As markets for tokenised assets develop and grow in size, so too will the need to safeguard investors, consumers and financial stability.
The OECD Blockchain Policy Centre has released a new paper identifying key regulatory issues associated with the use of asset tokenisation in financial markets.
Asset tokenisation is one of the most prominent use-cases of DLT (distributed ledger technology) in financial markets today, with implications for the functioning of markets and their participants, the paper says.
“Tokenised assets that fall under the purview of financial market regulators should comply with regulatory requirements that promote financial stability, financial consumer and investor protection, and market integrity while promoting competition.”
Policy makers in different jurisdictions have approached tokenisation in different ways. But as tokenisation activities and risks continue to evolve and expand across borders, regulators may determine that their regulatory regimes and rules may need to be adjusted.
The paper notes that although a large part of the purported value creation in asset tokenisation is expected to be captured by enhanced post-trade (clearing and settlement) efficiencies, in practice this presents legal, regulatory and implementation difficulties.
In some jurisdictions (e.g. EU MiFID and CSDR rules), legal and regulatory frameworks impose the need for intermediaries/operators to act as the securities settlement system, which may exclude the use of decentralised networks/public blockchains.
In addition, whether and how platforms for tokenised assets will be allowed to link to central bank payment infrastructure or be allowed to rely on private-initiative stablecoins is a policy decision that will affect settlement with DvP (delivery versus payment).
The paper also highlights a related issue concerning the absence of netting of trading in DLT-based atomic settlement, and the potential need for prefunding of accounts for trades to occur.
In addition, custodianship in DLT-based networks of tokenised assets is conceptually and operationally different from traditional financial security markets, and the application of existing financial security policies may be challenging in many jurisdictions.
Challenges arise in relation to proof of ownership, property rights, and the probabilistic nature and uncertainty of settlement finality in decentralised networks, the paper says.
Other challenges highlighted include issues related to the location of the asset (for tokens representing physical assets), enforceability of regulation on participants in decentralised DLTs, and governance and accountability issues stemming from the absence of a central authority in public DLT networks.
The paper also covers data protection and privacy issues, operational issues such as cyber-risk and hacking, and the lack of a shared understanding of terminologies – a particular challenge for policymaking in a global context.
“As decentralised finance and markets for tokenised and crypto-assets develop and grow in size and importance, policies, regulations, supervision and enforcement will remain important to ensure that the safeguards present in traditional financial markets will equally apply in DLT-based systems and networks.”
The paper, available here, also features a list of policymaking approaches taken by different jurisdictions concerning asset tokenisation markets and their participants.