Assessing the Feasibility of Tokenization
What's inside
Not all assets can be tokenized due to legal, regulatory, and financial constraints. Before proceeding, it’s crucial to confirm that the asset’s jurisdiction allows tokenization and that investors’ rights will be protected.
Skipping this step could lead to legal challenges, enforcement actions, or token holders not having enforceable rights.
Why This Step is Important
Avoids legal issues before launching tokenization.
Ensures investors have enforceable rights over the asset.
Prevents regulatory violations that could result in fines or shutdowns.
Securities Classification
One of the biggest legal questions in tokenization is whether the asset-backed token qualifies as a security. In many jurisdictions, security tokens are regulated like traditional stocks, bonds, or investment contracts, meaning they require registration or regulatory approval.
Does the tokenized asset fall under securities laws?
Does it meet the Howey Test (USA) or similar security classification tests?
Is the token considered a security, commodity, or financial instrument?
Who Regulates Security Tokens?
Regulatory authorities exist in every major financial jurisdiction to ensure security tokens meet the same legal and financial standards as traditional securities.
In the United States, security tokens must comply with federal securities laws and be registered or qualify for an exemption.
In the United Kingdom, digital securities are subject to financial market regulations and require proper licensing.
In the European Union, security tokens fall under investment and financial instruments regulations, enforced by national financial authorities.
Many other jurisdictions have their own licensing and compliance frameworks for tokenized assets.
Why It Matters
If the asset is a security, issuers must register it or qualify for exemptions under securities laws.
Some jurisdictions ban or limit security token offerings, making compliance essential.
Licensing & Compliance
Some jurisdictions require specific licenses or approvals for issuing, trading, or managing tokenized assets.
Key Licensing Considerations:
Does the country require a VASP (Virtual Asset Service Provider) or CASP (Crypto-Asset Service Provider) license?
Are issuers required to disclose financial statements or conduct audits?
Are additional financial market licenses required for a proposed business model, such as investment fund or broker-dealer requirements?
Relevant Licensing Regulations:
VASP License (Global) – Required for businesses offering virtual asset services, including trading and custody.
CASP License (EU under MiCA) – Required for crypto-asset service providers.
Financial Licensing Requirements (Varies by country) – Some jurisdictions require securities dealer licenses for tokenized securities.
Why It Matters
Without the right license, token issuers may face legal restrictions or regulatory enforcement.
AML/KYC procedures are required in most jurisdictions before selling tokenized assets.
Transferability & Ownership
Even if the token is legally issued, local laws may restrict ownership, transferability, or foreign investment.
Key Considerations:
Are there restrictions on foreign ownership of the asset?
Does the jurisdiction legally recognize tokenized ownership and digital securities?
Can the asset be sold, traded, or inherited under local laws?
Can tokens be transferred in a way that preserves ownership rights without additional reporting or notarization?
Potential Challenges:
Some countries do not allow foreigners to own real estate.
Some legal systems do not recognize digital ownership as legally enforceable.
Certain securities may have lock-up periods restricting transferability.
Why It Matters
If tokenized ownership is not legally recognized, investors may lose their rights to the underlying asset.
Some assets require special approvals before they can be legally transferred.
Taxation & Reporting
Even if an SPV is registered in a tax-friendly jurisdiction, tokenized assets may still be subject to taxation in the asset’s home country.
Key Tax Considerations:
Are token holders subject to capital gains tax on their profits?
Is there VAT or transaction tax on tokenized asset sales?
Does the jurisdiction require financial reporting or investor disclosures?
Potential Tax Implications:
Capital Gains Tax. Investors may be taxed when they sell their tokens for a profit.
Withholding Tax. If the asset generates income (e.g., rental income, dividends), local tax laws may require withholding tax on payments to foreign investors.
Corporate Taxes. If a tokenized asset is owned by an SPV, the entity itself may be taxed depending on its structure.
Why It Matters:
High taxes can reduce investor interest in tokenized assets.
Some jurisdictions offer tax benefits for digital assets or structured investment vehicles.
How to Complete This Review
Step 1: Research whether tokenized ownership is legally recognized in the asset’s jurisdiction.
Step 2: Verify if the asset qualifies as a security and requires compliance with securities laws.
Step 3: Check for licensing requirements (VASP, CASP, AML/KYC) and ownership transfer rules.
Step 4: Analyze the tax structure and ensure tokenized asset profits comply with local tax laws.
Example: You want to tokenize a hotel property in Spain.
Securities Classification
Tokenized real estate may qualify as a security under MiFID II, depending on its structure.
Licensing & Compliance
Spain requires AML/KYC verification for investors.
Transferability & Ownership
Spanish law does not restricts foreign ownership except for limited circusmtances.
Taxation & Reporting
Rental income is subject to local taxes, and token transactions may be taxed.
Before tokenizing, always check if the asset’s jurisdiction allows it and whether investors’ rights are protected under local laws.
Data points:
Is tokenization feasible for a selected asset in a selected jurisdiction?
Actor confirming feasibility:
Self-assessed
Insert the name of a legal provider
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