Recently, the Asia Securities Industry and Financial Markets Association (ASIFMA) published a report titled, Tokenised Securities — A Roadmap for Market Participants and Regulators. The report goes into detail regarding the impact of tokenization on market participants, as well as current areas that need to be considered in the various stages of the securities lifecycle across blockchain ecosystems.
The report, co-authored by employees from Citi, Nomura, PwC and Standard Chartered, defines a token as a digital representation of rights to any tangible (financial or otherwise) or intangible assets.
“Tokenised securities and security tokens are two different concepts. Tokenised securities are generally thought of as traditional, regulated securities, but with a digital wrapper.”
Key issues in tokenized securities offerings were listed in the report, including their inherent price volatility, security of the underlying blockchain protocol and regulatory actions by jurisdictions that may restrict the right to trade blockchain assets.
Also noted was how tokenized securities posed risks toward enabling illegal activity using the issuer’s products or services, stating that it is important to understand the effect on the issuer’s business if their AML/KYC non-compliance were to result in regulatory penalties. Additionally, the report talked about the need to assess cybersecurity risks applicable to the business operations of the issuer, and the extent to which ongoing compliance with cybersecurity requirements could result in additional costs.
“Misuse of encrypted personal data may give rise to breaches of privacy laws, fines and sanctions, and risks of security breaches with respect to the token holders’ personal identity information base.”
The report also suggested that token trades require consistent mechanisms for ensuring settlement finality in alignment with regulatory requirements across blockchain ecosystems. Regulatory requirements for storage and sharing of personal data also needs to be taken into account while designing the architecture and agreeing on the protocols among the various participants.