The Story Behind xStocks - Rome Wasn't Built in a Day

How to break through legal restrictions to reach retail investors with tokenized stocks.

Written by: Finance解 Web3

The Story Behind xStocks - Rome Wasn't Built in a Day

The public only sees that xStocks will launch in the first half of 2025, but the team behind it has been preparing for at least 4 years. Throughout the process, there must be many stories, and this article attempts to review their story from the financial and compliance dimensions, hoping to organize a set of financial compliance methodologies for similar projects in the future.

1. Tax Planning and Compliance Stories for Company Registration

The founding team saw the trends and enormous potential of stablecoins and RWAs in 2021, so they aimed to build a bridge between equity and blockchain. With a dream in hand, the next step is to realize this dream.

The first step is, of course, to register the company.

The most important thing about registering a company is to choose a good location. The team behind xStocks initially chose Switzerland.

Why Switzerland? Similar to the Silicon Valley in the United States, the city of Zug in Switzerland is known as Crypto Valley, where the renowned Ethereum Foundation was established. Switzerland has always been an important financial center, not only maintaining an open attitude towards the blockchain industry but also leading the way globally in legislative compliance construction. As early as 2021, it expanded its securities law and officially launched the DLT-related legislation, which partially came into effect on February 1, 2021, and fully came into effect on August 1 of the same year.

The company's registration timeline of the issuer can be said to closely follow the pace of this legislation.

The main companies involved in the xStocks business are 3:

1. Backed Finance AG, the parent company of the issuer, is registered in Zug and was established in early 2021. On February 1, 2021, certain provisions of Switzerland's DLT law came into effect. These two dates are certainly not a coincidence; the founding team is very professional, perceptive, and decisive in their actions.
2. Backed Assets (JE) Limited is a private limited company registered in Jersey on January 19, 2024. It is the issuer of xStocks.
3. Backed Assets GmbH was established in Switzerland on April 20, 2021. The company merged with the issuer on February 23, 2024, with the issuer Backed Assets (JE) Limited as the surviving entity, inheriting all assets and liabilities of the original Backed Assets GmbH.

So the question arises: what is the purpose of establishing Backed Assets (JE) Limited? For the role of the issuer, why is Backed Assets (JE) Limited established to serve as the issuer, instead of having the parent company Backed Finance AG act directly as the issuer?

Answer: To ensure functional division. By delegating the issuance function to a specialized subsidiary, the parent company Backed Finance AG can focus on its core tokenization technology and services, while the issuer can concentrate on product issuance. This is a common corporate governance and risk management strategy.

So why not directly establish a company in Switzerland, but instead go to Jersey to set up a new company? What exactly is the appeal of Jersey?

What kind of place is Jersey? Jersey is an island located between England and France (only 8 kilometers long and 14.5 kilometers wide). Jersey has its own independent legal system, courts, and government, and is regarded internationally as an independent jurisdiction. (Source: Government of Jersey*)*

For the founding team, the primary consideration is "taxes." The issuer's revenue source comes from charging an additional fee of up to 5% on the issuance and redemption prices of the product. As the business grows, this will become a significant income, and tax planning must be done well from the beginning, ideally without paying taxes. The team began to explore and ultimately chose Jersey because when they looked at Jersey's income tax laws, they found three tax brackets:

• 0%: Generally speaking
• 10%: Financial services company
• 20%: Utility companies, cannabis industry companies, income related to land, profits from hydrocarbon oil imports and supply trade.

They will think that this business is likely to be classified as a financial service, so how can they enjoy a 0% tax rate? The table below is compiled from the definition of the scope of financial service companies in that tax law, along with my judgment (which I believe is similar to that of the founding team).

Detailed Analysis: How to Avoid Being Classified as a Financial Service and Paying Taxes at a Rate of 10%. The team has conducted quite in-depth research here, this is also the core of the overall business architecture design. Let's delve into it.

First, according to the Financial Services (Jersey) Law 1998, the specific definition of "Investment Business" mainly includes:

• Trading Investment: As a principal or agent, to buy, sell, subscribe to, or underwrite investments.
• Arrange transactions: Arrange for others (whether as a principal or agent) to buy, sell, subscribe, underwrite, or convert investments.

The issuer's main business model involves additional fees (commissions) during the buying and selling process. At first glance, this seems to fit the definition of "investment business" and should be taxed at a rate of 10%.

