules for stock exchanges, clearinghouses, and central securities depositories to enable tokenization of financial instruments. The Governor of the Banque de France recently emphasized the importance of tokenization in strengthening European capital markets.

And Spiko in all this?

At Spiko, our ambition is to build a leader in the tokenization of financial instruments. Our first products will be fundamental building blocks of finance—namely, the first two money market funds in the European Union whose shares are fully tokenized. These funds will serve both businesses and individuals, enabling easy access to risk-free euro and dollar rates.