The tokenised asset dream will fail without a uniform global legal framework, according to a new CFA Institute paper.
Among a raft of recommendations, the CFA report says governments must define the legal status of “digital tokens”, align regulations across jurisdictions and lump the assets under existing property rights.
Trans-international digital asset rules should also aim to encourage network “interoperability” and stronger regulatory oversight, the study says.
Authored by Giovanni Bandi, Oliver Fines and Urav Soni, ‘An investment perspective on tokenization – part II’ suggests the current mish-mash of laws and regulations governing the nascent sector require an immediate overhaul under globally agreed tinkering.
Bandi et al delve into legal approaches to digital assets in various jurisdictions including the US, UK, Europe and Singapore.
Tokenisation has been touted as the next wave in finance using distributed ledger technology (aka blockchain) to bring step-change administrative efficiencies while broadening access to asset classes.
Several real-world examples, including a new fund-converter launched by Calastone last month, already showcase the potential of tokenisation in asset management but ‘scaling’ the technology globally remains problematic.
“Digital finance is a complex, controversial, and fast-moving field that is challenging policy and regulatory frameworks. Several jurisdictions are taking the lead, but no single market can deliver all the reforms required to scale tokenized finance. Meaningful international co-ordination and thoughtful legal reform will be essential to unlock the market’s full potential,” Fines said in a statement.
“Distributed ledger technology offers new models of investment and asset transfer, but it also raises fundamental questions around digital property rights and cross-border legal enforceability. Our research underscores the urgent need for international consensus on the recognition of ownership rights in the digital space.”
In ‘An investment perspective on tokenization – part I’ published this January, the CFA outlines how the technology works as well as its potential pros and cons.
“We consider the benefits and limitations of tokenization regarding clearing and settlement, transparency and compliance, and fractionalization and market access,” the report says. “The limitations and challenges we highlight include security risks, regulatory challenges, market infrastructure, and limited retail investor access to private markets.”
Possible nightmare scenarios include “investor protection issues arising from retail access to illiquid and sophisticated investments”.