Tokenization dynamics

Understanding tokenization of securities requires the knowledge of Blockchain, smart contracts but also Legal, Finance and Economic dynamics.

  • How do we really imbed rights?
  • How to distinguish various types of rights?
  • How do you model the dynamics? How do you integrate security management and KYC/AML requirements across different jurisdictions? Integration between various actors (custodian, exchanges)?
  • How to make sure that you onboard an “Eligible” Investor for the kind of financial products that you offer?

In Finance, the “Securitisation” of an asset follows a specific footstep

Usually the owner of the asset(s) creates a legal structure to pool the underlying assets to avoid counter-party risks like the risk of default or bankruptcy. This legal structure holding the asset(s) is then cut into several entitlements. Those “tranches” are the securities that are issued and backed by the value of the asset, usually correlated to the cash flow (possibly) generated. Finally, the securities are sold to investors in exchange for cash, as well as the rights entitled within the contract issue by the legal structure (it seems easy, right?).

However, the process can take up to a year (meaning, it’s very expensive). It mainly includes due diligence and asymmetric agreements between several parties. The process lacks transparency.

How does it work with Tokenization?

“Tokenization” includes a set of smart contracts that govern the behavior of the previous tranches that are made Tokens. The programmability and possible modularity of such tokens give more incentive to the business logic by automating features as transactions or asset price calculation. This participate to decrease the manual settlements and risk of default.

Thus, various legal issues allowed by local laws need to be considered such as the ability to register/store digitally the rights to an asset on the blockchain (Sapin 2 law in France), the ability to transfer those rights via the Blockchain (Pacte Law in France) and finally those rights embedded within the token must be exchangeable for Value (MIFID II: Alternative exchanges in EU).

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