“Every stock, every bond, every fund, every asset can be tokenised.” – Larry Fink, the CEO of the world’s largest asset management firm, Blackrock
Asset tokenisation is emerging as a significant shift in how ownership and investment in assets are conceptualised and executed. While still in its early stages, it is poised to become central to how real-world assets are going to be converted into digital tokens using blockchain technology – tokens that can be securely stored, transferred, and traded online.
The practical implications of assets tokenisation are both significant and compelling. Tokenisation offers a means for businesses and individuals to unlock liquidity from otherwise illiquid assets like real estate, private equity, or even intellectual property, without the traditional intermediation of banks, exchanges, or regulatory-heavy instruments.
In this article, we briefly unpack asset tokenisation and specifically touch on some of the legal implication and issues arising from it.
What is Asset Tokenisation?
Asset tokenisation is the process of representing ownership rights to an asset in the form of a digital token recorded on a blockchain. This allows for the fractionalisation of high-value assets, enabling a broader pool of investors to participate and providing issuers with a new channel for capital formation. For example: Consider a property valued at R10 million. The owner may choose to issue 10,000 tokens, each representing 0.01% of the property. These tokens can then be offered to investors, who can trade them or hold them to earn a proportional share of rental income.
This model is not limited to real estate and can extend to virtual any type of asset including equity in a private business; revenue streams from future intellectual property (e.g., music royalties); asset-backed debt instruments; shares in collectibles or luxury goods; and even infrastructure, energy, and ESG-linked assets.
Advantages of Asset Tokenisation
Asset tokenisation presents a number of strategic advantages for issuers and investors alike:
- Capital Accessibility: Businesses can reach a broader, often global, investor base.
- Liquidity for Illiquid Assets: Token markets allow assets traditionally considered illiquid to become tradeable.
- Fractional Ownership: Investors can acquire small stakes in large-scale assets, improving inclusivity and diversification.
- Operational Transparency: Blockchain offers a traceable, immutable ledger of transactions, enhancing trust and reducing disputes.
In regions with underdeveloped financial infrastructure, these benefits are particularly transformative.
Legal and Regulatory Considerations
Despite its promise, tokenisation requires careful legal structuring. As experienced technology and business lawyers, we assist clients in navigating complex regulatory terrain and ensure compliance with applicable laws.
Some key legal considerations include:
- Securities Classification: A critical first step is determining whether a token constitutes a security under the relevant jurisdiction’s laws. If it does this may trigger extensive disclosure, legal compliance obligations and heightened regulatory oversight.
- Licensing and Regulatory Requirements: Depending on the nature of the token and the structure of the offering, the issuer may need to register as a financial services provider, obtain other specific licenses, comply with KYC/AML requirements and/or secure authorisation under alternative investment fund or collective investment scheme regulations. Identifying and adhering to the appropriate licensing and regulatory framework is essential, not only to avoid legal exposure but to instil trust in the asset tokenisation scheme.
- Smart Contract Review: Smart contracts, which are, in essence, self-executing code that facilitates token transactions, must reflect the legal rights and obligations agreed to by the parties. This means that tech-savvy lawyers must ensure that the logic encoded in the contract accurately represents the legal agreement and that fail-safes are included for dispute resolution and error correction. Few law firms are equipped with the skills and expertise required to do this. A flaw in code, such as a smart contract miscalculating and distributing incorrectly, could potentially lead to investor disputes and further regulatory complications.
- Investor Protection Mechanisms: Tokenised offerings should have transparent terms, including clear information on rights attached to the token (e.g., voting, dividends, redemption), restrictions on transfer, and risks involved. Investors may need to have access to comprehensive offering documents (whether in the form of a prospectus or otherwise), and mechanisms for resolving complaints and enforcing claims should be clearly outlined.
- Cross-Border Compliance: Given that tokenised assets can be traded globally, this raises complex issues around compliance with multiple regulatory regimes. Legal structuring must address not only where the offering is launched but also where investors reside, which can bring a myriad of securities, tax, anti-money laundering (“AML”), and data protection laws into play. Proper cross-border legal planning can mitigate enforcement risks and enhance investor confidence.
- Data Privacy and Cybersecurity: Blockchain may be immutable, but the systems around it are not impervious to cyber risk. Tokenisation platforms often collect and process personal information, including investor identification for KYC/AML checks. Compliance with data protection laws such as POPIA (South Africa) is essential. This includes managing user consent, securing personal information, and ensuring that data subjects can exercise their rights. Additionally, robust cybersecurity frameworks must be put in place to protect wallets, smart contracts, and trading platforms from breaches and hacks.
- Tax Implications: Tokenisation may trigger various tax events, such as capital gains, income, or VAT, depending on the nature of the asset and jurisdiction. Structuring token offerings with tax considerations in mind is crucial for both issuers and investors to avoid unforeseen liabilities.
- Intellectual Property Rights: In cases where tokens represent rights to digital content or other IP, it’s important to clearly define the scope of those rights, whether they include reproduction, resale, licensing, or personal use, and ensure that copyright and licensing laws are adhered to across jurisdictions.
- Insolvency: In cases where an asset tokenisation issuer becomes insolvent, questions may arise about how this will be dealt with and whether investors may have any claims to the underlying asset.
- ESG: energy-efficient blockchains are also a consideration to issuers
Asset Tokenisation is here and now.
Clients are already exploring tokenisation across a diverse set of applications:
- Real estate developers creating fractional investment opportunities. In the UAE, for example, the Dubai Land Department has recently launch a pilot real estate tokenisation project.
- Tech startups are looking to raise capital through revenue-sharing tokens.
- Asset managers are using tokenised debt to expand into underserved markets.
- Sports organisations are tokenising future sponsorship rights or merchandise earnings.
These examples illustrate how tokenisation is not theoretical; it is already operational and evolving.
Conclusion
Asset tokenisation represents a convergence of law, finance, and technology. While it introduces novel risks and regulatory challenges, it also unlocks entirely new ways to engage with value, ownership, and investment.
For future professionals and clients alike, the key is to approach tokenisation with both curiosity and caution. When done right and with sound legal guidance, it offers a powerful vehicle for growth, innovation, and inclusivity.
For more information and assistance, please contact our Tech Law expert:
Executive | Technology, Media and Telecommunications
Note: This article is drafted in part using artificial intelligence technologies
