Current market issues

The problem with the other tokenization protocols and blockchains

The problem is technical, not regulatory

The digital transformation of finance has introduced tokenization as a means to represent real-world assets on the blockchain. However, current tokenization protocols, particularly permissionless tokens like ERC-20, face significant limitations that hinder their effectiveness and adoption. Most RWA chains and protocols overlook that tokenizing an asset doesn't alter the nature of the underlying assets.

Globally, wherever securities regulations exist, asset tokenization is possible. However, this requires the ability to enforce these securities regulations within a blockchain infrastructure.

Existing Limitations:

Lack of Compliance Integration: Most existing tokenization protocols do not integrate compliance mechanisms directly on-chain. This oversight leads to regulatory challenges, lack of transparency, and limits the participation of institutional investors who require strict adherence to financial regulations.
Fragmented Ecosystem: The financial industry is highly fragmented, with various silos operating independently. So far, this fragmentation has been replicated on chain. This is exacerbated by the use of private recording systems and blockchains, which, despite their declining popularity, still contribute to a disjointed landscape. As a result, there is no unified ecosystem where all stakeholders can seamlessly and securely interact.
Distributor-Level Tokenization: Tokenization often occurs at the distributor level (centralized exchange, bank or broker) rather than at the issuer level. This approach creates multiple ledgers, one for each distributor, leading to inefficiencies and the need for off-chain reconciliation. Without a single, aggregated ledger, the system remains complex and prone to errors.

Market Gaps:

Compliance and Control: There is a pressing need for tokens that enforce compliance rules directly on-chain. Permissioned tokens, which can only be transferred to eligible investors based on compliance criteria, would provide issuers with the necessary assurances to authorize any application on the blockchain. These tokens also offer guarantees to investors, ensuring that they are the legal holders of the underlying assets, even in cases of wallet hacking or theft.
Real-World Asset Integration: Current protocols struggle to effectively link real-world assets with their digital representations. This gap limits the potential of blockchain technology in asset management and hampers the adoption of tokenization in traditional finance.
Unified Registry: The absence of a single registry that aggregates all transfers and investments from various platforms and distributors is a significant drawback. A unified registry would streamline operations, reduce reconciliation efforts, and enhance transparency.

Issues with simple ERC-20 Tokens:

Transfer capable, but not legal: ERC-20 tokens are technically easy to transfer, but they often represent financial assets that are not freely transferable due to regulatory constraints. This discrepancy creates legal and compliance issues, as the ease of transfer does not align with the regulatory requirements of the underlying assets. These discrepancies undermine investor guarantees. Investors who purchased tokens on the secondary market think they own an asset. However, they do not appear in the legal registry.
Bearer Instruments: Most countries have regulations against bearer instruments due to anti-money laundering (AML) and taxation rules. Simple ERC-20 tokens, which can be transferred without compliance checks, often fall into this category, making them non-compliant with regulations. Sanctions vary based on the asset's issuing country and the token holder's country, ranging from fines to imprisonment.

The Need for a New Approach:

To address these challenges, the industry requires a new approach that integrates compliance, unifies the ecosystem, and effectively links real-world assets with their blockchain representations.

This approach should focus on creating permissioned tokens that ensure great investor experience and compliance, enabling issuers to confidently authorize blockchain applications. By doing so, the industry can move towards a more cohesive and efficient system that benefits all stakeholders, providing them with the assurance of legal ownership and compliance.

PreviousRoadmap NextT-REX Protocol

Last updated 2 months ago

The problem is technical, not regulatory

Globally, wherever securities regulations exist, asset tokenization is possible. However, this requires the ability to enforce these securities regulations within a blockchain infrastructure.

Existing Limitations:

Lack of Compliance Integration: Most existing tokenization protocols do not integrate compliance mechanisms directly on-chain. This oversight leads to regulatory challenges, lack of transparency, and limits the participation of institutional investors who require strict adherence to financial regulations.

Fragmented Ecosystem: The financial industry is highly fragmented, with various silos operating independently. So far, this fragmentation has been replicated on chain. This is exacerbated by the use of private recording systems and blockchains, which, despite their declining popularity, still contribute to a disjointed landscape. As a result, there is no unified ecosystem where all stakeholders can seamlessly and securely interact.

Distributor-Level Tokenization: Tokenization often occurs at the distributor level (centralized exchange, bank or broker) rather than at the issuer level. This approach creates multiple ledgers, one for each distributor, leading to inefficiencies and the need for off-chain reconciliation. Without a single, aggregated ledger, the system remains complex and prone to errors.

Market Gaps:

Compliance and Control: There is a pressing need for tokens that enforce compliance rules directly on-chain. Permissioned tokens, which can only be transferred to eligible investors based on compliance criteria, would provide issuers with the necessary assurances to authorize any application on the blockchain. These tokens also offer guarantees to investors, ensuring that they are the legal holders of the underlying assets, even in cases of wallet hacking or theft.

Real-World Asset Integration: Current protocols struggle to effectively link real-world assets with their digital representations. This gap limits the potential of blockchain technology in asset management and hampers the adoption of tokenization in traditional finance.

Unified Registry: The absence of a single registry that aggregates all transfers and investments from various platforms and distributors is a significant drawback. A unified registry would streamline operations, reduce reconciliation efforts, and enhance transparency.

Issues with simple ERC-20 Tokens:

Transfer capable, but not legal: ERC-20 tokens are technically easy to transfer, but they often represent financial assets that are not freely transferable due to regulatory constraints. This discrepancy creates legal and compliance issues, as the ease of transfer does not align with the regulatory requirements of the underlying assets. These discrepancies undermine investor guarantees. Investors who purchased tokens on the secondary market think they own an asset. However, they do not appear in the legal registry.

Bearer Instruments: Most countries have regulations against bearer instruments due to anti-money laundering (AML) and taxation rules. Simple ERC-20 tokens, which can be transferred without compliance checks, often fall into this category, making them non-compliant with regulations. Sanctions vary based on the asset's issuing country and the token holder's country, ranging from fines to imprisonment.

The Need for a New Approach:

To address these challenges, the industry requires a new approach that integrates compliance, unifies the ecosystem, and effectively links real-world assets with their blockchain representations.