As the idea of tokenizing assets continues to gain momentum, companies must keep regulatory compliance in mind.
For many consumers, dealing with certain industries — including finance and real estate — is a frustrating experience due to the vast amount of paperwork and red tape that comes with carrying out a transaction. Not surprisingly, the crypto industry has a tech-forward solution: tokenization. By representing real-world assets such as real estate, art, stocks and bonds — essentially, anything — as tokens on a blockchain, transactional parties can more easily trade, transfer and manage assets. The percentage of tokens owned by an individual represents their percentage stake in the underlying asset.
It’s a simple enough solution — but as is often the case in the crypto industry, the complication comes with regulatory compliance. In the United States in particular, there is still little clarity around the tokenization of RWAs, and regulations are likely to emerge and evolve in coming years. Below, 12 members of Cointelegraph Innovation Circle share their tips for companies currently offering, or contemplating offering, an asset tokenization service.
Choose the right assets to tokenize
The key lies in choosing the right assets to tokenize. For example, understanding the main differences between physical assets — such as art, real estate and so on — and rights — shares, bonds and so on — is paramount. Ventures engaged in this challenge should consider duties concerning public offerings of their tokenized assets and the contractual architecture linking a token to the tokenized asset. – Sheraz Ahmed, STORM Partners
Continually monitor regulatory updates
Companies should ensure clear disclosures, implement rigorous Anti-Money Laundering and Know Your Customer measures, emphasize data security and privacy, and proactively engage with regulators. It is crucial for businesses to continually monitor regulatory updates, maintain adaptability and seek guidance from legal professionals who specialize in tokenized assets to maintain compliance and reduce potential risks. – Irina Litchfield, Lumeria
Know that tokenized assets may be classified as securities
As companies explore asset tokenization, they must keep regulatory compliance at the forefront. Specifically, they need to understand that tokenized assets, depending on their nature, may be classified as securities by regulatory bodies like the Securities and Exchange Commission. Thus, they should ensure proper registration, disclosure and compliance with securities laws to avoid legal repercussions. – Tomer Warschauer Nuni, Kryptomon
Don’t forego spot asset audits
Whether it’s a paper certificate, blockchain digital token or nonfungible token that tracks a real-world asset like a house, car, expensive watch, painting or supply chain item, there is still no replacement at the moment for a spot asset audit. Remember that an RWA token is just a claim of ownership. If the actual item is no longer with the seller or custodian, then you have a problem. – Zain Jaffer, Zain Ventures
Remember “temporal compliance”
Tokenized asset enterprises should remember “temporal compliance.” This entails following current regulations and anticipating future ones. Token regulation is changing, therefore enterprises need adaptable compliance solutions. It’s like playing 4D chess with regulatory bodies — anticipating movements while keeping an eye on the present. – Arvin Khamseh, SOLDOUT NFTs
Incorporate a flexible design
This digital frontier is new, and so is its legal landscape. When tokenizing assets, remember this: Regulatory compliance isn’t an afterthought, it’s your trusted guidepost. Embrace it from the inception. Incorporate a flexible design that can adapt to evolving laws and norms. Preemptive regulatory foresight will keep you from stumbling on compliance rocks while you cruise the tokenization tide. – Erki Koldits, OÜ Popspot
Integrate multiparty computation
For companies tokenizing assets, integrating multiparty computation can be a forward-thinking approach to regulatory compliance. MPC allows for secure data processing while keeping the data decentralized and private. As regulations evolve, focusing on advanced data security methods like MPC could position a tokenized asset favorably in terms of compliance and investor trust. – Tiago Serôdio, Partisia Blockchain
Ensure asset authenticity
Similar to the art world, crypto should adopt the rigorous establishment of provenance to ensure an asset authentically corresponds to its stated origin. If digital representations are said to equal those of real-world significance, they should be held to the same standard. This will help ensure bad actors face steep barriers when attempting to circulate fraudulent assets and insulate the value of this nascent class. – Oleksandr Lutskevych, CEX.IO
Say “no” to custody
RWAs are now becoming a trend. We need to ensure that we say “no” to custody. Any custodial solution (including ERC-regulated compliance specs that enforce authorized whitelist or counterparty checks) should be avoided at all costs. There are ways to solve legal issues, ensure secondary sales are carried out between known entities, and primary issuances are regulated — all without custody. – Jagdeep Sidhu, Syscoin Foundation
Ensure smart contracts are up to date
Companies should ensure their smart contracts for asset tokenization include accurate and up-to-date regulatory requirements, such as ownership restrictions or investor qualifications. For example, a real estate tokenization platform must program the smart contract to restrict property ownership to accredited investors only, maintaining compliance without manual oversight. – Vinita Rathi, Systango
Be diligent about white-labeled products
The tokenization of RWAs is becoming an attractive bridge between emerging blockchain technology and traditional finance, so there should be increased diligence around white-labeled products. Nothing is truly “one size fits all,” and that’s increasingly true in the world of tokenized assets, which encounter unique obstacles such as digital clones, tokens, fractional ownership and more. – Megan Nyvold, BingX
Know the difference between security tokens and utility tokens
Prioritize regulatory compliance. Companies need to understand the difference between security tokens versus utility tokens, as well as the specific regulations in the jurisdictions where they operate. Establish processes to monitor ongoing compliance, and expect regulatory requirements to change over time. To be safe, engage a legal team with expertise in securities and blockchain law. – Anthony Georgiades, Pastel Network
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.
