What is Tokenization?
Tokenization is a process by which a representation of a real-world asset is created using a digital token, which is made available on the blockchain. We believe any asset has the potential to be tokenized – from property to commodities to paintings.
How does tokenization work?
eToro utilizes its proprietary tokenization structure to create and offer customers eToro Digital Assets tokens.
The tokenization structure involves three entities:
- The Issuer – eToro Digital Assets Ltd. (registered in Gibraltar)
- The Market Maker – eToro (Europe) Limited (registered and regulated in Cyprus by the Cyprus Securities and Exchange Commission (Licence No. 109/10)
- The Exchange – eToroX Ltd. (registered and regulated in Gibraltar (Licence No. FSC1333B)
Through the tokenization structure, the Issuer selects an underlying real-world asset to tokenize and mints (i.e., issues) a predefined amount of tokens intended to represent that asset. Immediately after the tokens are minted the Issuer sells the tokens to the Market Maker which then distributes the tokens through the eToroX exchange and undertakes market-making activities (described in more detail below) which seek to peg the value of the tokens by reference to the value of the relevant underlying asset.
Are tokenholders guaranteed to be able to sell their tokens?
No. Tokenholders will only be able to sell their tokens if there is someone willing to buy their tokens. Although in normal market conditions the Market Maker will seek to make offers to buy tokens through eToroX it is not obliged to buy tokens from tokenholders. If a tokenholder cannot sell their tokens, they will not be able to recover any capital they have invested in the tokens.
It cannot be guaranteed that there will always be a market in the tokens.
For example, if the Market Maker became insolvent tokenholders would be unlikely to be able to sell their tokens. Furthermore, the Market Maker is only obliged to make a market in the tokens for 90% of the continuous trading during normal market conditions (the “minimum presence requirement”) at which time it is subject to a maximum average spread during the calendar day. However, in abnormal market conditions, the Market Maker is no longer subject to the minimum presence requirement and is able to increase its spread beyond the maximum average spread mentioned above. This means that tokenholders are less likely to be able to sell their tokens in abnormal market conditions and the price they could receive for the tokens in these conditions could be less than the value of the relevant notional amount of the underlying asset.
It should also be noted that the Market Maker’s obligations to make a market in the tokens are owed to eToroX and eToro Digital Assets and not tokenholders meaning that tokenholders have no right to enforce the obligation to make a market in the tokens against the Market Maker.
Can tokenholders sell their tokens in exchange for fiat currency (such as USD, EUR, GBP etc.) through eToroX?
No. Tokenholders will only be able to sell their tokens in exchange for certain other cryptocurrencies that are listed on eToroX (such as Bitcoin). This means that in order for a tokenholder to effectively convert their token into the underlying asset which it represents they would need to first sell the token through eToroX in exchange for cryptocurrency (such as Bitcoin) and then execute a further transaction to sell the cryptocurrency in exchange for the relevant underlying asset (such as euros).
Are the tokens or the tokenization structure regulated?
The tokens are not regulated instruments. Therefore, although the Market Maker is authorized and regulated as an investment firm, its trading activities on the eToroX platform are not specifically regulated and tokenholders will not be clients of the Market Maker meaning they will not benefit from protections afforded to clients of the Market Maker. Tokenholders will, however, be clients of eToroX which is authorized and regulated as a DLT provider in Gibraltar.
Are there any other risks tokenholders should be aware of before purchasing the tokens?
Please refer to our “Risk Warnings” for further risk disclosures concerning the tokens.
Why Tokenized Assets?
We believe that in the future all assets will be tokenized and that tokenization has the potential to make the process of investing in real-world assets more efficient. We also believe that token ownership will help to create a new economic model, and fractional ownership enables new diversification models. Moreover, tokenization helps eliminate temporal and territorial barriers encouraging investing for everyone.
What are eToro Digital Assets tokens?
The tokens are digital tokens that exist on the Ethereum blockchain. The Ethereum blockchain is the underlying platform that allows the tokens to be created by eToro Digital Assets and transferred by eToro Digital Assets and tokenholders using the exchange services offered by eToroX.
