- L Higgins and M Bacina
World Bank releases guidance for real world asset tokenisation
Blockchain technology holds immense potential for revolutionising infrastructure financing by enabling asset tokenisation. Earlier this year, the World Bank released a report on the tokenisation of real world assets, an important step in setting international standards and approaches to this process.
Tokenisation involves representing real-world assets as digital tokens on a blockchain, seeking to unlock advantages such as increased efficiency, transparency, and liquidity for many traditionally illiquid assets. The World Bank believes that tokenising infrastructure projects through blockchain technology could significantly enhance project management, investment environments, and overall infrastructure management.
One key application of blockchain technology in infrastructure projects detailed in the report is the use of smart contracts. These programmable and automated agreements smooth processes by removing intermediaries, including administratively heavy work such as invoice verification, and linking documents to master data sources, which can eliminate fraud, ensure accuracy and increase transparency. By leveraging smart contracts, infrastructure stakeholders can mitigate the risks associated with contractors overstating subcontract amounts, reduce manual effort in verifying and rectifying discrepancies, and improve compliance with contractual details. Although unlikely to replace the need for lawyers, smart contracts will increasingly be used for legal processes that are conducive to automation. The decentralised and immutable nature of smart contracts ensure transparency, accountability, and real-time resolution of changes to orders and claims.
Given the immense potential of asset tokenisation, the World Bank has outlined several risks and challenges that require careful consideration, particularly in the legal and regulatory landscapes. Tokenising different things, such as ownership of an infrastructure asset, equity interests, debt positions, or revenue streams, is subject to varying regulations across jurisdictions, much of which was not designed with data objects that can move globally at speed.
Harmonizing financial services regulations for tokenised assets is crucial to ensure widespread democratisation of the space as an asset class, rather than limiting access to traditional private equity or wholesale debt investors only. The idea of a globalised set of standards of digital assets is gaining more and more traction, especially with the recent adoption of MiCA in the EU.
The current lack of global standards and codes of conduct for managing digital assets poses governance risks and hinders legal clarity and creates difficulties for those wanting to take advantage of the technology. Establishing widely accepted standards is essential for addressing key provisions related to ownership rights, anti-money laundering (AML) and know-your-customer (KYC) requirements, administrative rights, and integration with secondary markets. The World Bank recognises in their report that the rapid evolution of technology compared to stagnant regulatory frameworks creates challenges in fully realising this technology's potential, and this view stands in start contrast to the approach by the US SEC in asserting their existing laws do no need to evolve to meet technological change.
Another significant challenge outlined by the World Bank in its report lies in defining the legal status of digital tokens and smart contracts. Tokenised securities must comply with existing securities regulations, but recognition of tokens as digital assets varies across jurisdictions. While tokenization enables the creation of holding vehicles for purchasing loans and other assets, most jurisdictions do not recognize infrastructure tokens as independent investments, which raises questions about their legal status. Overcoming these challenges is crucial for establishing secondary market liquidity for tokenised assets and enabling broader investor participation. The utilisation of smart contracts also introduces cybersecurity concerns. Automation and immutability, while beneficial, increase vulnerability to cyber hacks and fraudulent activities. Compliance with AML and KYC regulations, coupled with collaboration with security token exchanges for tracking token ownership, is crucial to ensure cyber resilience and accountability.
Considering the potential benefits of tokenization, the World Bank believes traditional "big money" corporates should explore this innovative approach to infrastructure financing. By tokenising one of its own infrastructure projects, the World Bank aims to demonstrate leadership in leveraging blockchain technology and fostering change in financial regulation to accommodate the use of security tokens.
The tokenisation of real world assets is certainly a hot topic in the digital assets world in 2023, with institutions like the World Bank, Citi, Mastercard, and even countries like Germany and the UAE paving the way with bespoke legislative reform. By actively exploring real world tokenisation, these significant players can contribute to global regulatory advancements and foster transparency, efficiency, and will help support the wider adoption and proliferation of the benefits of blockchain technology.