Arush Sehgal: Tokenized Clearing Is The Next Big Unlock (Full Interview)

Tokenized equities are moving beyond settlement and custody toward clearing, according to Arush Sehgal, Alpaca’s head of digital assets and co-founder of ITN. ITN is an internal Alpaca clearinghouse for instant, 24/7 swaps between traditional shares and tokenized versions. Launched at Token 2049 the previous year, it had cleared more than $5 billion in flows and was Alpaca’s fastest-growing product. Its current reach is limited, however: it cannot yet clear trades across unrelated broker-dealers or connect disparate on-chain and off-chain systems.

The challenge is that a tokenized asset may need to move across traditional settlement rails and faster crypto rails, as well as between different tokens, blockchains, and venues. Sehgal said tokenized shares are not necessarily bearer assets: the share remains registered with a transfer agent, and the transfer agent’s master security holder file remains the source of truth even if a token is lost. Alpaca is not the transfer agent. Sehgal also warned that unrestricted bearer securities could create AML risks, and described Metallics’ model as separating a bearer-asset NFT from the ERC-20 token used for trading.

Today, tokenized-equity market makers generally have to pre-fund shares on their balance sheets, with issuers paying them to deploy that capital. Alpaca planned to introduce a locate-based mechanism that year to support post-trade settlement. In Sehgal’s example, a token could be minted at trade time, T, against a locate-backed share position, with the share delivered at T+1. The mint would still need to be collateralized under the applicable margin and clearing rules; the mechanism changes the timing of share delivery, not the need to manage exposure.

Alpaca often acts as broker-dealer for issuers including Kraken X Stocks, Ondo, and Denari, and for market makers. When both sides use Alpaca, it can net activity internally. Bringing in counterparties that use other broker-dealers or external prime brokers creates a multilateral clearing problem. Sehgal’s future-state model would guarantee token delivery before the underlying share arrives, then net broker obligations as the share passes through the clearinghouse. He said multilateral netting could reduce the capital needed to support trading, which today generally requires both sides of tokenized-equity and crypto trades to pre-fund.

To illustrate the potential, Sehgal cited DTCC holding $100 trillion of U.S. equities and NSEC clearing $4.6 quadrillion of flow, which he described as 46 inventory cycles a year. He said multilateral netting reduces that flow by 98%, leaving 2% of the capital moving through the system. ITN does not yet perform multilateral netting. Its mint-and-redeem API has been live for a year and supports tokenized shares including B stocks and X stocks, with almost everything supported or in production. Minting and redemption currently require institutional status with an issuer; a planned facilitating-AP model is intended to extend access to retail participants. Sehgal cited Binance customers minting and redeeming B-Stock tokens through Binance as an AP.

Minting and redeeming can happen 24/7, but converting a token into a share does not eliminate the underlying share risk; that risk remains with whoever takes the other side. Broad 24/7 equities trading also depends on fiat payment rails operating around the clock, which Sehgal called a key unlock. RTP and FedNow need sufficient penetration for that to happen. Even if trading and operations run continuously, he expects liquidity to remain concentrated around the Friday close and Monday New York open, with Monday’s open still the best time to access major market liquidity. Human staffing patterns and inertia at large financial firms may sustain those scheduled events, while exchanges have an incentive to concentrate liquidity and markets in Asia and elsewhere may welcome broader access.