The tokens are representations of underlying real-world assets that seek to broadly replicate the economic exposure of holding the underlying asset. The value of the tokens is pegged by reference to the value of the underlying asset, however, the tokens do not give tokenholders any rights concerning the underlying asset and they are not securities, derivatives, electronic money or any other kind of regulated instrument.
Will the value of the tokens always correspond exactly with the value of the relevant notional amount of the underlying asset?
No. It is possible that the prices offered by the Market Maker or the prevailing market price for the tokens may deviate from the value of the relevant notional amount of the underlying asset. However, the Market Maker has committed to a maximum average spread of 5% per calendar day during normal market conditions which should serve to limit any deviation.
The value of the tokens may also fall below the value of the relevant notional amount of the underlying asset in circumstances where the Market Maker chooses not make a market or is not able to offer prices at the level required to allow tokenholders to buy and sell for an amount of cryptocurrency approximately equal to the relevant notional amount of the underlying asset. This could occur, for example, in the event of abnormal market conditions or if the Market Maker became insolvent.
What are “normal/abnormal market conditions”?
Normal market conditions are conditions that are not abnormal market conditions.
Abnormal market conditions are a prescribed set of exceptional circumstances in which the Market Maker is not obliged to make offers to buy and sell the tokens through eToroX. Abnormal Market Conditions broadly includes the following circumstances: (a) extreme volatility impacting the majority of our tokenized assets or their underlying; (b) war, industrial action, civil unrest or cyber-sabotage; (c) the suspension or closure of any exchange or the nationalization, government sequestration, abandonment or failure of any instrument on which our tokenized assets are based; (d) any significant release by central banks, heads of states or other significant announcements which has a material impact on the financial markets of our tokenized assets; (e) any breakdown or failure of transmission, communication or computer facilities, interruption of power supply, or electronic or communications equipment or software failure, interruption in telecommunications or internet services or network provider services or error or breach which shall occur in blockchain or in any other networks in which our tokenized assets are being issued or traded.
Do the tokens give tokenholders rights in relation to the underlying asset?
No. The tokens do not give tokenholders any rights in relation to the underlying asset – for example, a tokenholder does not have ownership rights in relation to the underlying asset, does not have the right to call for delivery of the underlying asset, and does not have the right to be paid a return by reference to the underlying asset.
Do tokenholders have the right to redeem their tokens against any eToro entity?
No. Tokenholders do not have the right to redeem their tokens against any eToro entity.
How do the tokens “seek to broadly replicate the economic exposure of holding an underlying asset”?
The tokens seek to broadly replicate for tokenholders the economic exposure of holding a notional amount of a specified underlying asset. This effect is achieved by the activities of the Market Maker on the eToroX exchange which seeks to peg the value of the tokens by reference to the value of the underlying asset (for more details about the Market Maker and its role see the description of the tokenization structure above).
In normal market conditions, the Market Maker will seek to make offers to buy and sell the tokens through eToroX at prices denominated in certain other cryptocurrencies that are also listed on eToroX (such as Bitcoin). The Market Maker will seek to offer prices that allow tokenholders to buy or sell the tokens on eToroX for an amount of cryptocurrency having a value approximately equal to the prevailing market price for the relevant notional amount of the underlying asset. In order to do this, the Market Maker will enter into agreements with Tier-1 Liquidity Providers which back its exposure in relation to its marketing making activities on eToroX.
- 1 eToro EURX token is intended to broadly replicate the economic exposure of holding 1 euro.
- The Market Maker makes offers to buy and sell eToro EURX through eToroX at prices denominated in cryptocurrencies (such as Bitcoin).
The Market Maker will seek to ensure that the prices at which it offers to buy and sell the token are approximately equal to the prevailing market prices for the relevant cryptocurrency/EUR pair, with the aim of allowing a participant on eToroX to buy or sell 1 eToro EURX in exchange for an amount of the relevant cryptocurrency that is approximately equal to the value of 1 euro.