A new industry in search of regulatory clarity

Michael Juul Rugaard, CEO of The Tokenizer reveals for The Paypers’ readers the ABC of asset tokenisation industry and security tokens

Most of The Paypers’ readers probably associate the concept of tokenisation with payment tokenisation. Conceptual confusion is unfortunate but sometimes hard to avoid, and in this case, a new tokenisation industry is currently emerging worldwide, next to the already established payment tokenisation industry. This new industry deals with asset tokenisation, and so does this article.

The asset tokenisation industry has set out to revolutionise capital markets by representing a wide range of asset types through pieces of computer code called tokens. Tokens on a blockchain can represent shares, bonds, derivatives, and all kinds of real-world assets. Companies, organisations, and asset owners can use Security Token Offerings - STOs - as alternatives to traditional means of raising capital.

The potential of asset tokenisation is enormous, and the industry is expected to become a global trillion-dollar business within the next 5-10 years. However, despite these promising prospects, regulatory uncertainty and lack of a regulatory overview across jurisdictions threaten to slow down the development. The challenge here is that since security tokens are real financial instruments, genuine securities, all the parties operating in the space need to be aware to comply with laws and regulations. But since this is a brand new area, many jurisdictions still lack regulatory clarity.

In July 2021, The Tokenizer, together with the Office for Financial Market Innovation (SFI), a part of the government of Liechtenstein, published a comprehensive report on the core regulatory challenges for the industry of asset tokenisation and security tokens. The report was a comparative regulatory analysis of nine countries - Austria, Canada, Germany, Hong Kong, Liechtenstein, Malta, Singapore, Switzerland, and the UK - all known as token economic frontrunners to understand the current status, challenges, and opportunities for players of the security token industry in these countries.

The overall very positive finding of the report was that although the industry of security tokens is still very young and the Security Token Offering (STO) concept is still untested in most jurisdictions worldwide, it is possible to locate a group of progressive countries in which security tokens and STOs are accepted and legally covered by national law.

In all nine countries, it is even possible to conduct an STO without producing a full prospectus, provided that the STO aims to raise less than a certain amount in total. A majority of the countries amend existing laws and legal frameworks to include security tokens. Like most European countries, they referred to security tokens as financial instruments regulated by the EU directive MiFID ll.

However, even among this group of assumed progressive countries, the degree of friendliness towards crypto in general and the security token industry, in particular, differs relatively much. The most innovative countries have a sincere interest in and desire to be far-sighted and at the forefront of development. In contrast, the least progressive countries, more than anything, are interested in controlling what is going on in the digital assets space and make sure that the new developments within the token economy industry do not represent a threat to the status quo and the reputation of the country - Malta is perhaps the best example of this among the nine countries.

When it comes to the more practical side of things in terms of finding relevant information and support, setting up a company, opening a bank account, conducting an STO, getting a prospectus approved by the local FSA (Financial Supervisory Authority), all of this is possible in all of the participating countries. Nevertheless, the level of easiness, convenience, and costs differ significantly.

The numbers of STOs are still low in most countries, including the nine countries participating in the report. However, even though it’s still early days in the security token industry, the very positive finding is, as mentioned, that a strong group of countries are highly enthusiastic on behalf of the security token industry. Also, there is little doubt that this group will grow a lot soon.

There are lots of statements from leading experts to choose from about the promising future of security tokens. One comes from Jonathan Larsen, Chief Innovation Officer of Ping An Group, declaring that:

‘Tokenisation is a really massive trend. That’s a much bigger story than cryptocurrencies, initial coin offerings, and even blockchain.’

Another good example comes from German Plutoneo, in this case focusing on the European numbers:

‘The market volume in Europe will be around 918 billion Euro in 2026, covering all kinds of security tokens. For the first time, security tokens will surpass cryptocurrencies by then. Despite the strong growth within the next few years, the tokenised market will still cover only a small portion of the total market, which is expected to grow 259 trillion euro in Europe. The tokenisation share will be 0.35%, indicating that the tokenised market will still be pre-matured with attractive growth rates beyond 2026.’

However, a certain level of regulatory clarity is a prerequisite for these estimates to be met. That is why The Tokenizer is developing The RegRadar with the sole purpose of collecting data and keeping track of all regulatory news and changes across jurisdictions worldwide. But obviously, more initiatives are needed, and we cannot recommend enough that governments, FSAs, academia, financial institutions, companies, and organisations start paying close attention to the security token approach of countries such as Singapore, Austria, Switzerland, Hong Kong, and Liechtenstein.  

Michael Juul Rugaard

Michael is a founding partner of Norfico and the editor-in-chief of The Tokenizer. Michael has more than fifteen years of experience as a strategic communication adviser, author and editor of magazines, books, articles, and white papers.

In Norfico Michael has been responsible for strategic communication advice, editorial services and content providing for a number of clients within banking, fintech, blockchain and crypto.

Michael holds a master’s degree in communication, language and literature from the Department of Scandinavian Studies and Linguistics, University of Copenhagen.

About The Tokenizer

The Tokenizer is the leading platform for news and data related to the tokenisation of real-world assets and the token economy. Visit https://thetokenizer.io