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The Emerging and Innovative Field of Tokenization: A Conceptual, Legal, and Technological Perspective - DDSP Note

"Tokenization has enormous disruptive power in affecting the role of current intermediaries and is therefore a topic that we will devote special attention to in future sessions of the DDSP group of Fide"

Last Thursday we celebrate the 14th virtual session of Digital Money Group and Payment Systems #DDSP de Fide Foundation about the possibilities that tokenization opens, and we had the luxury of having Alfredo Munoz Garcia and with Luis Pastor, moderated by Alberto Lopez Nestar well known for their involvement in the analysis and practice of new models brought by technology blockchain.

But what is the tokenization? It can be defined as a system for the storage, registration and mobilization of tokens representing ownership rights over digital or physical assets, or provision of activities. All this happens in technological systems DLT, permitted or not, which de facto become transparent and valuable information transit systems through the Tokens. The token economy it has a transformative potential that reaches all sectors.

Tokenization increases the liquidity of assets that are digitized in blockchains thanks to the network effects, is a less frictional mobilization formula than current systems, thanks to features such as atomic swaps. These operations allow interoperability between different blockchains and between operations onchain y offchain.


For this reason, a law is necessary to recognize the legal rights of the token owners and to regulate the relationships between the participants in the different processes (creators, service providers, users, ...)
The financial sector is key in tokenization, since money is dematerialized (it is already more than 90% digital), as well as world stock markets. It is necessary to regulate the legal ownership of the tokens and the framework of action of the intervening parties. In future European Regulation of the Pilot Regime and the experiments of the Financial sandbox Spanish are exemplary initiatives.


Regulation on tokenization is gradually advancing in countries such as France, Germany, Luxembourg, or outside the EU, in Switzerland or Liechtenstein. Is being generated arbiregulatory suit, and new businesses and spin-offs will choose the most innovative jurisdictions. Above all, what is at stake is redesign of economies to take advantage of blockchain. Future European regulation Mica is one of the most advanced, but does not contemplate, for example, regulation of NFTs.


Right now, the network Ethereum and its different protocols is the most advanced in tokenization operations, but there are many others, such as Solarium.


Tokenization is already a growing reality in sectors such as real estate with brickex, evidence in the world of money like Smart Money Iberpay, or in the field of digital identity with Digitalis.


Tokenization has enormous disruptive power by affecting the function of current intermediaries and is therefore an issue to which we will devote special attention in future sessions of the group. DDSP de Fide.

Henry Titos

Director of the Digital Money and Payment Systems Working Group (DDSP)

Session Information:

SESSION OF THE DIGITAL MONEY GROUP AND PAYMENT SYSTEMS: THE INCIPIENT AND INNOVATIVE FIELD OF TOKENIZATION: A CONCEPTUAL, LEGAL AND TECHNOLOGICAL PERSPECTIVE (I) - (ONLINE)

 SESSION FIDE
 THURSDAY, DECEMBER 02, 2021
 16:00 - 18:00

Present the session:

  • Enrique Titos Martinez placeholder image, Independent Director. Advisory Counselor. Director of the WG "Digital Money and Payment Systems" of Fide, Academic Advisor of Fide

Speakers:

  • Alfredo Munoz Garcia, Professor of Commercial Law, Complutense University of Madrid. Lawyer.
  • Luis Pastor Perez, Consulting Managing Partner, Grant Thornton.

Moderator:

  • Alberto Lopez Nestar, Director of Technology and Projects, Iberpay.

Objectives:
For years we have lived in a fast-paced digital world. New digital products and services are part of our daily lives, coexisting with physical and analog activities such as going out to eat, working in the company or going on vacation. These activities are being digitized through online reservations, remote work or travel planning on the web. But now we are entering a new phase, the tokenization of almost everything, still very early, but undoubtedly already on the agenda of many companies, institutions and even governments.

But what is tokenization?

Tokenization is the process by which assets, activities or services are digitally represented in blockchain networks, public or private, in such a way that environments and markets are created where the resulting tokens are identifiable and attributable, transferable, traceable and immutable according to their programming code and applicable legal regime. Its operating system responds to coding and consensus protocols between the parties that, on some occasions, have a governance system established in the code, which makes them predictable, scalable, automatic and adaptable to change as established in the system of protocol. Tokens, in contrast to centralized registries that conserve substantially immobile assets and activities, can generate high efficiencies, improve liquidity, trust, and traceability when transferred within transparent information sources based on blockchain technologies. In addition, they can be connected to the real world through oracles, pieces that allow executing a transaction based on an external event, such as the transmission of an insured amount in the event of the cancellation of a flight.

Tokenization can live and develop on the sidelines or in parallel with cryptocurrencies, and tokenization can be classified as a new dimension of data use, creating an incentive for those who create it in the face of data exploitation models from large corporations. The best proof of this is the explosion of the NFT market.

Being tokenization “a layer” that overlaps tremendously varied physical and digital assets and services, it is key in a first dimension to know its conceptual framework and perimeter, to know why companies should develop a “tokenization strategy”. Second, in order to seek tokenization to offer new systems of representation and registration of property and transmission, it is essential to understand its legal framework, to what extent it has been developed to date, such as what future regulatory reforms may be.

Finally, and since blockchain technology (or, in general, DLT technology) is the key to tokenization, it is useful to know the most applied models in the most developed activities, understanding that all technologies, and blockchain in particular, are in development and growth process.

In the next few years we will see how, as before the software, “tokenization is eating the world”. Better to start sooner than later. This session will be the first in a series of sessions on the phenomenon of tokenization.

Methodology: The dynamics of holding the session will respect the usual system of Fide and the participation and interaction of the speakers and attendees as well, exclusively making the changes required by its online celebration. All the sessions that we develop in Fide Convened under the Chatham House Rule, participants have the right to use the information they receive, but the identity or affiliation of any other participant may not be revealed.

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