El Salvador’s Digital Assets Law: Bridging Traditional & Descentralized Markets

The El Salvador's Frameowrk for Digital Assets bridges information on/off-chain, solving the biggest concern regarding RWA Tokenization

The Binance July 2023 Report on Real Asset Tokenization provides an extensive overview, in-depth analysis, practical use cases, and market forecasts for the Tokenized Real Asset (RWA) sector. With an estimated valuation expected to reach $16 trillion by 2030, the Tokenized RWA market emerges as a prominent gem in the Global Financial Market. This phenomenon can be attributed to various factors, one of the foremost being the transition from traditional banking and database systems to blockchain technology. This paradigm shift alone unveils a sea of opportunities, but it also presents its own set of challenges.?

INVESTOR RIGHTS

One of the primary challenges in the process of tokenizing real assets (RWAs) lies in the transfer of Investor Rights to the underlying asset, ensuring that the holder of the digital asset genuinely owns the real asset to which it is linked. Consequently, numerous institutions and corporate entities find themselves lacking the necessary governance to enter this burgeoning market, which matures alongside its regulatory framework.

How can an executive justify to the Company's Board of Directors that the asset they have acquired simply does not exist in the real world??

To address this issue, a layer of information transmission between the Real World and the Digital World is imperative to confer legitimate bearer asset status upon RWA Tokens.?

INFORMATION BRIDGING

Once the RWA has undergone off-chain formalization, which includes establishing clarity regarding its economic value, ownership rights, legal validity, among other crucial attributes, this information must be disseminated to on-chain protocols and decentralized finance (DeFi) channels.?

The pivotal element in this process is Informational Bridging. While numerous initiatives have achieved success in both Off-chain and On-chain RWA developments, approximately 95% fail to seamlessly connect these pieces of information, leaving a potential vulnerability unaddressed. The capacity to broadcast information is contingent upon the regulatory framework in place, with noteworthy examples, such as El Salvador's regulatory framework, facilitating this crucial function.??

EL SALVADOR'S SOLUTION

The Salvadoran Digital Assets Law goes further in the pursuit of secure and transparent tokenization of real-world assets. It not only requires the off-chain formalization of Tokenized Real Assets (RWA) but also imposes rigorous verification and auditing requirements to ensure the integrity of the process.?

?One of the key requirements of the law is the verification of RWAs that will be tokenized. This means that the assets to be transformed into tokens must undergo a thorough and transparent verification, providing a solid foundation for the issuance of digital tokens. Additionally, the audit of smart contracts, the digital contracts governing the operation of the tokens, is strictly necessary to ensure that these contracts are reliable and operate as expected.?

Another relevant aspect of the legislation is the securitization of local assets. This means that real-world assets to be tokenized must be backed by tangible assets or strong promissory notes, increasing investor confidence and ensuring that the tokens have substantial real value.?

To further enhance the reliability of tokenization operations, the law stipulates that all digital asset issuances must be approved by a certifying company authorized by the National Digital Assets Commission. These companies are responsible for verifying compliance with all regulatory requirements and ensuring that tokens are issued in accordance with established standards.?

CONCLUSION

In summary, the Salvadoran Digital Assets Law goes beyond mere tokenization, establishing a robust system of safeguards that includes asset verification, smart contract auditing, securitization of local assets, and approval by certifying entities. This ensures a strong and reliable regulatory environment for the development of the digital asset market in the country.?

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