Tokenization of Financial Assets: Financial blockchain revolution
The financial world is at the edge of a revolution surpassing the emergence of online payment services. Technology underlying global changes is tokenization of assets using the blockchain solutions. Tokenization is a process of issue, followed by the circulation of rights on tangible and intangible assets in the form of tokens issued via digital systems based on the blockchain. Since the token is a digital asset, issue and circulation are done in a digital form.
A traditional way of issue and circulation, of stocks, for instance, is entails significant timeframes and costs. Tokenization on the blockchain platform can be done much faster and with minimal costs. Assets that have gone through tokenization process are brought to secondary market and can be sold and purchased right away. This offers great opportunities for the development of financial markets, cost reduction and simplification of the investment process. Investment can become cheaper, more accessible and secure which should attract new participants into the investment process.
Furthermore, tokenization is not limited to stocks, any asset can be tokenized.
Most major commodity exchanges started to work in a digital environment with standardized digital contracts and online payments. At the same time despite standardization legal registration of payments and transactions requires significant time funds and involvement of high-paid specialists.
Tokenization using a blockchain platform allows to abandon not only complex and expensive transaction registration, but also the exchange itself. Anyone registered in the blockchain can become an issuer of a legal asset one would like to tokenize.
So what is a token and how does the system that promises such revolutionary advantages works?
A token is a sign that proves the existence of a certain legal fact. For example, a coin, a bank note or promissory note are tokens proving that their legal owner has certain rights (rights on a certain amount of fiat money or the right to require some amount of money from a person who issued promissory note). Thus, tokenization is a binding to certain tangible assets with corresponding symbols (tokens) that allows to determine assets owner and to certify the fact of transfer of ownership, use and disposal right from one person to another.
Thanks to spreading blockchain technology token application has reached a new level allowing to tokenize any assets with tokenization being done in a secure system in a digital environment which significantly simplifies further token turnover in the secure environment.
Advantages of tokenization on the blockchain are as follows:
- Use of the universal blockchain protocol based on a continuous and interconnected chain of blocks that provides unification and universality of interactions for various market participants;
- High level of security due to inability to post-factum change the chain of blocks ;
- Token issuers can directly communicate with parties interested in tokens acquisition significantly reducing their expenditures;
- Anonymity due to authorization occurring with the user’s ID;
- Publicity since all operations are stored in blockchain with public access to data.
These advantages contributed to active development of tokenization which requires appropriate reflection in the legislation.
A lot of initiatives has recently been undertaken to legitimize token status, for example, State Duma of Russian Federation has held first hearings (and received positive conclusions from relevant committees) to the bills, aimed to determine future token status in the Russian jurisdiction :
1. Bill №424623-7 “On amendments to part one, two and four of the Civil Code of Russian Federation” (on digital rights)
2. Bill № 419059-7 “On digital financial assets”
3. Bill № 419090-7 “On attracting investments through investment platforms”
These bills determine token as a digital financial asset that’s issued by a legal entity or a person (token issuer) with the aim to attract funds and registered in the digital transaction registry. At the same time rights for tokenized assets are certified by a set of digital data (digital code or designation) existing in an information system that meets statutory characteristics of a decentralized information system, provided that information technologies and technical means of that information system provide a person that has unique access to that digital code or designation an opportunity to read the description of the corresponding object of civil rights at any point of time. Digital code or designation are recognized as digital right and can be confiscated or transferred from one person to another under the same conditions (article 129 of the Civil Code) as the assets, rights on which they certify.
Following the logic of these bills, the token on the blockchain platform can certify the token holder ownership of the tokenized asset. The range of assets subject to tokenization is wide and, in fact, not limited. For example, remaining bonuses, invoices for communication services or for housing and utility services, digital money where the token is a mean to certify the ownership of corresponding payment unit transferred to the blockchain and as well as many other assets, including securities
As asset tokenization on the blockchain platform is not tied to any particular market, therefore legislators should look at the situation in other jurisdictions, and, first of all, the jurisdiction of the USA as the largest market with the highest potential for tokenization.
Widely known SEC conclusion about blockchain platform theDAO implemented on Ethereum Virtual Machine indicates that theDAO tokens presented as digital assets within the frames of ICO and during the second sale are recognized as securities.
Thus, an opportunity for tokenization of securities conducted within initial offering and then further free sale on the secondary market is recognized.
There’s a question, however, how one distinguishes tokenized securities from other tokenized assets. The most universal and popular way to verify any asset (including digital asset, token), is the way acknowledged by the US Securities and Exchanges Commission. This test (Howey Test) is proposed by the Supreme Court of the USA and provides for a token to be recognized as security if a token meets the following:
- A token is issued with the aim to invest money;
- Investment is made with the expectation to gain profit;
- Investment is made in a joint venture;
- Any profit is a result of the activity of the person who offered a contract or a third party and not the token holder himself.
Active development of asset tokenization, including securities on the blockchain, is the near future of financial markets that will completely change the existing system of commodity-money relations. Thanks to the blockchain, interactions between market participants can be simplified and unified, costs can be reduced due to lack of intermediaries and security levels can be increased. Such global changes require significant changes in the current legislative base. A number of countries are making great efforts in this direction which indicates the importance of and the demand for tokenization technology. At the same time development of regulatory base should rely on global experience, particularly coming from the US, since the unification of legislative approaches to tokenization will allow token issuers and tokenization system operators to successfully act on the biggest global markets.