Navigating Regulatory Waters in Tokens

Tokenization uses blockchain technology and smart contracts to unlock liquidity and transparency in a middle of a financial crackdown. Back in 2009, when crypto was invented, people were starting to lose faith in the establishments. Here’s the market outlook almost 15 years later.

Tl;dr

• Geographical regions known for favorable regulatory environments?
• Emerging trends?
• Challenges in the regulatory environment
• Success stories in asset tokenization across industries and geographies
• Why writing the rules is important

Let’s begin with the digital heaven for crypto companies.

Switzerland

In November 2022, Switzerland enforced more stringent regulations regarding AML checks with a threshold of CHF 1000 (~ $ 1070) in linked transactions within 30 days. The country’s pre-existing securities laws, compliance requirements, cross-borders considerations and legal enforceability of smart contracts make it a conducive environment for tokenization.?

#Innovator Shoutout

• BrickMark Group tokenizes a commercial property in Zurich, Switzerland, offering investors fractional ownership and the potential for rental income.
• Finka enables the tokenization of agricultural assets, such as farmland. It aims to increase liquidity in the agricultural market, facilitate fractional ownership, and attract a broader range of investors allowing farmers to unlock the value of their land and investors to diversify their portfolios.

European Union (EU)

MiCA (Markets in Crypto Assets) which was proposed in 2020 was recently passed in May 2023. It harmonizes regulations in the EU without entrepreneurs knocking on multiple doors. Protects investors, increases transparency, and exhaustively covers mechanisms for licensing requirements, the regulation of stablecoins, and asset-referenced tokens (ARTs). While it remains ambiguous about NFTs and DeFi, it’s a progressive step for the rest of the world to follow suit.?

While EU-wide efforts are likely to become gold standards in the long-term future for global tokenization, Malta made a considerable headstart.

Malta

Malta’s Virtual Financial Assets Act (VFAA 2018) is a pioneering comprehensive legal framework for digital assets, including security tokens. It regulates virtual financial assets, initial virtual financial asset offerings (IVFAOs), and service providers operating in the digital asset space. Malta was also the first country to introduce an online gaming regulatory framework in 2018 and a Security Token Test to determine whether a digital asset qualifies under existing financial regulations. More recently in December 2022 Malta was expressly seeking to remove NFTs from its crypto asset classes in anticipation of MiCA which would pass in 2023 May. More updates to follow.?

#Innovator shoutout

For instance, Poseidon Impact leverages blockchain technology to tokenize carbon credits, enabling individuals and organizations to offset their carbon footprint through digital assets.

The United Kingdom

The UK government is showing a positive stance towards crypto market assets. It is collaborating with the Bank of England, the Financial Conduct Authority, and the industry. The FCA has already established regulatory frameworks for security token offerings (STOs), Initial Coin Offerings (ICOs) with specific guidelines for tokenized assets, investor protection, disclosure, and AML measure. In February 2023, the FCA published a paper addressing fund tokenization within the UK asset management regime.?

LawtechUK, the Jurisdiction Taskforce a government-backed group recognizes crypto assets as property and considers smart contracts as enforceable under British law. But challenges remain around the validity of smart contacts, legal remedies for errors, and legal interpretation.

#Innovator shoutout:?

• The UK's Regulatory Sandbox allows innovative tokenization projects to operate under controlled conditions, enabling businesses to test and develop their offerings in a supportive environment.
• The London Stock Exchange explored the tokenization of traditional financial assets, including shares and bonds, to improve liquidity and streamline trading processes.

The United Arab Emirates

The UAE is soaring to new heights with its Digital National Economy strategy at both the federal and emirates level. Remarkable achievements:

• Abu Dhabi’s Global Market’s Hub with 71+ Digital Assets has deployed $ 2 billion to make room for Web3 startups.?
• Dubai’s metaverse strategy has attracted 2000+ blockchain and metaverse startups
• In the spirit of entrepreneurship, 500+ startups have already registered for Dubai’s multi-commodities center.
• In February 2023, Ras al Khaimah ‘Digital Oasis’ was announced. The world’s first free zone for digital and virtual asset companies to attract innovation in the metaverse, blockchain, NFTs, DAOs, and other Web3 businesses.?

Singapore:

While 2022 experienced a crypto winter with collapses like Terra stablecoin and Three Arrows Capital, the Monetary Authority of Singapore (MAS) outlook is still optimistic. Regulatory bodies are emphasizing consumer protection while issuing restrictions on advertising that abuses consumer information.

• Projects like Nexus, Ubin, Orchid, Guardian, and Greenprint focus on cross-border remittance, settlement, programmable money, tokenized assets, and trusted sustainability data.?
• The metaverse, NFTs, Ethereum sign-in, and zero-knowledge proof identification are also emerging developments.
• Regulatory Sandbox: Similar to the UK, Singapore harbors fintech innovation including tokenized assets under regulatory supervision.?

Watch Yes To Digital Asset Innovation, No To Cryptocurrency Speculation:

#Innovator Shoutout:?

• Digix tokenizes physical gold by creating tokens, such as #DGX, backed by actual gold bullion stored in vaults. These tokens allow fractional ownership and easier transferability of gold assets.
• ACX (AirCarbon Exchange) created a digital exchange platform for tokenizing carbon credits, facilitating the trading and offsetting of carbon emissions.

United States

A new regulatory framework is in the works for digital assets. It aims to redefine the oversight of digital assets in the country. As bodies of authority, the Commodity Futures? Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), both claim authority over digital assets. But recent enforcement actions against the FTX by the CFTC and the SEC show the need for coordinated efforts to protect investors and prevent fraud.?

Besides, state-level differences and federal regulations call for a unified regulation like MiCA. At the same time, states like Wyoming (which pioneered real-estate tokenization) have legislation to create a more conducive atmosphere for blockchain and digital assets, including tokenization. Also, the introduction of the?

#Innovator Shoutout:?

• Aspen Coin (USA): The St. Regis Aspen Resort in Colorado was tokenized by Elevated Returns, allowing investors to own fractional shares of the luxury resort.
• ?Minted offers a platform that allows investors to buy and trade tokenized silver, providing fractional ownership of physical silver assets.

Writing the rules of tokenization

‘If the tokenization thesis holds true, then the 21st Century may see the creation of regulated, global, token-based, multi-asset networks. It would be undesirable for the functionality of unregulated multi-asset networks to pull too far ahead of regulated financial infrastructures. Financial transactions may migrate to the more capable platforms, even if they fall outside of the regulatory perimeter.’

- Tony McLaughlin, Emerging Payments and Business Development, Treasury and Trade Solutions at Citibank

As a community of developers and entrepreneurs are building a solid sustainable future in tokenization, ignorance in trade and commerce is a risk. And regulatory indifference is dangerous. Both corporate ignorance and legislative apathy allow bad actors or avarice to go unchecked.?

The fact that so many global players are responding to the digital transformation of Web2 is a good sign. Regulators usually pay attention to tech that has the ability to stay long-term and laws indicate industry maturation. Frameworks that ensure order, consistency, and accountability within the #tokeneconomy will spur entrepreneurship and innovation. Leveling the playing field in real-world asset tokenization is crucial to a truer and more reliable decentralized technology. For both the #futureinternet and economy. And their mass adoption.

A big shoutout to Achala keshava from Verum Legal for her insights on the token economy's regulatory landscape across the world.

Thanks for reading!