Tokenization Support

Tokenization is a rapidly developing technology that is transforming traditional industries and opening new horizons for businesses.

• According to recent research by P&S Intelligence, the tokenization industry is showing impressive growth. It is expected that its volume will more than triple over the next seven years, reaching $12.6 billion by 2030.

With the rapid development of fintech and blockchain sectors, the issue of legal support is becoming increasingly critical. The legal aspects of issuing and implementing digital assets require a professional approach, which is followed by the team of the (AA) Lawrange law firm.

This article provides a comprehensive analysis of the legal aspects of tokenization, starting with the definition of token categories and ending with an examination of the best jurisdictions for launching such projects. But let’s begin with the basics, namely, what is tokenization?

What is Tokenization?

Tokenization is a revolutionary process that transfers traditional assets, such as real estate, securities, or even works of art, into the digital realm. The essence is that ownership rights to an asset are represented as a unique digital token, which is recorded in a secure and transparent system – the blockchain.

To understand how this works, let’s imagine that you are the owner of a share in commercial real estate. In tokenization, this share would be represented as a digital token. Each such digital asset contains information about your share of ownership and is recorded on the blockchain. This means you can easily buy, sell, or transfer your share to others without complex bureaucratic procedures.

However, the rights of the token holder depend on the type of asset and the terms of its issuance. If it pertains to real estate (as in the example above), the owner has the right to participate in property management and receive rental income. If it involves the tokenization of a work of art, you will have exclusive rights to copy and sell it.

Advantages of Tokenization

Portfolio diversification has become easier thanks to tokenization. Now, it is possible to own shares in various assets, from real estate to artworks, without being tied to large sums of money. However, tokenization offers much more than just diversification. Let’s explore how this technology is changing the investment landscape.

Increased Liquidity

Tokenization transforms illiquid assets, such as real estate, into easily tradable tokens. Previously, selling a share in real estate, for example, could take months, but now it can be done in just a few minutes. Digital assets are freely traded on exchanges, making it more convenient for investors to buy and sell shares in these assets.

Access to Global Markets

Since tokenized assets are not tied to a specific geographic location, investors from anywhere in the world can access a wide range of assets (from real estate in New York to artwork in Paris).

Moreover, the blockchain technology underlying tokenization ensures continuous market operations. This means that tokens can be bought or sold at any time, regardless of time zones.

Reduced Transaction Costs

Unlike traditional financial institutions, decentralized exchanges and platforms for digital assets generally have lower fees. This has become possible due to process automation and the elimination of intermediaries.

Smart contracts, which underpin many token operations, automatically execute agreements, eliminating the human factor and the associated risks. As a result, operational costs are reduced, and transactions are expedited.

Transparency and Security

Each token transaction is recorded on the blockchain as a new block. Once the block is added, altering information in previous blocks becomes virtually impossible. As a result, a reliable and immutable historical ledger of all operations is created, which, in turn, is public and accessible for verification by anyone.

It is important to note that the blockchain is not controlled by a central authority. Data is distributed across multiple computers in the network, making the system more resistant to hacker attacks and failures.

Access to New Assets

Tokenization enables investment in a wide variety of assets:

• Traditional assets (real estate, securities, fractional shares in companies);
• New assets (physical items such as artwork, precious metals; intellectual property like patents, copyrights, trademarks, etc.).

The process of tokenization makes investments more flexible and allows for the creation of portfolios that precisely align with the individual goals and preferences of investors. For example, you can now become a co-owner of a collectible car, invest in promising startups, or even in individual projects within the decentralized finance (DeFi) sector.

What are Tokenized Assets and Their Characteristics

Tokenized assets are digital representations of real or virtual assets recorded on the blockchain as cryptographic tokens. They certify ownership rights or other rights to the underlying asset, such as receiving dividends, voting, or utilization.

The value of tokenized assets is directly tied to the value of the corresponding real asset. For instance, if the price of company XXX’s shares increases by $10, the price of the token representing these shares will also increase by $10.

