March 1, 2021

Volume XI, Number 60

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March 01, 2021

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Regulatory Approaches to the Tokenisation of Assets

The Organisation for Economic Co-operation and Development (OECD) published a report on Regulatory Approaches to the Tokenisation of Assets (Jan. 2021).  The report notes that: “Policy makers in different jurisdictions have approached tokenisation in different ways, either by applying existing financial regulations to tokenised assets; by introducing new tailor-made regulatory frameworks or by adapting existing rules to accommodate the application of DLTs in tokenisation.” Some of the key takeaways from the report are:

  • Most jurisdictions with active tokenised markets adopt a technology-neutral approach to regulation for financial services, so the use of DLTs or other technology does not affect the way these regulators assess whether or not the ensuing financial product/service or activity falls within the regulatory perimeter or not, and by consequence, whether it is regulated or unregulated

  • Regulators across the world continue to issue guidance addressing perceived ambiguity by some market participants around the way tokenised asset activity is regulated and supervised in some jurisdictions

  • Potential gaps in the regulatory treatment of tokenisation may give rise to regulatory arbitrage opportunities and/or give rise to novel risks that may arise from the application of innovative technologies, such as DLTs

  • The innovative nature of DLTs and the novelty of their inherent characteristics give rise to unique issues and risks associated with asset tokenisation and may necessitate the attention of policy makers as part of their ongoing supervisory and/or regulatory work, whether to address such new risks and/or to consider, within their own regulatory frameworks, alternative approaches they believe are appropriate. Some of these issues are examined in this Section

  • Policymaking around asset tokenisation may face a number of potential challenges, including:

    • lack of common language around tokens;

    • the probabilistic nature of settlement finality in decentralised networks;

    • issues of location of the asset for tokens representing physical assets;

    • enforceability of regulation on participants in decentralised DLTs;

    • legal considerations, including around the enforceability of smart contracts;

    • governance and accountability issues related to the absence of a single established central authority in public DLT networks;

    • vulnerabilities around data protection and privacy particularly, including in the use of digital IDs;

    • operational issues (cyber-risk, hacking)

  • 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 protect investors and financial consumers and safeguard financial stability.

DLT technology and applications have come a long way, but it is still very early in the game. Many big institutional players remain on the sideline due to the regulatory uncertainty that exists. Once regulatory clarity is enhanced to the point that these institutions move from the sidelines and join the game, digital asset tokenization will become ubiquitous and will transform the world of finance. It is only a matter of time.

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Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 27
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About this Author

James Mattinson Blockchain Technology and Digital Currency Lawyer Sheppard Mullin Washington DC
Partner

Jim Gatto is a partner in the Intellectual Property Practice Group in the firm's Washington, D.C. office. He is also Co-Team Leader of the firm's Digital Media Industry and Social Media and Games Industry Teams, Blockchain Technology and Digital Currency team, and Team Leader of the firm's Open Source Team. 

Areas of Practice

Mr. Gatto leverages his unique combination of nearly 30 years of IP experience, business insights and attention to technology trends to help companies develop IP and other legal...

202.747.1945
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