DORA Compliance Framework | DORA Compliance Checklist
April 13, 2024
The thought behind asset tokenization is straightforward permitting change the legitimate rights over to assets with monetary worth into a Digital Token. Such digital tokens can be stored, recorded, and administered on a blockchain network. Because of their nature, these sort of Tokens is treated by specialists as Security Tokens which in the event of tokenization address shares in an organization, interest in an asset or trust, a home, an art collection, a farm, or any asset that an individual can claim.
In short, tokenization of assets and issuing of security tokens addressing that assets are to take something that is on paper, and begin following responsibility for carefully. Security tokens are a digital portrayal of significant worth that is dependent upon guidelines under the security laws of numerous jurisdictions. Given to promising limit of more prominent transparency, liquidity, information trustworthiness, and exchange potential, countless investors are keen on asset tokenization and on the most proficient method to move certifiable assets into a blockchain meaning to make lives simpler by getting the investment process faster.
Digitalized tokens sponsored by tokenized assets can address interest rights in the type of decentralized conventions and this way permits investors, all things considered, to buy shares, rights, and so forth in given assets. In case such tokens are offered for one-time use in a manner such that these cannot be minted again, the tokens can also qualify as non-fungible tokens or NFTs.
Upon taking an asset and tokenizing it will create its digital representation that is transferred on Blockchain distributed network. And now it lives its own life without being altered or hacked, at the same time a potential investor has guaranteed that the ownership information is immutable.
Such technology ensures to “liquify” millions of worth of assets into a certain number of digital tokens which further makes an easier investment process. For instance, investment in real estate.
If a person does not have enough money to buy the building or the apartment, then tokenization allows investors to invest gradually by investing 5000 or 10000 every month by trading in digital tokens that exhibit a fraction of the tokenized assets and not assets over the complete building (asset).
In other words, one cannot buy 5 or 10 square meters in a building or apartment but can buy a limited number of tokens backed by tokenized property. Because tokenization is a process that converts rights to an asset into a digital token and it can transform the building or apartment, for instance, into 1,000,000 tokens, each token representing a 0.0001% share of the underlying asset.
Subsequently, the tokens shall be issued on an online platform supporting smart contracts, so that the tokens can be freely bought and sold on different exchanges. Therefore, if one buys a digital Token, they can buy 0.0001% of the ownership in the asset and if they buy 500,000 tokens then they can own 50% of the assets.
The problematic thing is that even if one buys all the tokens, this does not imply that they would become a legal owner of the property. This is where the legal issue starts to appear.
Security token investors can claim the rights in a court when offering on papers that are properly drafted and token purchase transaction was completely legal, however, there are many jurisdictions where such offerings and tokens are not regulated by the said authority, so the investor’s rights are not protected completely and can lead to scams.
Since there exists a lack of regulation, various steps have been taken to regulate tokens categorized as securities, whereas in most cases smart contracts are still unregulated, implying that token owners will only own tokens.
They, however, have no legal rights on the property and are not protected by the law. Thus, legal changes are required to house these new business models in more jurisdictions to get more consistency. Another issue that persists is to create a legally binding connection between tokenized assets and generated security tokens as compared to utility tokens.
It brings in new challenges because of its new and unregulated nature. The lack of judicial practice in the early stage and the insufficient number of business decisions makes it difficult to the creation of any legal framework.
The benefits that tokenizing an asset brings are the features that could be very attractive for investors. Assets tokenized on the blockchain are:
Once the tokens are bought by the investors, then nobody can “erase” the ownership of the tokens.
Tokens can be accessed from any place in the world, via laptop, smartphone app, etc.
Tokens hold a guarantee of greater liquidity which increases the likely value from trade and eradicates the requirement for minimum investments.
Tokens eliminate the middlemen, which often limit investment accessibility by for instance restricting investments to accredited investors only, demanding high fees, and requiring access to stock-trading accounts.
Tokens eradicate irregularity of information present throughout the transfer of ownership.
There are some legal concerns and problems that must be solved before the business environment which would further help in successfully tokenizing assets on Blockchain. There are also jurisdictions where tokenization is legal, and investors are protected by law.
The main problem is the lack of regulation. Other countries usually control Security Tokens through references and views of financial market managing authorities. For instance, if a company that handles tokenization sells the property then the token owners would only own tokens.
They have no legal rights on the property whatsoever and thus are not protected by the law. Therefore, few legal changes must be accommodated in more jurisdictions to get more consistency.
One of the most significant problems is to create a legal obligatory connection between tokenized assets and produced security tokens. This gets new challenges due to its new and unregulated nature.
The lack of complete judicial practice given the early stage of its development and the insufficient number of business decisions based on legal practice makes it difficult creation of a legal framework related to this field.
In the case of tokenization of assets, digital tokens are generally issued. This digital token implies an asset, equity, or share, leading to a debt or claim on the issuer. Asset tokens are backed by a guarantee to get a share in future company earnings or capital. In other cases, this type of token is financed by the company’s equity or certain material goods.
Security is a tradable financial asset that commonly refers to any form of financial instrument that holds some type of monetary value and represents an ownership position in a business, a creditors connection to an administrative body or a company, or rights to ownership as indicated by an option.
Legal guidelines of securities are projected to ensure that market contributors can make their decisions whether to invest or not in stocks of companies, bonds, shares, etc. on a foreseeable, dependable, and clear set of data.
With the digital world changing our communication network, the legal parameters of what constitutes an Asset have changed drastically. Tokenization has allowed users to change real estate assets, paintings, precious jewellery, etc to Asset Tokens that are integrated into a Blockchain network.
However, with this concept comes the limitations of the transfer possibilities of fundamental ownership rights. By utilizing tokenization users gain more liquidity for their assets and yet at the same time considering the jurisdiction of the asset some issues can take place concerning the legal connection between the ownership over the asset and tokenized digital asset.
Our team of advanced patent attorneys assists clients with patent searches, drafting patent applications, and patent (intellectual property) agreements, including licensing and non-disclosure agreements. Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.
Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).
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Working closely with patent attorneys along with international law firms with significant experience with lawyers in Asia Pacific providing services to clients in US and Europe. Flagship services include international patent and trademark filings, patent services in India and global patent consulting services.
Global Blockchain Lawyers (www.GlobalBlockchainLawyers.com) is a digital platform to discuss legal issues, latest technology and legal developments, and applicable laws in the dynamic field of Digital Currency, Blockchain, Bitcoin, Cryptocurrency and raising capital through the sale of tokens or coins (ICO or Initial Coin Offerings).
Blockchain ecosystem in India is evolving at a rapid pace and a proactive legal approach is required by blockchain lawyers in India to understand the complex nature of applicable laws and regulations.
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