Key characteristics include:

• Blockchain as the foundation for tokens. The use of decentralized technology ensures transparency, security, and immutability of ownership records.
• Link to real assets. The token’s price always corresponds to the price of the underlying asset (e.g., stocks, gold, real estate), ensuring reliable investment.
• Extensive trading opportunities. Tokens can be freely bought and sold for both cryptocurrency and fiat money, broadening access to investments.
• Regulated environment. Many jurisdictions are developing regulatory frameworks for tokenized assets, ensuring stability and trust in the market.

However, tokenized assets are not without the risk of key loss or cryptocurrency wallet hacking. Before investing, we recommend consulting with our specialists.

Token Categories

Utility and investment tokens are the main types of digital assets, which are often confused with each other. While they share a common foundation — blockchain — their functions and purposes differ significantly.

Utility Tokens

Utility tokens grant their holders access to specific services or products offered by the company or platform that issued them. They are often used in projects related to decentralized applications (dApps) and serve the following purposes:

• Transaction payment (e.g., Ethereum, ETH);
• Access to computational resources (as in the case of the Golem token);
• Protocol governance (through Maker tokens);
• Stimulating network activity (for example, the Steemit platform uses a reward mechanism in the form of STEEM tokens for the creation and distribution of content by users).

The working mechanisms of utility tokens are determined by smart contracts and can be integrated into various blockchain platforms.

Investment Tokens

Investment tokens (Security Tokens) are digital assets that are equivalent to traditional securities such as stocks or bonds. They grant holders rights to:

• a share in the company’s assets;
• income from profits (e.g., in the form of dividends);
• voting rights at shareholder meetings.

The use of investment tokens is quite diverse. They can be used for creating collective investment funds, tokenizing real assets, and raising funds for startups.

Types of Investment Tokens

Depending on their characteristics, investment tokens can be divided into several subcategories. Let’s take a closer look at each of them.

Equity Tokens

Equity tokens refer to the creation and issuance of digital tokens that represent shares of a company or organization. Essentially, these are the digital version of traditional shares. This approach to raising capital is becoming increasingly popular. Companies issue shares in the form of digital assets—cryptocurrencies or tokens.

Debt Tokens

Similar to the tokenization of equity capital, companies can issue tokens representing debt obligations (bonds). These are called debt security tokens. Their value depends on two factors:

1. Risk – the possibility of default or a decline in the value of the debt.
2. Dividends – the interest on the debt that the company pays to token holders.

Unlike shares, ownership of tokenized debt does not make the investor a co-owner of the company. The company is obligated to pay interest and return the principal debt amount within the established timeframe.

Asset-Backed Tokens

Asset-backed tokens are tied to the value of a real asset, such as real estate, precious metals, or works of art. They allow for the tokenization of physical assets, making them more accessible to investors. Owners also have the right to a corresponding share of the underlying asset.

Hybrid Convertible Tokens

Hybrid convertible tokens combine the characteristics of equity and debt tokens. Initially, they function as debt instruments, but when certain conditions are met (for example, when the company reaches a specific stage of development), they are converted into equity tokens.

These digital assets allow investors to achieve higher returns in the case of project success, while also protecting their investments in the event of failure.

Revenue-Sharing Tokens

Revenue-sharing tokens derive their value from the underlying assets or other tokens. Owners can exchange them for these underlying assets, use them as collateral for loans, or simply hold them as an investment. Essentially, revenue-sharing tokens serve as digital certificates confirming ownership rights to certain assets.

Challenges in the Tokenization Industry

Despite the rapid development of the tokenization industry, it faces several obstacles that hinder its widespread adoption. Let’s focus on a few of them.

Lack of Unified Legal Framework for Tokens

One of the most significant obstacles to the widespread adoption of tokenization is the lack of a unified and clear legal framework. Regulatory authorities in each country approach the classification and regulation of tokens differently, and this creates uncertainty for issuers and investors.