Then, the team did not stop there, but found another law, Financial Services (Investment Business (Special Purpose Investment Business – Exemption)) ( Jersey ) Order 2001. The clause 4(1) of this law actually provides an exemption clause for Special Purpose Entities (SPV), meaning that if certain conditions are met, they do not fall under the category of "companies registered under the Financial Services Jersey Law 1998," and therefore the 10% tax rate in Jersey's income tax law does not apply.

The conditions for these exemptions are as follows:

1. It is a special purpose company and has obtained the relevant approvals.
2. The sole or primary activity is to participate in involving:
3. Grant loans, provide guarantees, conduct derivative trading
4. Issuing Securities
5. Asset securitization, acquisition or asset repackaging
6. Capital Market Trading
7. Any other transactions approved by the committee
8. Any transaction related to any of the above transactions

Seeing these conditions, the team began to think about how to meet the exemption criteria for their business. Naturally, if a company is established in Jersey that only engages in "issuing securities," there should be an opportunity for exemption. Even if this approach does not work, they can still attempt to go for special approval. For the team, the action plan has been clarified, that is to establish a Special Purpose Vehicle (SPV) in Jersey.

Therefore, we see that on January 19, 2024, the issuer Backed Assets (JE) Limited was established, and just one month later, on February 23, Backed Assets GmbH was absorbed and merged by the issuer, which can be considered quite swift. Moreover, such a special purpose company also meets the management requirements of the division of labor mentioned earlier.

Choosing to establish the issuer in Jersey also involves another consideration, namely "licensing." Generally speaking, issuing securities requires a license. From the perspective of the founding team, Jersey serves as an independent autonomous "village," where issuing can even be done without a license, only requiring permission from the local government, which makes it relatively easier. Of course, Switzerland should also be able to obtain a license, but the difficulty of obtaining a license, along with the aforementioned tax planning factors, makes Jersey undoubtedly a better location.

Inspiration for future teams: Tax law embodies the power and will of the state. To protect national interests, the original tax law usually reflects a comprehensive coverage of the taxation scope. If there are no tax incentives in the original law, do not give up right away; you can look for them in subsequent supplementary laws, special clauses, etc., and there are usually surprises. There are two directions to search: first, clearly defined incentive clauses; second, opportunities for special approvals, which means checking if the government has intentionally left a loophole for flexibility.

2. Compliance Story about Custody

Source: Company『s Securities Notes

The product logic of xStocks is that investors first transfer funds to the issuer, who then uses these funds to purchase the corresponding real stocks, while simultaneously crediting the investor's wallet with an equivalent amount of xToken. To prevent these real stock assets from being misappropriated or lost, a secure practice is to entrust these assets to a trusted third party for custody. This third party is the custodian.

Custody is not only to ensure asset security but also plays an important role in anti-money laundering (AML), customer due diligence (KYC), and other matters. Therefore, various countries have targeted laws, such as the Investment Advisers Act of 1940 in the United States and the CASS rules in the United Kingdom.

From the product page of xStocks, you can see 3 different custodians, why is that?

In general, multiple different custodial companies are adopted for the following considerations:

• Diversify risk. Ensure that even if one custodian encounters issues (such as asset loss or system failure), other custodians can still maintain the security of the assets.
• Meet the regulatory requirements of different jurisdictions. xStocks is aimed at the global market (excluding the United States), and the regulatory requirements may vary in different countries/regions.
• Improve operational flexibility and efficiency. Some custodians may excel in handling specific types of assets (such as stocks or ETFs) or have better technical integration capabilities on certain blockchains (such as Solana or Ethereum). xStocks optimizes asset management and trade settlement efficiency by collaborating with multiple custodians.
• Address the demand for scale growth. As the business grows, multiple custodians can share the workload, ensuring the efficient operation of the system and laying the foundation for future expansion into more asset types (such as bonds or other RWA).

The situation of these three custody companies is as follows. It can be seen that there are custody companies that comply with U.S. regulatory requirements as well as those that comply with EU regulatory requirements.

