A blockchain, or distributed ledger, digitally represents tokens as entities. The technology in question possesses the capacity to revolutionize an extensive range of economic activities, encompassing both conventional commercial transactions and intricate financial undertakings. This article examines conventional legal instruments in the field of commercial law. It further demonstrates the appropriate legal frameworks governing their functioning, such as elements of securities law and consumer protection law for RWA tokenization.
Legal Systems Regarding RWA Tokenization
Securities Law
The vast majority of asset-backed tokens qualify as securities. Assets primarily gain monetary value through income generation, and tokens that yield even a slight profit are usually considered securities. Among other provisions, this legislation requires investors to receive information prior to selling tokens and to obtain registration.
Law of Financial Marketplaces
Authorization is frequently required of entities that deal in securities and offer associated services by competent authorities. Financial market legislation establishes the authorization regime along with necessary licenses.
Commercial Law
RWA tokens frequently serve as bonds or shares. Corporate law outlines the rights of the owners of such assets. The company that issues tokens selects a jurisdiction based on convenience.
Legal Regulations Governing Virtual Assets
Since RWA tokens are virtual assets, virtual asset laws may require sanction, and entities that facilitate transactions may need to register as virtual asset providers of service.
AML Regulations
The responsibility of safeguarding the integrity and openness of financial markets is collective. Every organization involved, including issuers and platforms, must implement KYC/AML programs to ensure the use of neither illegal funds nor RWA income for criminal activities.
Tax Systems
The design of the structure must incorporate the obligation of both issuers and investors to pay taxes. Considering the prevalence of cross-border issuances, the concerns of double taxation and taxes withheld assume particular significance as they have the potential to consume substantial profits. As an illustration, Switzerland levies a 35% withholding tax on dividends received by non-citizens (subject to reimbursements), thereby reducing returns from 10% above the market average to 6.5% below the market average.
Consumer Safety
Potentially applicable to utility tokens, which encourage consumption, is consumer protection legislation. However, the authors have not faced any lawsuits based on these laws, making this a more theoretical consideration at this time.
Platforms and RWA issuers that collect user data have a duty to protect it.
Legal Aspects Related to RWA Tokenization – Diamonds
When tokenizing diamonds, it’s important to consider several legal factors:
Regulation of Securities
Depending on the token offering’s structure, applicable laws regarding securities may apply. In regard to diamond tokens, regulators must establish unequivocally whether they signify investment contracts or merely ownership certificates.
KYC and Anti-Money Laundering (AML): “Know Your Customer”
Strict AML/KYC protocols are essential for the prevention of illegal activities. The establishment of regulations that guarantee transparency regarding the origin and ownership history of diamonds is imperative.
Consumer Safeguarding
The protection of investors must take precedence. Critical are transparent disclosures regarding token risks and the value of the underlying diamond.
Grading and Valuation of Diamonds
Standardized and dependable diamond grading and valuation procedures are indispensable for determining the value of tokens. Collaboration between regulatory bodies and established diamond grading institutions may be necessary.
Storage and Custody
Secure storage solutions are required for tangible diamonds that are associated with tokens. Legal frameworks should delineate the allocation of liabilities and the designated entity responsible for diamond protection.
Taxation
Clarification is required regarding the tax consequences associated with trading diamond tokens. Regulations should govern the imposition of capital gains taxes and other duties on tokenized diamond transactions.
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Importance of the Right Selection of a Blockchain for RWA Tokenization
Issuers who are considering undertaking a RWA tokenization initiative ought to meticulously evaluate their legal obligations before making a decision regarding the underlying blockchain. With regard to blockchains, variations exist.
Smart contracts on blockchains exhibit diverse functionalities. Concerning prospective blockchains, issuers ought to take into account the capabilities and constraints of their smart contract platform. It is imperative to conduct an evaluation regarding the capacity of the smart contracts to fulfill the legal obligations of the tokenization work, encompassing matters such as data protection, privacy, and transfer mechanisms and restrictions. It is imperative that the smart contracts possess legal enforceability and conform to the regulations of the relevant jurisdictions.
Certain issuers of tokenized RWAs opt to utilize permissionless blockchain solutions while coordinating the sale of the assets through registered securities dealers, such as exempt market dealers, in accordance with prospectus exemptions. This can be effective because it encourages compliance with securities and AML laws and transfers certain legal responsibilities to a service provider.
The issuer’s technology preferences, liquidity, market conditions, compliance obligations, and business nature will ultimately determine the optimal blockchain for an RWA token issuer.
To Conclude
The implementation of RWA tokenization for tangible assets offers promising prospects for enhanced liquidity and fractional ownership. Nevertheless, it is critical that you understand the legal ramifications associated with this procedure. Privacy, consumer, and data protection, regulatory compliance, ownership and exchange of tokens, and investor protection are among the most important legal considerations that must be thoroughly addressed. To ensure a tokenization process that is compliant with the law and blockchain technology, it is advisable to enlist the services of legal professionals who possess such expertise.
