Challenges of regulating tokenisation of real-world assets (RWAs)

Technology tends to move a lot faster than laws could ever catch up to it, but in recent years we have seen a huge effort to make this happen. The DeFi ecosystem has been subject to several regulation proposals and laws, mostly in order to safeguard investors. DeFi is extremely broad and different sectors get regulated at different times.

Tokenisation of Real-World Assets

Regulating the tokenisation process of real-world assets is not an easy task, as it involves analyzing, altering and adapting several existing fields of law, depending on the asset involved, such as tax law, corporate and securities law, real estate law, regulatory and compliance orientations, anti-money laundering laws and banking and finance law, among others. Additionally, to regulate DeFi, it’s very important to understand the underlying technology and all its implications in the financial world — a task not always easy to accomplish for most legislators and regulators.

Tokenisation is the process of transforming a real-world asset into a digital token that represents the whole asset or parts of it. An asset that has real-world value can be transformed into a token, which can then be traded on a secondary market such as a cryptocurrency exchange or platform. Furthermore, tokenized assets can be used to unlock capital for a business and allow companies to fund themselves through alternative forms of financing via DeFi.

Jurisdictional Variation

These tokens are normally issued through STOs (Security Token Offerings). While some jurisdictions already have clear rules about the classification of security tokens, such as Switzerland, others still have no clear rules on how to qualify these tokens. For the Swiss Financial Market Supervisory Authority (FINMA), tokens which enable real-world assets to be traded fall under the category of “asset tokens” and are classified as securities under Swiss financial market law.

Depending on the value of the token offering, certain jurisdictions might require the publication of a prospectus and/or white paper. In Portugal, token offerings below the value of 5 million euros are not required to present a prospectus, as per the orientations of the Portuguese Securities Market Commission (CMVM).

Some jurisdictions also require STOs to comply with several KYC (Know Your Client) and AML (Anti-Money Laundering) requisites. In the USA, as the SEC (Securities and Exchange Commission) has classified security tokens as securities, they fall under the scope of KYC and AML regulations, meaning companies offering these tokens must ensure that they can verify the identity of their customers.

Certain countries impose DeFi companies to register with their central banks and/or with their securities and exchange commissions, in order to operate in that country and offer their decentralized finance services to investors and customers. These companies must have a legal team, either in-house or from a law firm, that can advise on these licensing and registration processes. Some regulators also impose the requirement of designating an authorized custodian bank for holding client’s assets. Currently, only a few banks are themselves registered as digital assets banks that can act as custodians, but this number should increase in the near future.

Protocols Working with Real-World Assets

The main regulatory authorities of the world will keep giving new orientations on the different aspects of DeFi, as to try to accompany the development of this ecosystem. It’s expected that in the near future more jurisdictions will be enacting laws and regulations to regulate the DeFi ecosystem and specifically on the different areas that affect the tokenisation of real-world assets. It’s very important that the different actors of this space voice their opinions and suggest proposals for security tokens standards, helping regulators and legislators adapt legislation that was designed with Web2 traditional securities in mind.

Defactor [Official] is a platform that is tokenizing real-world assets, with a focus on receivables, to unlock capital through DeFi for growing businesses. Defactor continues to be attentive to the changes in laws and regulations that might affect the DeFi space to ensure that platform users are protected and the real-world asset ecosystem can flourish. Defactor works closely with its legal team and with regulators to assess new platform developments that may be affected by regulation. Taking these actions assures that the platform is being fully compliant, so that Defactor can focus on propelling the real-world asset ecosystem forward!

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