[By Yash Tiwari]
The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.
Introduction: Asset Tokenisation
One of the most exciting applications of blockchain technology is digital asset tokenization, which is the act of representing an asset’s ownership rights into digital tokens and storing them on a blockchain. Tokens can serve as digital certificates of ownership in these situations, representing nearly any kind of asset, including digital, physical, fungible, and non-fungible ones. Because assets are kept on a blockchain, owners are able to keep custody of them.
Through increased asset utility and composability, this approach has the potential to completely change the global financial landscape. Recognising the potential advantages of asset tokenization, regulators worldwide are putting effort into creating frameworks that would safeguard investors from harm while encouraging innovation and industry expansion. The article covers India’s early steps in asset tokenization. It highlights initiatives taken by entities like RBI, SEBI, and IFSCA. It also compares advanced global approaches and suggests a way forward for India.
Early Stages of Development in India
India is only now starting to explore the world of asset tokenization, as the nation makes the first moves in utilising this innovative financial technology. Despite being in the early stages of development, India is showing signs of rising interest in incorporating tokenization and blockchain technology into its economic structure with these initiatives:
RBI-
Launched on November 1, 2022, the RBI’s wholesale Central Bank Digital Currency (CBDC) pilot project focuses more on technical testing than transaction volume as it explores asset, bond, and security tokenization, including customer-held fixed deposits. The Digital Rupee-Wholesale (e-W) program settles secondary market involving government securities. In addition, Peer-to-peer (P2P) & Peer-to-Merchant (P2M) transactions are covered by the RBI’s December 2022 retail CBDC trial, which promotes a CBDC ecosystem.
Deputy Governor T Rabi Sankar revealed during the 19th Banking Technology Conference that the RBI is considering the idea of tokenizing assets and government bonds, with a greater emphasis on technological testing than transaction volume.
SEBI’s Perspective on Security Tokens-
SEBI plans to regulate security tokens representing financial securities, promoting issuance and trading. Blockchains can democratize markets through fractional ownership. Fractional ownership is when the cost of an asset or property is split among individuals, each getting a share. It helps an individual co-own a high-value property with multiple investors. In its consultation paper titled “Regulatory Framework for Micro, Small and Medium REITs (MSM REITs),” released on May 12, 2023, SEBI addresses firms that facilitate fractional real estate ownership. In order to promote asset democratisation and market participation, SEBI established a legal framework for fractional real estate ownership at its 203rd board meeting on November 25, 2023.
International Financial Services Centres Authority (IFSCA)-
On September 12, 2023, the Indian government’s statutory authority, the International Financial Services Centres Authority (IFSCA), formed a committee to create asset tokenization regulations and assess the legality of smart contracts. Establishing a regulatory framework expressly for the tokenization of tangible, real-world assets is a major first for any authority.
GIFT City– The goal of Gift City’s Expert Committee on Asset Tokenization is to establish thorough rules for tokenizing both tangible and intangible assets, evaluate the validity of smart contracts, and provide a strong framework for managing risks associated with digital tokens. In order to ensure responsible use and integration within the Gift City framework, the committee will also investigate the role of digital custodians in the asset tokenization paradigm and develop operational guidelines to support their functions.
This broad scope emphasises the committee’s critical role in establishing Gift City’s asset tokenization regulations and operational framework. The usage of blockchain creation and tokenization of digital assets will be allowed in GIFT City, as approved by the IFSC Authority. Although real estate will be the main focus initially, comfort goods and precious metals are also planned.
Telangana Government-
The Telangana government created a Blockchain District with the goal of acting as a cooperative platform for the collaboration of industry and academia. The founding members of the Blockchain District are the Telangana government, IIIT-Hyderabad, Tech Mahindra, and the Centre for Development of Advanced Computing (CDAC). A Technical Guidance Note on Asset Tokenization has also been released by the Telangana government’s Department of Information Technology, Electronics, and Communications. The document details the technical nuances of tokenization, proposes standards, and outlines strategies for businesses or startups initiating asset tokenization.
Tokenization across key Jurisdictions
While India has begun to explore asset tokenization, its progress remains in the early stages. In contrast, leading jurisdictions like Singapore, the United States, UAE, and Switzerland are actively shaping the tokenization landscape through their legislative efforts and collaborative projects.