• Alpaca Securities LLC ( Wilmington, North Carolina, USA ): A broker-dealer registered with the SEC in the United States and a member of FINRA, whose securities account control agreement is dated June 20/23, 2025, governed by the laws of the State of New York.
• Maerki Baumann & Co. AG ( Zurich, Switzerland (: A Swiss bank licensed by FINMA, will act as the Swiss custodian. The custody agreement (framework agreement) signed with the issuer is dated November 23/24, 2022, governed by Swiss law.
• InCore Bank AG ) Zurich, Switzerland ): Maerki Baumann & Co. AG has outsourced its securities trading to InCore Bank AG.
• Alpaca Crypto LLC ( San Mateo, California, USA ): A money service business registered with FinCEN in the United States, acting as the custodian in the U.S. The cryptocurrency service agreement with the issuer is dated March 28, 2025, and is governed by the laws of the state of California.

The question arises again: Since the business cannot be conducted in the United States, why introduce a U.S. custody company?

This brings us to an innovation from the team: an alternative Collateral Structure. Simply put, this is a new method of holding and managing collateral introduced by the issuer to increase the scalability of its product xStocks and further reduce risks during the settlement process.

Due to the fact that many popular underlying assets (such as US stocks) are primarily traded in the US market, using custodians and brokers located in the US can more directly and efficiently handle the purchase, holding, and sale of these underlying assets, thereby optimizing the settlement process and reducing the complexity and potential delays of cross-jurisdictional transactions. The innovation lies in the fact that this mimics the practice in the real economy of establishing warehouses at the origin of goods to facilitate faster and more efficient handling of the inbound and outbound logistics, regardless of where the end customer is located.

Inspiration for future teams: Custody is a necessary step, and based on the location of the underlying assets, the team can engage multiple custody companies.

III. The Story from Professional Investors to Retail Investors

According to Jersey regulations, products can only be issued to the following two categories of people:

• Professional Investor: A person whose daily activities involve the acquisition, holding, management, or disposal of investments for business purposes (as a principal or agent).
• Individuals who have received and confirmed the "SPB Order Investment Warning": The warning states that the product is only suitable for individuals with a "significantly substantial asset base" to bear potential losses and who are "sufficiently financially professional" to understand investment risks; at the same time, the issuance of the product and the activities of any functional parties are not entirely bound by all provisions of the 1998 Jersey Financial Services Law. Investors will be required to confirm that they belong to either of the above categories before issuance.

In simple terms, it can only be issued to professional + affluent investors. We can understand that if it is issued to individuals outside of these two categories, it would violate the conditions of consent from the Jersey government regarding the issuer's business, which could result in losing the 0% tax rate at best, or being unable to continue operations at worst.

How can ordinary investors also invest in xStocks?

According to my analysis and observation, it mainly involves leveraging the hierarchical structure of financial markets, the openness of blockchain technology, and the ecological cooperation between Backed Finance and exchanges and DeFi platforms.

Taking exchanges as an example, the core is that as long as retail investors do not directly participate in the initial issuance, it is fine. Currently, the exchanges cooperating with the issuers are all regulated and have complete user KYC procedures. xStocks, as tokenized assets, were indeed initially issued to the above two types of investors, but once it is on-chain, retail investors can also participate in buying and selling. At that time, even if the Jersey government wants to regulate, it would be out of reach.

Further extending the idea, in addition to exchanges, ordinary investors can also participate through DeFi platforms, or qualified professional investors can repackage these xStocks into other financial products to sell to retail investors after participating in the initial issuance.

Insights for retail investors: This operation, which bypasses the initial issuance regulations, essentially transfers the risk onto the retail investors. Retail investors must fully recognize their lack of information and understanding. Before investing in such products, they must thoroughly read the risk warnings in the prospectus to ensure they truly understand what they are investing in.

4. The Story of the Team

It can be seen from the table above:

• The core team is from Israel, most likely Jewish.
• The founding team has a very high level of cognition and shares similar backgrounds and philosophies, with several being alumni or former colleagues from the previous company.
• Attach great importance to compliance. In addition to legal experts, there are 3 people responsible for anti-money laundering (AML).

Summary:

In the more than 4 years from 2021 to the present, an innovative financial product has faced challenges in its journey from initial concept to final launch that are beyond the imagination of most people. The above three stories are only one-sided, but it is not difficult to see that success can only be achieved when the right timing (the trend of tokenization), the right location (a good company registration place), and the right people (team talent, major ecological partners) come together.