Since I started my company (ScanSan Properties) many people have asked me for info, tips, advice, and clarity on what to do and how to start in the world of Real Asset Tokenization (bear in mind Debt is classified as a Liability, not an Asset, but....)
If you know me already you might know that I'm here to leave a LEGACY and this is part of who I am, therefore I will use this medium to express myself and to spread info about this topic (the subject is very long and I will try to keep it short and sweet if you would like more info just ask me)
First and foremost Real Asset Tokenization is the process of creating digital tokens that represent ownership rights in a tangible asset, such as real estate, commodities, precious metals, or artwork. The tokens are typically created on a blockchain platform, providing investors with a secure, transparent, and decentralized way to invest in real assets.
(...Hold on because this is just the beginning...)
So up till now the most important piece is "creating digital tokens that represent ownership right"!
The next step is very simple...
Now that we have created the digital representation of the asset we can include or "add" information about the asset.
Information like: the asset's location, physical characteristics, ownership history, and any other relevant information.
This information is then stored on a blockchain platform that allows for the creation and management of digital tokens that represent ownership rights in the asset.
A few benefits of the above can be:
Fractional ownership
Liquidity
Transparency
Security
Diversification
Now you can see how something completely abstract like Distributed Ledger (Blockchain) and Digital Asset Contract (a type of smart contract) has a real connection with tangible objects that is tangible like Real Estate, Art, Farm, or Gold.
But wait you mentioned Debts as well, how that is going to work? As far as we know Debts is a Liabilities it is not Asset (well it depends on which perspective you see things)
Tokenizing Debts
Tokenizing debts is an innovative way to unlock new opportunities for investors and issuers alike. By using blockchain technology, debts can be converted into digital tokens that can be traded on secure and transparent platforms, allowing for greater efficiency and liquidity in the market.
If you specifically want to read about Mortgages have a look at our previous blog post:
Mortgage with Stable Coins: https://scansanproperties.com/blog/f/tokenizing-mortgages-w-stablecoins-a-new-frontier-in-real-estate
Mortgages and Fractional Ownership: https://scansanproperties.com/blog/f/can-distributed-ledger-enable-fractional-ownership-of-mortgages
I will start with one important consideration when tokenizing debts: You have to follow regulatory compliance. This means that you are required to adhere to the rules and regulations set forth by the governing bodies in your industry or profession. This is important for ensuring that you operate within the bounds of the law and avoid any legal or financial consequences that may arise from noncompliance.
In the UK, the Financial Conduct Authority (FCA) regulates tokenized securities, and firms that operate in this space are required to be authorized by the FCA.
One way to comply with FCA regulations while tokenizing debts is by using a Special Purpose Vehicle (SPV).
An SPV is a legal entity created for a specific purpose or transaction, which can be used to isolate the risks associated with the debt instrument and provide a clear legal structure for investors while ensuring compliance with FCA regulations. Now pay attention here: The SPV can be authorized and regulated by the FCA and can provide a clear legal structure for investors and issuers. In the context of tokenizing debts, an SPV can be used as the issuer of the debt instrument, and the debt can be tokenized and traded on a blockchain platform.
Here are some key steps that can be taken to comply with FCA regulations while tokenizing debts with an SPV:
Establish an authorized and regulated SPV: To comply with FCA regulations, the SPV should be authorized and regulated by the FCA. This involves submitting an application to the FCA and meeting its regulatory requirements.
Conduct a thorough due diligence process: Before creating the SPV, it is important to conduct a thorough due diligence process to ensure that the debt instrument is suitable for tokenization and that the SPV structure is appropriate for the particular transaction. This may involve engaging legal and financial advisors to provide guidance on the process.
Design the tokenization structure: The tokenization structure should be designed in a way that complies with FCA regulations, and that provides investors with the necessary disclosures and protections. This may involve creating a whitepaper that outlines the terms and conditions of the tokenized debt instrument and providing investors with a prospectus that complies with FCA regulations.
Ensure compliance with AML and KYC regulations: To comply with FCA regulations, the SPV should have robust AML and KYC procedures in place to prevent money laundering and terrorist financing. This may involve conducting thorough background checks on investors and monitoring their transactions for suspicious activity.
Provide ongoing reporting and disclosures: To comply with FCA regulations, the SPV should provide ongoing reporting and disclosures to investors, including regular financial statements and updates on the performance of the debt instrument. This can help ensure that investors are well-informed and can make informed decisions about their investments.
Tokenizing debts with an SPV can be a powerful way to unlock new opportunities for investors and issuers while complying with FCA regulations and it can be a complex process.
By complying with FCA regulations and following best practices for tokenization, firms can create a secure and transparent platform for trading tokenized debts, and provide investors with a clear legal structure for their investments.
As the use of blockchain technology continues to grow, tokenizing debts with an SPV it can become a popular solution for unlocking new investment opportunities.
This might be not in the near future but it can be a future way where we will see people or institutions working using financial debts to move funds around.
Is this perhaps connected with CBDC?
CDBC stands for Central Bank Digital Currency.
I will talk more about CDBC next week, stay tuned.
Alessio
Disclaimer: The information provided on this website/blog is for general informational purposes only and should not be considered financial advice. The content of this website/blog may not be suitable for all investors and traders. Any investment or trading decisions should be made after consulting with a professional financial advisor and considering your personal financial situation and goals. We do not guarantee the accuracy, completeness, or reliability of the information provided on this website/blog, and we are not responsible for any losses or damages incurred from the use of this information.
If you want to know what the Gov has released so far you can find more info here:
Digital Asset: https://www.lawcom.gov.uk/project/digital-assets/
Smart Contract: https://www.lawcom.gov.uk/project/smart-contracts/
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