Governments and regulatory bodies are introducing new blockchain regulatory frameworks for tokenized assets and securities.
Asset tokenisation has come a long way since its first mention a few decades ago. Not only has it found a place in mainstream finance and supply chain, but blockchain regulation is making strides towards standardization in the tokenization of assets.
In this article, we examine key findings from OECD’s report on Regulatory Approaches to the Tokenisation of Assets. New, tailored frameworks for tokenised assets and DLT-based markets are being rolled out to govern new decentralized networks and systems.
To facilitate the tokenisation of assets as a form of digital representation of real (physical) assets on distributed ledgers, or the issuance of traditional asset classes in tokenised form blockchain regulation is relying on some of the most prominent use-cases of DLTs in financial markets. As the implications for the functioning of markets and their participants are tremendous, policymaking with respect to asset tokenisation faces a number of challenges.
The innovative nature of DLTs presents certain challenges in dealing with or incorporating them into centralized structures
Many of these challenges remain unresolved as markets and products continue to evolve. Importantly, some of the challenges identified do not appear in all types of DLT networks and are very much dependent on the characteristics of the DLT used. To that end, regulators are looking for a way to distinguish between public permissionless and permissioned types of DLTs when discussing such challenges.
The approaches taken by different jurisdictions are not mutually exclusive; some regulators combine various elements of different policies approaches in the way they address asset tokenisation, participants of tokenised markets and risks arising in these markets.
Most jurisdictions with active tokenised markets adopt a technology-neutral approach to regulation for financial services, which they also apply to tokenised assets and their markets (e.g. European Commission, FCA, US regulators).
Under a technology-neutral principle, the regulatory perimeter and the subsequent treatment of financial products/services and activities are not influenced by the technological medium through which the product/service or activity is provided.
Industry participants, investors and financial consumers have argued that greater clarity around the regulatory and supervisory frameworks applied to tokenised assets and markets would assist the development of fair and sound markets for such instruments, even in the case of a technology-neutral approach to policymaking, where the same rules will apply to the same types of risk.
Policy makers in a number of jurisdictions have opted for specific, tailor-made rules for (parts of) tokenised asset markets, sometimes in spite of a general technology-neutral approach to financial regulation. Examples include France, Luxembourg, Malta, Switzerland, as well as Germany relative to the issuance of electronic (and DLT-based) securities.
As decentralised finance and markets for tokenised and crypto-assets develop and grow in size and importance, policies, regulations, supervision, and enforcement will remain important to ensure that the safeguards present in traditional financial markets will equally apply in DLT-based systems and networks with a view to protecting investors and financial consumers and safeguarding financial stability.