The story behind xStocks, Rome wasn't built in a day.

Written by: Cai Jie 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 this 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 story of company registration

The founding team saw the trend and huge potential of stablecoins and RWA in 2021, so they hoped to build a bridge before equity and blockchain. With a dream, the next step is to realize this dream.

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

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

Why Switzerland? Similar to 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 holding an open attitude towards the blockchain industry but also leading the way in legislative compliance. As early as 2021, it expanded its securities law to officially launch the DLT-related legislation, which partially came into effect on February 1, 2021, and fully took effect on August 1 of the same year.

The issuer’s company registration timeline can be said to follow closely behind this legislation.

There are 3 main companies involved in the xStocks business:

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 the Swiss 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.

Backed Assets (JE) Limited is a private limited company registered in Jersey on January 19, 2024. It is the issuer of xStocks.

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 establish Backed Assets (JE) Limited to take on this role, rather than having the parent company Backed Finance AG act as the issuer directly?

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

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

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

For the founding team, the primary consideration is “taxes.” The issuer’s income comes from charging a maximum additional fee of 5% on the issuance and redemption prices of the product. As the business grows, this will become a significant source of income, and tax planning must be done well from the beginning; ideally, it would be best to avoid taxes altogether. The team began to explore and ultimately chose Jersey because when they looked into Jersey’s income tax laws, they found that there are three tax brackets:

0%: Generally speaking

10%: Financial Services Company

20%: Utility companies, cannabis industry companies, income related to land, profits from the import and supply trade of hydrocarbons.

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

Detailed Analysis: How to Avoid Being Taxed at a 10% Rate as Financial Services, the team has conducted quite in-depth research here, which is also the core of the overall business architecture design, let’s delve into it.

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

Trading and Investment: As a principal or agent, buy, sell, subscribe to, or underwrite investments.

Arrange transactions: arrange the purchase, sale, subscription, underwriting, or conversion of investments for others (whether as a principal or an agent).

The main business model of the issuer, which involves additional fees (commissions) during the buying and selling process, initially 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 (Financial Services ( Investment Business ) Special Purpose Investment Business – Exemption ( ) Jersey ( Order 2001). The 4) 1( provision of this law actually provides an exemption clause for Special Purpose Vehicles (SPVs), meaning that if certain conditions are met, they are not considered companies registered under the “Financial Services ) Jersey ( Law 1998” as defined in tax law, and thus, the 10% tax rate in Jersey’s income tax law does not apply.

The conditions for these exemptions are as follows:

is a special purpose company and has obtained relevant consent

The sole or primary activity is to participate in involving:

Issuing loans, providing guarantees, conducting derivative trading

Issuing securities

Asset securitization, acquisition or asset repackaging

Capital market trading

or any other transaction approved by the committee

or any transaction related to any of the above transactions

Seeing these conditions, the team began to think about how to meet the exemption requirements for their business. Naturally, if a company is established in Jersey that only issues securities, there should be an opportunity to be exempted. Even if it doesn’t work out, they can attempt to go through special approval. For the team, the action plan has become clear: to establish a Special Purpose Vehicle (SPV) in Jersey.

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

Choosing to establish the issuer in Jersey also involves another consideration, namely the “license.” Generally speaking, issuing securities requires a license. From the perspective of the founding team, Jersey, as an independent and autonomous “small village,” can issue without needing a license, only requiring permission from the local government, which makes it relatively easier. Of course, Switzerland could also obtain a license, but the difficulty in obtaining a license, along with the aforementioned tax planning factors, makes Jersey undoubtedly a better location.

Insights for future teams: Tax law is a reflection of national power and will. In order to protect national interests, the tax law’s original text usually reflects full coverage of the taxation scope. If tax incentives are not visible in the original text, do not give up immediately; you can look for them in subsequent supplementary laws or special provisions, as there may often be surprises. There are two directions to look for: first, clearly defined incentive provisions; second, opportunities for special approval, that is, to see if the government has intentionally opened a loophole for flexibility.

