South Africa’s Intergovernmental Fintech Working Group (IFWG), has published a detailed blog of the benefits and risks associated with asset tokenisation.
IFWG is a panel of South Africa’s top financial and regulatory government agencies mandated with the goal of understanding and regulating new financial technologies such as blockchain and cryptocurrencies.
In the blog, IFWG includes a literature review describing tokenization. However, the regulatory body has settled on the digital representation of rights to an asset or group of assets. through the issuance of DLT-based tokens, either as native protocol assets or subsequently created through the use of smart contracts.
IFWG has also determined 4 main use-cases of tokenization and their rights as shown below:
- Transaction ledger: Purely Using a blockchain to record transactions
- Security tokens: The rights are directly embedded in the token itself
- Stablecoins: Represent rights to an asset, which could be linked to the stablecoin itself or linked to assets held in custody
- Tokenised securities: The token is linked to an underlying asset or group of assets
The blogs lists the following benefits and risks associated with tokenisation:
Potential Benefits of Tokenisation
- Speedy Clearing and Settlement disintermediation and process efficiencies like parallel processing
- Smart Contracts enable automated compliance and busines logic (including corporate actions)
- Expanded geographic reach and access to global markets; 24/7 trading, where it makes sense from an operational perspective
- Transparency through a single source of truth and immutable asset register
- cheaper fees through efficiencies, cyber security and resilience, more efficient secondary market operations
- greater access to capital, including for small, medium and micro enterprises, increased liquidity of illiquid assets; and lower barriers to investment through fractionalisation
Potential Risks of Tokenisation
- Retail investors may gain access to previously restricted asset classes and may not have the capacity to consider the implications of investing in high-risk products
- Bifurcation of markets may occur should tokenised securities traded in secondary markets continue to be traded off-chain
- Existing risks inherent in DLT, including scalability, governance, and operational concerns
- Regulatory arbitrage and gaps in regulation
- Non-compliance with anti-money laundering and countering terrorist financing requirements (AML / CFT)
- Concerns surrounding digital identity
- Settlement finality may be uncertain in public permissionless DLTs
- Counterparty risk still remains pertinent with principal risk and issuer risk being raised
The IFWG work will help South African regulators and lawmakers set up regulations and/or policies to govern the sector.
In June 2021, IFWG published a position paper that called for a phased and structured approach to crypto regulation.
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