The advent of blockchain technology has brought about a revolution in the financial sector. A concept that has been gaining traction in recent times is the concept of tokenization of real world assets (“RWA”). Tokenization of RWA’s refers to the process of converting ownership rights of an asset into a digital blockchain token through distributed ledger technology. Sectors which work with assets that are eligible for tokenization include, but are not limited to, financial assets, real estate, data, collectibles & art, infrastructure and entertainment & gaming. This innovative approach and revolutionary concept has the potential to streamline access to investment and asset management opportunities, making it easier for businesses to raise funds and for investors to buy and sell assets globally via fractional ownership. This article will delve into the tokenization of real-world assets (“RWA”), with a particular focus on Singapore and Switzerland.
Both Singapore and Switzerland are renowned world-class financial hubs that are well-regarded for their favourable regulatory environment that fosters innovation and growth. Both Singapore and Switzerland have been at the forefront of FinTech advancements and have been the launchpads for digital assets and tokenization projects.
In Switzerland, the DLT Act provides specifically a clear legal framework for uncertificated registered value rights, facilitating the digitisation or tokenisation of assets like shares, bonds, and other financial instruments, along with their transfer.
In addition, an association called the Capital Markets and Technology Association (CMTA) has established Swiss legal and technical standards for the issuance of security tokens, particularly for the tokenizing of participation rights (non-voting shares). The CMTA is a non-profit, independent association that brings together various market participants to provide a common framework that facilitates the development and use of blockchain technology in the capital markets.
These industry standards and guidelines outline the legal and technical requirements for the issuance of tokenized securities in Switzerland. These guidelines provide a clear and comprehensive framework for companies looking to issue tokenized securities, ensuring that they comply with Swiss law and meet the highest standards of transparency and investor protection.
Swiss law and the industry standards provide a clear path for projects involving tokenization of RWAs.
Singapore, on the other hand, does not presently have an equivalent of the Swiss CMTA which specifically regulates the issuance of security tokens.
In Singapore, the Monetary Authority of Singapore (MAS), the country’s central bank and financial regulator, has been proactive in providing guidance and regulations in respect of general digital token offerings.
The MAS has issued guidelines on the application of securities laws to the issue of digital tokens in Singapore. These guidelines provide clarity on when digital tokens would be considered capital markets products such as securities, or units in a collective investment scheme (“CIS”) under the Securities and Futures Act (“SFA”), and as a result, would be subject to the regulatory and licensing regime under the SFA and/or the Financial Advisers Act.
For example, a person who carries out a business in a regulated activity involving RWA tokens that constitute capital markets products must have a Capital Markets Services Licence.
Further, if a RWA token is a security, securities-based derivatives contract or unit in a collective investment scheme, and a person intends to offer it for sale, they would need to prepare and lodge a prospectus, unless the sale falls within an exemption under the SFA, such as a private placement or a small offer exemption.
The Swiss Financial Market Supervisory Authority (FINMA) has recently granted the world’s first ever securities token exchange licence to operate a trading venue based on distributed ledger technologies for retail investors. This ground-breaking license creates a seamless value chain from the issuance to the trading of tokenized assets, marking a significant milestone in the Swiss financial centre.
With the new Swiss standard for legal documentation supporting the tokenization of RWA and financial products, combined with the Swiss regulated securities token exchange through CMTA, issuing and trading securities tokens on a fully compliant online platform is now more accessible than ever.
In essence, the new trading venue is a one-stop-shop for the trading, custody and settlement of digitized assets (e.g. tokenized shares or other security / asset token that qualify as distributed ledger technology securities), which is open not only to banks or brokers but also to retail customers.
The MAS has embarked on “Project Guardian”, where they collaborate with the financial industry in an attempt to expand asset tokenization initiatives and develop foundational capabilities to scale tokenized markets. As part of this initiative, there will be four layers in a digital asset solution – the Access, Service, Asset and Platform layers.
With respect to the four aforementioned layers, MAS has already started with the launch of Global Layer 1 (GL1), where they have collaborated with international policymakers and financial institutions to explore the creation of a foundational digital infrastructure that will host tokenized financial assets and applications. The aim of GL1 is to facilitate seamless cross-border transactions and enable tokenised assets to be traded across global liquidity pools, while meeting relevant regulatory requirements and guidelines.
Ultimately, with the implementation of the subsequent layers, the objectives of Project Guardian are to formulate industry standards for asset tokenization on a commercial scale, establish policy guidelines and frameworks, and develop a sound and sustainable digital asset ecosystem.
The launch of Project Guardian is an indication that Singapore has much potential when it comes to the tokenization of RWA, and will certainly see an expansion in this area in the coming years.
Both Singapore and Switzerland have taken and continue to take proactive steps to regulate the tokenization of RWA, recognizing the potential benefits of this innovative approach. While their approaches differ in some respects, both countries are leading the way in the development of the tokenization industry.
Before conducting any tokenization projects in Singapore or Switzerland, it would be advisable for one to seek legal opinion from a Singapore or Swiss law firm to determine whether and how such activities would be regulated under the relevant jurisdiction.
KGP in Singapore and OA Legal in Switzerland can assist with structuring your tokenization projects in Singapore and/or Switzerland. Both firms are leading legal experts in the fintech sector, and our combined expertise will ensure that you obtain comprehensive legal support for navigating the complex regulatory landscape in both jurisdictions.
For more information about tokenization of RWA projects in Singapore, please contact Kenneth Pereire and/or Lin Yingxin by email at kenneth@kgplegal.com.sg and yingxin@kgplegal.com.sg respectively.
For more information about tokenization of RWA projects in Switzerland, please contact Fabien Gillioz and/or Alexandre de Boccard at fgillioz@oalegal.ch and adeboccard@oalegal.ch respectively.