Markets
How to overcome regulatory hurdles in the asset tokenization market
In an exclusive interview with crypto.news, Bing Wang, Legal Director at BasedVC, delves into the complexities of real-world asset (RWA) tokenization and the regulatory challenges hindering its mass adoption.
Tokenization of real world assets contains an immense promise. It enables the digitization of tangible assets such as real estate, art, and commodities and has revolutionized the way these assets are traded and owned.
In April, research firm Messari Crypto Messari reported that the total value locked in the RWA market was close to $8 billion. According to a IBM ReportThe sector is expected to reach a value of $24 trillion by 2027, demonstrating significant interest from financial institutions eager to exploit the benefits of blockchain technology.
In reality, however, the path to mass adoption is fraught with obstacles, especially legal ones.
The global nature of the market adds to the challenge. Different jurisdictions have different regulations regarding securities, digital assets and property rights, which complicates compliance for issuers and investors.
Wang believes that navigating these regulatory complexities requires a solid strategy to ensure compliance with various international standards.
What regulatory reforms do you think are needed to support the widespread adoption of tokenized RWA?
Confusing or non-existent regulations can hinder the growth and adoption of RWA, potentially allowing bad actors to thrive. It is the government’s job to adopt clear rules to help provide clarity, protect investors and promote innovation in the industry. We believe regulators need to first clarify and define tokens. Too many confusing regulations regarding whether tokens are securities or commodities drive potential investors out of the market, avoiding unnecessary scrutiny and oversight. This will help define the regulatory requirements that apply to RWA. Secondly, regulators should also specify registration and licensing requirements for tokens and tokenization platforms. Participants will have clear guidelines on the standards they must adhere to along with their regulatory obligations. Regulators can also establish sandboxes to help test innovations in the tokenization industry. This will allow regulators to assess the risks involved before introducing industry-wide regulations. Regulatory reforms should also address establishing a dedicated mechanism for market oversight and supervision to protect investors and enforce regulations against bad actors.
Given the different regulatory landscapes in different jurisdictions, what strategies can tokenization platforms adopt to comply with different regulations around the world?
Legal compliance with international standards when issuing tokenized RWAs requires an assessment of the various jurisdictional laws that apply to securities in specific countries. The most important strategy is to study and conduct a thorough analysis of registration, licensing, disclosure requirements, investor KYC, and transaction reporting. After this analysis, tokenization platforms can then streamline their offerings to comply with the laws of each jurisdiction. This may include how the security is offered (via public offering or private placements) and what acceptable marketing methods can be used. Platforms should leverage technology solutions, such as blockchain-based compliance tools, to automate their chosen compliance methods across different jurisdictions. Smart contracts will eliminate the human-intensive work that lawyers will have to deal with. Education is also important for ongoing compliance. Investors, team members, and advisors should be kept up-to-date on international securities laws, especially for the jurisdictions in which their operations span. This will keep them updated on best practices and new trends in the RWA tokenization industry.
Given the crucial role of the US market in the global financial ecosystem, how might the SEC’s “regulation by enforcement” approach impact the global competitiveness of its tokenized RWA market?
The US market is central to the global financial debate. The approach taken by the US Securities and Exchange Commission (SEC) in recent years has been considered abysmal by most analysts. Multi-front legal battles tend to create negative sentiments about tokens and the platforms that help manage and list them. If regulators do not create a simplified guide to regulate RWAs, they will force most platforms to relocate their platforms to crypto-friendly jurisdictions such as South Korea, El Salvador, and the United Arab Emirates. Regulation through enforcement also weakens investor confidence, leading to reduced investment inflows and slower market growth. A slower market means limitations on global competitiveness.
What should you consider when selecting a blockchain platform that meets the legal and compliance requirements for tokenizing real-world assets?
Investors should always do their own research before adopting. However, investors should consider platforms that meet the jurisdictional requirements of the tokenization platform they intend to use. This will help them assess whether they meet the KYC and AML requirements that help protect them. Some tokenization platforms have privacy features that help with asset security and data confidentiality. Investors should evaluate the platform’s history of security breaches and its security protocols. Platform security is critical to protecting the integrity of tokenized assets and sensitive investor information. Investors may also want to consider the scalability and interoperability of the tokenization platform they choose to adopt. Support for other traditional financial system blockchains is important to facilitate seamless integration with external platforms and access to liquidity.
Finally, how can tokenization platforms increase transparency and trust among investors regarding the authenticity and backing of RWAs?
RWA tokenization facilitates the presentation of blockchain-based digital tokens that represent tangible physical assets (such as real estate, art, commodities, and intellectual property). At the heart of RWA tokenization is transparency. Using the decentralized and immutable nature of blockchain, tokenization platforms ensure that transactions are recorded and stored on the blockchain and visible to everyone on the network. This helps increase trust among all participants. Tokenization platforms enable fractional ownership of assets, allowing multiple investors to own smaller portions of high-value assets. The distributed ledger at the heart of the blockchain ensures that investors can see their ownership stake and vested rights in the most transparent way possible. Additionally, tokenization platforms can use cryptography to secure tokens, protect ownership, and reduce the incidence of fraud.