When the web first emerged, nobody could have predicted that combining a map, a payment system and a driver’s location would produce Uber. Or that layering a booking engine on top of property listings and a reputation system would create Airbnb. The magic was not in any single component but in the combination. That principle, building new things by snapping existing components together, is called composability. It is coming to financial markets through tokenization, and it may be the single most transformative opportunity in modern finance.
But it is also the area that demands the most caution. Composability is a modern iteration of the securitization that was at the heart of the Great Financial Crisis. And the SEC is right to take its time.
In tokenized markets, composability means taking a tokenized representation of an asset and using it as a building block inside another tokenized product, which can in turn become a building block inside yet another. Each layer is individually comprehensible. The power and the risk lie in the combination.
A no action letter request recently filed by Ondo Finance1 illustrates this concretely. Ondo Global Markets, an unregulated offshore entity, already issues “tokenized stocks” as structured loan notes offered to non U.S. investors. The underlying U.S. stocks are held as collateral by regulated intermediaries. Now Ondo’s onshore affiliate2 is requesting that its transfer agent Oasis Pro be allowed to tokenize the entitlements to those collateral stocks on Ethereum. Ondo frames this as a recordkeeping innovation. Structurally, it is composability. One token’s integrity depends on another token’s integrity, which depends on the underlying custody chain.
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