Problems with the Legal Connection Between Tokens and Underlying Assets

Tokenization often involves linking digital assets to real-world assets. However, the legal connection between the token and the underlying asset is not always clear-cut. For example, questions arise about how to define ownership rights over the token and the underlying asset, and how to protect investors’ rights in case of issuer bankruptcy or loss of the underlying asset.

Significant Risk of Fines and Lawsuits

Uncertainty in legislation and high market volatility only increase the threats. Token issuers risk facing charges for selling unregistered securities, violating anti-money laundering (AML) rules, and financing terrorism. Investors, on the other hand, may lose their investments in the event of fraud or other violations by issuers.

Liquidity and Market Issues

The value of a token is directly tied to the reputation of the brand that issued it. In the case of little-known startups, liquidity levels are extremely low, as investors are wary of new and unproven projects.

Another aspect is determining the real value of a token, especially if it is not tied to physical assets or shares in a company. In such cases, market demand plays a significant role, meaning that the token’s value can be highly volatile.

Legal Support for Token Issuance and Implementation

Engaging professionals to handle the tokenization process significantly simplifies all procedures — from project analysis to obtaining licenses and complying with regulatory requirements.

Let’s consider the stages that legal support for tokenization often includes.

Legal Analysis of the Project

First, lawyers assess the business model, target audience, technological platform, and other key aspects. Based on the analysis, potential risks can be identified, the optimal jurisdiction for token issuance can be chosen, and a plan for further actions can be developed.

Development of International Corporate Structure

For the issuance and implementation of tokens, an international corporate structure (holding company, special legal entity, trust, etc.) is often created. The choice depends on the project’s goals, tax considerations, and regulatory requirements.

Preparation of Regulatory Documentation and Reporting

Token issuers are required to comply with various regulatory requirements. Legal support for tokenization alleviates this burden, as it includes preparing the necessary documentation: white papers, marketing materials, reports for regulators, and investors.

Preparation of Legal Documents

For the successful implementation of a tokenization project, legal documents must also be prepared. Specialists know exactly what may be required. Typically, founding documents, contracts with counterparties, agreements with investors, and company policies are requested.

Obtaining Licenses for Digital Assets

In many jurisdictions, the issuance and circulation of digital assets require obtaining special licenses. Lawyers will help determine which licenses are necessary for the project, file the application with the relevant authorities, and oversee the licensing process.

Compliance with AML/CTF and Development of KYC Policies

To prevent money laundering and financing of terrorism (AML/CTF), token issuers must carry out client identification procedures (KYC). With professional help, it is easier to develop and implement effective KYC policies, conduct client checks, and provide reports to regulators.

Legal Review of the White Paper and Marketing Materials

A white paper is a detailed document created when launching a new project, especially in the blockchain and cryptocurrency space. It and other marketing materials should not mislead investors. Lawyers will check them for compliance with legislation and the company’s internal documents.

Legal Opinion on the Token’s Status

This is an important document confirming the token’s compliance with a legal category (such as a security or utility token). Its presence allows for the determination of the applicable legislation and reduces legal risks.

Popular Jurisdictions for Token Issuance

Successful tokenization requires analyzing the legal landscape of different jurisdictions before issuing tokens. Let’s review several common and advantageous options.

Sweden

Despite the lack of specific cryptocurrency legislation, Sweden has introduced registration requirements for custodians, wallet providers, and virtual asset exchanges. Therefore, for legal operation, it is necessary to register the company in Sweden with the Financial Supervisory Authority (Finansinspektionen) and obtain the appropriate license.

European regulation also significantly impacts the Swedish cryptocurrency market. The MiCA Regulation introduced by the European Union establishes new categories of crypto-assets and sets unified rules. Once MiCA comes into effect, companies dealing with cryptocurrencies will have to comply with new European licensing requirements.

Cryptocurrency taxation in Sweden follows the general principles applied to other assets. Profits from the sale of cryptocurrency are subject to capital gains tax, while income from staking or lending cryptocurrency is subject to interest income tax.

