Tokenized Assets: What are They, and how are They Regulated?

Critical aspects of assets tokenization

The advent of Bitcoin opened up a new way of issuing, managing, and transacting investments and assets. The technology behind the world's first cryptocurrency, blockchain, is a distributed ledger technology that opens the floodgates to a myriad of ways to invest.
Blockchain will fit the financial landscape and allow an asset to be easily broken down into smaller units representing ownership, encouraging the democratization of investment in historically illiquid assets and creating fairer markets. You may tokenize everything on a distributed ledger: paintings, digital media platforms, real estate, company shares, or collectibles. Read more about what can be Tokenized.

The definition of asset tokenization

Asset tokenization is a method of digitizing tangible and intangible assets and converting them into tokens; you can store them on the blockchain. One asset is usually not equal to one token: assets contain small parts that form different tokens.
Once the owner has tokenized his assets and entered the digital world, it becomes possible to store and sell them in part or whole and transfer them to other owners.

Those who have heard about asset tokenization may have heard something about STO (short for Security Token Offering). Such a concept has a lot to do with blockchain technology and tokenization.

The connection between these three terms is quite simple. It all starts with the blockchain, which allows you to create and store tokens. Then the owner of the assets needs to choose a particular STO platform that will allow him to digitize his assets and turn them into the desirednumber of tokens. After that, they may launch their own STO campaign, and anyone can buy these tokens, thereby investing in the business of the asset owner.
In recent years, more and more asset owners, startups, and investors are discovering the possibilities of tokenization. As the popularity of asset tokenization increases, so does the size of such market. According to Plutoneo, for example, in Europe alone, the size of the market for tokenized assets is projected at 1.4 trillion euros in 2024. Read more about what asset tokenization is.

Types of tokenized assets

In the crypto space, there can be tokens for any service or product. The most distinct types of tokens are fungible and non-fungible tokens.

* Fungible tokens are divisible assets that are not unique, and you can easily exchange them for another asset of the same type. Specialists create tokens so that each part of the token is equivalent to the following Bitcoin, the most popular fungible asset.

* Non-Fungible Tokens (NFTs) are a new blockchain/cryptocurrency innovation that allows you to track who owns a particular asset. Non-interchangeable means something unique; you cannot exchange them for another item. NFTs are like real-world items that have some value. These are a kind of digital assets that can be bought and sold online, often with cryptocurrencies. NFTs are a single entity; you cannot divide them into several parts.
The platform ICOholder offers to learn more about different types of digital assets, their current state, and development trends.

Basic steps of asset tokenization

Some Critical Steps in a successful tokenization journey.

Step 1. Selecting an asset
The critical thing you need to do is decide what you will tokenize. It is better to choose an asset with a significant market because you will know the price range and be able to price the tokens correctly.

Step 2. Develop a business model and strategy
You must also be clear about your future business model. To develop it, you must consider sources of income and funding details and decide where the client base will come from.

Step 3: Choose a Platform
Such a stage is about how the idea is embodied in a mechanism that will work according to the business plan. Here you have a choice between different issuing platforms, or a full asset management solution as in the case with Brickken.

Step 4: Studying the rules in your jurisdiction
Such a step can be relatively complex, as the laws regarding digital assets and blockchain technology must be clearly understood and strictly enforced.

Step 5: Publishing the whitepaper
You then write and publish a white paper that briefly describes the purpose of creating the token and how potential buyers can benefit from buying your asset-backed tokens. Include an analysis of your work and the conclusions you reached while preparing the project.

Step 6. Attracting investors
After publishing the whitepaper and having created the tokens, you can start working on attracting potential investors. It's where your marketing skills come into play.

Step 7: Fostering Investor Relations
Once the fundraise is a success, it is important to continously communicate and foster the relations with your investors to reap the full benefits of having a community of investors.

Main aspects of token regulation

In their nascent state, digital assets such as tokens are receiving intense scrutiny due to a lack of standardization and regulatory guidance. Ultimately, this deprives more conservative participants of incentives to invest. Lack of uniformity can also hinder market value. In the context of credit cards, the Payment Card Industry Security Standards Council ("PCI SSC") primarily governs tokenization standards. In the context of digital assets, both federal regulators and developers of cryptocurrency platforms offer different ways of dealing with tokens.

On the one hand, to address the regulatory implications of different types of tokens, the SEC prepared a framework for applying the Howey test in 2019. This structure explains when the SEC will deem a token subject to US federal securities laws. Recognizing that immediately applying securities regulation to the nascent sector could stifle innovation, SEC Commissioner Hester M. Pierce has since developed a potentially proposed Securities Act rule that would create a temporary haven for token developers.

The Token Safe Harbor 2.0, published on April 13, 2021, on GitHub, provides "network developers with a three-year grace period during which, under certain conditions, they may contribute to the participation and development of a functional or decentralized network according to registration provisions of federal securities laws ".
SEC Chairman Gary Gensler told the Aspen Security Forum: «I consider former SEC Chairman Jay Clayton said it well in 2018: "To the extent that digital assets like [initial coin offerings or ICOs] are securities — and I believe that every ICO I've seen is a security - we have jurisdiction, our federal securities laws apply."

Conclusion

The utility and adoption of tokenization are rapidly growing in the fintech industry. The SEC and CFTC continue to develop new frameworks for tokens. They made it clear that the attitude towards the token will depend partly on whether it gets the status of a traditional security representative. Regulators will likely continue to look through the same lens they have used for years. We hope that the current infrastructure bill and its interpretation will help determine the reporting requirements for tokens. Transparency in regulation that balances innovation and the rule of law will be a welcome relief for the Fintech community.

Published On: September 1, 2022Categories: Legal0 Comments

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