Highlights of X Spaces “From Code to Compliance: Regulatory Insights for RWA Tokenisation"
Hello everyone!
We are delighted to share with you that we had a great episode of Real World Alpha (RWA) Chats on the topic “From Code to Compliance: Regulatory Insights for RWA Tokenisation”. The episode saw participation from several luminaries in the field of RWA tokenisation. They shared valuable insights on the changing regulatory landscape in the crypto industry and recommendations on ensuring regulatory compliance.
Following are a few highlights from the episode -
Joseph, Founder & General Counsel at Axis on the existing global regulatory landscape for RWA tokenisation -
According to Joseph, there are different types of regulatory landscapes for RWA tokenisation across the world. The first type is where existing securities laws are applicable to RWA tokenisation. The US has this type of a regulatory landscape. Companies like Securitize that tokenise assets like shares and bonds report directly to the SEC.
Then, there are jurisdictions with specific laws for tokenisation. For example, in Switzerland, the Swiss code of obligations has the concept of ledger-based securities or DLT securities. In this arrangement, if you maintain an asset in a brokerage account, then via a ledger-based securities agreement which is recognised by regulators and the law, you can tokenise the asset and have a digital representation of it. The Swiss code of obligations for DLT securities also allows you to issue assets on the blockchain that are not backed by other assets. For example, if you are a company, you can issue shares to your employees directly on the blockchain.
Then, there are countries like the Cayman Islands which do not have a regulatory regime per se for tokenisation but you can have contractual agreements stating that you either have in your custody, or have a broker to hold tokenised products.
Raj Bagadi, Founder and CEO of E Money Network on how E Money Network is leading the regulatory landscape for all RWAs
According to Raj, conversion of any asset from Web2 to Web3 has to undergo compliance and regulatory oversight. This involves following PSD2 laws, which are essentially the current banking laws.
Furthermore, the asset has to be placed in the custody of a licensed entity like a broker or a commodities platform, and only then can the tokenisation of an asset take place.
For example, if E Money Network wishes to offer 100 tokenised shares of a company like Tesla, then it has to have the actual shares in the custody of a regulated broker platform. Now, E Money Network will create a 100 tokenised Tesla shares - eTesla, which will then be offered to users. So, this is how MiCA is defining rules for the proof of custody and ownership in the context of tokenisation.
Shashi Jha, Partner at Jigsaw on the definition of a real world asset as per regulatory language -
According to Shashi, defining tokenisation is difficult in the context of existing legal provisions, but tokenisation has existed since the time we have had assets. One of the earliest examples of tokenisation can be seen in fractionalisation. In the context of corporate entities, the issue of shares is tokenisation.
Today, tokenisation is understood in the context of moving centralised fractionalisation infrastructure to distributed ledger on blockchain. Thus, tokenisation is enhancing transparency and liquidity in existing fractionalisation mechanisms.
Regulators across different jurisdictions have different approaches to tokenisation. Within the US, the securities laws come into play when we talk about tokenisation, and what they effectively do is slow down the tokenisation of assets like real estate and private equity by putting onerous compliance requirements on them. In Europe, the MiCA regulations provide a much clearer regulatory framework for tokenisation. They are also trying to harmonise rules across EU member states, potentially fostering growth in tokenisation. In the UAE, tokenisation falls under VARA regulations and is treated as securities issuance, and therefore, all securities laws are applicable to tokenised products.
Elisenda Fabrega, Manager and General Counsel at Brikken on how to overcome regulatory roadblocks in tokenisation.
According to Elisenda, one of the chief issues in tokenisation is understanding which laws are applicable to a company. If a company wants to tokenise real world assets such as financial instruments, then MIFID ii regulations are applicable to them. However, if a company wants to help other companies tokenise their assets, then the DORA regulation is applicable to them. It is also important to understand how to be compliant with AML laws.
Apart from complying with DORA and MIFID ii, it is essential to understand and comply with the local laws of the jurisdiction in which the company is registered and the local laws of the jurisdictions of their investors and clients. And that is why it is important to have mechanisms for KYC and KYB.
Sercan Koc, Founder & CEO of Genesis on where the regulatory landscape for RWAs is headed -
According to Sercan, this is just the beginning of tokenisation. Most of the tokenisation happening right now is for securities, especially company shares. One of the problems of the industry right now is that companies that are offering tokenised shares also want to add other utilities to the tokens. This makes it difficult to regulate such complex products.
The right approach in tokenisation would be to first categorise assets properly and have appropriate protocols for them. Then these protocols need to be integrated in smart contracts. For regulating assets under standard compliance laws, lawyers must work with developers.
We will be back with more episodes of RWA Chats. Stay tuned!
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