In Singapore, the Monetary Authority of Singapore (MAS) examines the structure and features of a digital token, including its associated rights, to determine if it qualifies as a capital markets product under the Section 2(1) of the Securities and Futures Act. On June 27, 2024, MAS declared the expansion of programmes aimed at scaling asset tokenization for financial services. This involves collaborating with international trade associations and banking establishments to promote standard asset tokenization protocols in the domains of fixed income, foreign exchange, and asset & wealth management. Together with global financial institutions, MAS announced the successful conclusion of the Global Layer One (GL1) initiative’s first phase. The group also revealed plans to create market norms, rules, and guiding principles for the fundamental digital infrastructure that would support tokenized assets. Under Project Guardian, MAS has collaborated with 24 financial institutions to test out potential use cases for asset tokenization over the last two years.
When it comes to asset tokenization regulation, the US has adopted a more cautious stance. The regulatory oversight over the issuance or resale of tokens and digital assets classified as securities, is generally within the purview of the Securities Exchange Commission (SEC), although it has not released any official guidance on the subject. The regulator has been actively involved in negotiations with industry partners and has set up a sandbox environment for testing new tokenization schemes. The Committee on Payments and Market Infrastructures, and the Financial Stability Board both have the SEC as a member. These groups are attempting to create international guidelines for the control of digital assets.
The Securities and Commodities Authority (SCA), which governs and oversees the securities and commodities markets in the United Arab Emirates (UAE), has established a comprehensive regulatory framework for “asset tokenization.” Companies that invest in or issue tokenized assets are subject to the same rules as those governing traditional securities. The offering, issuance, listing, marketing, and trading of digital assets and associated financial services in the United Arab Emirates is governed by the SCA’s ‘SCA Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation‘ (CAAR), adopted in November 2020. Further regulating crypto assets is ‘Administrative Decision No. (11) of 2021 concerning Guidance for Crypto Asset Regulations’ (Crypto Assets Guidance 2021) was issued in March of 2021. Tokenizing real estate in the UAE is gaining popularity, leading to the creation of tokenized real estate investment trusts (REITs) and other investment vehicles.
On February 1, 2021, the Swiss Digital Ledger Technology Act went into effect, granting tokenized securities the same legal standing as conventional assets when they are traded on a blockchain. the state bank of the Swiss Canton of Berne (Kantonalbank), launched a tokenized asset digital marketplace on December 1, 2021. The blockchain-powered marketplace known as “SME|X” caters to small and medium-sized businesses. The entire process, from share issuance to tokenized asset settlement, trading, and storage, is covered by this offering.
Tokenization: India’s Strategy
Lessons from these advanced jurisdictions would help India greatly enhance its endeavor of asset tokenization. The most important point for the implementation is a clear and comprehensive regulatory framework. For instance, Singapore has developed a partnership between the Monetary Authority of Singapore (MAS) and international trade associations which has allowed them to standardize protocols on behalf of all participants- this could be a good model for India to adopt so that it can have uniform regulations nationally and at the same time facilitate global cooperation. India could experiment with sandboxes and pilot programs to refine tokenization schemes. These can be testbeds- safe experimental environments, which ensure control from a regulatory point of view. In addition, Indian regulators such as SEBI and RBI need to cooperate closely with financial and technology companies in order to come up with their own guidelines for the digitization of assets.
The UAE’s framework, whereby conventional securities regulations apply to tokenized assets, can also be a model for India. This can be an all-inclusive legislation to protect investors from risks; hence, one of the models that India could consider. In creating an atmosphere where investors can have trust and become involved in the market, it is upon India to ensure laws clearly provide the legal status of tokenized assets with efficient enforceability. Other Indian initiatives-like the Blockchain District in Telangana or the expert committee in GIFT City should focus on stimulating innovation and fruitful collaboration between business, academia, and government. Appropriate legislation, use of sandbox environments, and ensuring legal recognition and promoting collaboration can help drive innovation and economic growth by building the asset tokenisation ecosystem in India.
Way forward
Tokenization adoption is mostly being driven by institutional investor interest, clear regulations, and a strong financial infrastructure. Although the regulatory environment surrounding the tokenization of digital assets is constantly changing, a more unified approach to regulation is becoming increasingly evident. This is good news for the sector since it would provide investors and businesses with more assurance and facilitate the growth of a worldwide market for tokenized assets.
India would need to adopt a sophisticated approach involving a number of calculated steps to seamlessly integrate physical assets into the digital sphere while guaranteeing regulatory compliance, investor protection, and legal compliance, as can be seen from the jurisdictions mentioned above, if similar laws were to be developed. A complex methodology and a number of calculated processes are needed to complete the process of integrating a legal compliance regime for the regulation of tokenization of RWAs. These steps all work together to ensure the smooth integration of physical and digital assets. As the regulatory landscape matures, we can expect to see a surge in activity in the asset tokenization space, as businesses and investors take advantage of the opportunities that this new technology offers.