2. The Compliance Story of Custody

Source: Company’s Securities Notes

The product logic of xStocks is that investors first transfer funds to the issuer, who uses this capital to purchase the corresponding real stocks, while depositing an equivalent amount of xToken into the investor’s wallet. To prevent these real stock assets from being misappropriated or lost, a safe practice is to entrust these assets to a reliable third party for custody. This third party is the custodian.

Custody is not only for ensuring the safety of assets, 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 custodial companies. Why is that?

Generally speaking, using multiple different custodians is considered for the following reasons:

Diversify risks. 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 regulatory requirements may vary by country/region.

Enhance operational flexibility and efficiency. Some custodians may excel at 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 the efficiency of asset management and trade settlement by collaborating with multiple custodians.

To meet the growing demand. 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 RWAs).

The situation of these three custodial companies is as follows. It can be seen that the custodial companies include those that meet 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 New York.

Maerki Baumann & Co. AG ) Zurich, Switzerland (: A Swiss bank licensed by FINMA, serving as the Swiss custodian. The custodian agreement (framework agreement) signed with the issuer is dated November 23/24, 2022, and is 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 currency service enterprise registered with FinCEN in the U.S., will act as a custodian in the U.S. The date of the cryptocurrency service agreement signed with the issuer is March 28, 2025, and it is governed by the laws of California.

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

This brings us to an innovation by the team: an alternative Collateral Structure. In simple terms, this is a new way of holding and managing collateral introduced by the issuer to increase the scalability of its product xStocks and further reduce risks in the settlement process.

Due to the fact that many popular underlying assets (such as U.S. stocks) are primarily traded in the U.S. market, using custodians and brokers located in the U.S. can handle the purchase, holding, and sale of these underlying assets more directly and efficiently, 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 establishment of warehouses at the origin of goods in the real economy to facilitate faster and more efficient handling of goods’ inbound and outbound logistics, regardless of where the final 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.

3. The Story of Professional Investors to Ordinary Investors

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

Professional Investor: A person whose daily activities involve acquiring, holding, managing, or disposing of investments for business purposes (as a principal or agent).

Individuals who have received and confirmed the “SPB Order Investment Warning”: This warning states that the product is only suitable for individuals with a “considerable asset base” to withstand potential losses and “sufficient financial expertise” to understand investment risks; at the same time, the issuance of the product and any activities of any function parties are not wholly governed by all provisions of the 1998 Jersey Financial Services Law. Investors will be required to confirm that they fall into one of the above categories before issuance.

In simple terms, it can only be issued to professional + risk-tolerant investors. We can understand that if it is issued to people outside of these two categories, it would violate the Jersey government’s consent conditions for issuers, which could result in losing the 0% tax rate at best, or being unable to operate at worst.

How can ordinary investors also invest in xStocks?

According to my analysis and observations, it mainly relies on leveraging the layered structure of financial markets, the openness of blockchain technology, and the ecological cooperation of Backed Finance with exchanges and DeFi platforms.

Taking exchanges as an example, the core idea is that as long as ordinary investors do not directly participate in the initial issuance, it is fine. Currently, the exchanges cooperating with the issuers are all regulated and have comprehensive user KYC procedures. xStocks, as a tokenized asset, was initially issued to the two types of investors mentioned above, but once it is on the chain, ordinary investors can also participate in buying and selling. At this point, even if the Jersey government wants to intervene, it would be beyond their reach.

Further extending the imagination, besides exchanges, ordinary investors can also participate through DeFi platforms, or qualified professional investors can repackage these xStocks into other financial products for sale to ordinary investors after participating in the initial issuance.

Insights for Retail Investors: This operation, which circumvents initial issuance regulations, essentially transfers the risk onto 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 issuance prospectus to ensure they truly understand what they are investing in.

4. The Story of the Team

As can be seen from the table above:

The core team is from Israel and is 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 last company.

Very important to compliance. In addition to legal experts, there are 3 people responsible for anti-money laundering (AML).

Summary:

In the more than four years since 2021, an innovative financial product has faced challenges beyond what most people can imagine, from its initial concept to its eventual launch. The three stories above are just one-sided, but it is not difficult to see that success requires the right timing (the trend of tokenization), geographical advantage (a good company registration location), and harmony among people (team talent and partners from various ecosystems).