Ondo Lets Institutions Swap Real Shares for Tokens Without Touching Cash

Ondo Finance has opened an in-kind conversion route for its tokenized stocks and exchange-traded funds, letting approved institutions create and destroy tokens by delivering or receiving the underlying shares instead of cash, according to Cointelegraph. Ondo issues tokens that track listed US equities and funds, each backed by the corresponding security held in custody.

In-kind creation is the mechanism that makes exchange-traded funds work. An authorised participant hands the fund a basket of the securities it holds and receives fund shares in return, or reverses the trade. No one sells anything, so no taxable event is triggered inside the fund and no bid-offer spread is paid on the way in.

Why cash creation is the expensive path

Until now, minting a stock token generally meant sending dollars to the issuer, which then bought the share in the open market. That imposes two costs. The issuer pays the spread and any market impact on the purchase, and the institution has to have liquidated its position first, which may mean realising a gain it did not want to realise.

In-kind conversion removes both. A market maker holding real shares can convert them into tokens, deploy the tokens onchain, and convert back when it wants the shares again. The position never leaves equity exposure, so the round trip costs custody and operational fees rather than two crossings of the spread.

What it means for the price of a stock token

The practical consequence is tighter arbitrage. A stock token trades away from its underlying share whenever the cost of closing the gap exceeds the gap itself. Every basis point taken out of the creation and redemption process narrows the band in which a token can drift before someone finds it worth arbitraging.

That matters more for the largest holders than for retail. Cash creation is workable at small size. At institutional size, market impact on the underlying purchase becomes the binding constraint, which is precisely why the ETF industry settled on in-kind decades ago.

The regulatory setting

The move lands days after the Securities and Exchange Commission issued a five-year conditional exemption allowing tokenized National Market System stock to trade on permissioned automated market makers, as reported by The Defiant. Automated market makers are pools that quote prices from a formula rather than an order book, and permissioned ones restrict who may trade in them.

An exemption that lets tokens trade is only half the machinery. The other half is a way for professional traders to get in and out of the wrapper cheaply enough to keep the token honest to the share. In-kind conversion is that second half, and it is being built by issuers rather than mandated by rule.

Access is limited to approved institutions, which is the standard shape for this kind of facility and the reason it does not change anything directly for an individual holder. What it can change is the spread that individual pays.