Switzerland

Opening a company in Switzerland to conduct cryptocurrency business is a good option. The country is known for its political stability, developed financial infrastructure, and favorable tax climate, especially in the so-called “Crypto Valley.”

FINMA, the country’s main financial regulator, has developed detailed rules for ICOs and other crypto projects, categorizing tokens and establishing corresponding requirements. Depending on the type of token and the company’s activities, various licenses may be required.

Switzerland also offers an attractive tax regime for crypto companies, although the exact rate depends on the specific circumstances.

USA

Cryptocurrency regulation in the USA varies by state. Some, such as Wyoming, offer a favorable environment for crypto business development by providing clear rules and benefits. Others, like New York, have stricter requirements and regulate cryptocurrencies as securities.

Register a company in the USA in an appropriate state will help minimize legal risks and ensure stable business development. Therefore, it is essential to carefully study the legislation of each of the 50 states and consult with lawyers specializing in cryptocurrencies.

There are also many regulators at the federal level. The SEC, CFTC, and FTC oversee various aspects of cryptocurrency companies’ activities. Understanding the requirements of these bodies and complying with them is essential to meet all regulatory standards.

United Kingdom

Registering a company in England for activities related to tokenization is an attractive option for many projects. The country has a well-developed financial infrastructure, which simplifies the integration of crypto companies into the traditional economy. Additionally, the British government shows interest in innovations within the financial sector, which also creates a favorable environment for the development of blockchain technologies.

An important advantage is the ability to create a unique regulatory model for the cryptocurrency market, not limited by the EU framework (since the United Kingdom left the EU in 2020). This allows for the creation of more predictable and stable conditions for doing business in this sector. However, the regulation of cryptocurrency exchanges in the country depends on the laws that will be adopted at the national level.

Tokenization Practice in Western Countries

Global interest in tokenization continues to grow, driven both by the obvious advantages of this technology and by companies’ desire to take a leading position in financial innovations.

The USA, Canada, Japan, Singapore, and Hong Kong are among the leading jurisdictions developing infrastructure for working with digital assets. The European Union countries, Switzerland, and Liechtenstein have also made significant progress in regulating cryptocurrencies, particularly through optimizing the legal environment for working with tokenized assets.

Tokenization Practice in Ukraine

The implementation of cryptocurrency legislation in Ukraine is influenced by many factors. For several years, the Verkhovna Rada has been considering the law “On Virtual Assets,” which provides for the possibility of settlements using Bitcoin, Ethereum, and stablecoins tied to fiat currencies. If the law is passed, legal entities will be able to:

• Tokenize rights to various assets, including raw materials and finished products;
• Introduce them to international markets.

This will significantly simplify both domestic and international trade and create the opportunity for online transactions.

Despite regulatory uncertainty, Ukrainian businesses are showing interest in innovations and are beginning to implement tokenization in their operations, as there is no direct prohibition.

Advantages of Working with Lawrange

With more than 10 years of experience in the blockchain and financial technology sector, we offer a personalized approach to each client, carefully analyzing the specifics of the project and developing the optimal strategy.

Our tokenization legal services are scalable according to your needs and changing market conditions. Whether it’s tokenizing real estate, securities, or other assets, the Lawrange team will provide comprehensive support, from legal expertise to the development of necessary documentation.

Conclusions

Tokenization is not just a technological trend, but a fundamental shift in the paradigm of finance and investment. By transforming real assets into digital tokens, opportunities for investors are multiplied, and market liquidity is increased. What is more obvious, but no less important, is that the financial system is transforming, becoming more efficient and secure.

However, despite its enormous potential, the widespread adoption of tokenization is hindered by several factors, including regulatory uncertainty and technological challenges.

This is why a comprehensive approach, combining a deep understanding of blockchain technologies and legal nuances, is key to the successful implementation of projects in this area. The Lawrange team is ready to guide you through the world of tokenization.

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