Legal Structures of Tokenized Assets - Xavier Lavayssière

Transcript

[Music] okay nice we have a nice music to to get started um so it's going to be the more regulatory Talk of the afternoon I think in the middle of a lot of Community and Technical talk so I hope it's interesting to you uh so my name isavia indeed uh yes um a little bit about me just so you know from where I come from so I've been in the E ecosystem for quite a long time for instance we created a co-working space in Lisbon that's called the block and I encourage you to visit if you go to Lisbon uh I created a game to introduce people to defi um which took me like some long nights during the covid pandemic so it

was fun to do but mostly what I do is I work as a consultant researcher for the public sector trying to understand the space So at the beginning it was explaining the blockchain how that works and slowly we are moving to that was the cbdc topic and I think the main topic at the moment is tokenization so how financial asset can be put on a blockchain um so that's what I'm working on and that's why we have this presentation um I will try to keep a few minutes at the end if you have some questions so uh yeah it's good if you think about them before um a few Trends so why are we talking about tokenization you know stable coin I've been getting a lot of interest I think it's clearly the first tokenized asset we have on the

blockchain chain a bit unregulated at the beginning but uh um a bit more clear now there's two Trend I distinguish one is what I call real word assets so real word asset is mostly what happens from the web 3 community of creating startup that tokenize assets not asking permission sort of like in typical web 3 or even startup way so we have the stable coin treasuries corporate bond and slowly a lot of companies have um issued this kind of assets it's not huge the volume and especially compared to stable coin it's it's quite minimal still but it's taking off slowly uh and it's interesting because it it match some need of the crypto ecosystem to diversify risk if you don't want to be only correlated to whatever happened in

defa you can have a different way of managing your your yield you we have also like big de that have a lot of treasuries and they need to put that liquidity somewhere and sometime they want to uh use a different type of assets so the other face of these is what I call tokenized financial instruments it's the same thing but it's just like a different aspect and um it's mostly the the bank the financial institution that are trying to have asset on a blockchain there have been many many experiments in Europe there has been um last year the European Central Bank open call for making experiment with them and they have tried all different option one was

on the blockchain and two were using existing systems of the Central Bank but just having a connection to some sort of API to uh connect with the the the cache part which is often the problem um the main problem they have at the moment is all this experimental well but like they have no liquidity like every issuance is its own Universe in the sense and there is no platform to exchange them broadly so they need to coordinate choose the same uh platform same standard and that's the big challenge uh also the regulators and Central Bank are not uh living that and they are actively working there have been especially in Europe two failures that we had in the past decade that we still need to work

on one one was called the Capital Market Union so we were trying to make one um Union um one market for the the capital markets in at the scale of Europe to facilitate the funding of smmes and all of that didn't work we are still have a really fragmented ecosystem and that's really important compared to the us and that has been report by Mario dragy few months ago showing that we don't have the right funding for or startups in Europe um and open banking also the hope of open banking was to create an ecosystem with different startup competing and using the apis of the bank didn't work the bank made all they could to have the most crappy apis so no one could build on top of it some used it like Stripes some intermediaries in the

end use these apis but it hasn't been a Frank success when we see that in other countries uh we have parly peaks in Brazil and UPI in India has been a huge success so that's where we are like we haven't managed to create this these European systems so that's why there is a lot of experiments trying to use the blockchain to create new sort of payment mechanism and using also um all of this so what we are talking about tokenization I think you all have some sort of knowledge of this just one thing I will skim through but it's I think that we shouldn't Focus only on the blockchain aspect uh but more on the properties like what's it really interesting in the tokenization it's not

because it's on the blockchain and to me two properties I like is the fact that it's a shared system so everyone is interacting with the same system and so can share the same view on the state and can interact and have trade with other people because that's kind of clearing the topic of like permission blockchain right if you have your private blockchain on your side yes you have tokenized by using a blockchain but if it's not connected to the rest of the world I don't think you have achieved any benefits of of tokenization so shed and Trust minimize and I think uh in this room I won't need to explain it but often this is the part I have to explain for hours of like why there are some benefits of minimizing trust you lower the cost of of starting things and so um so yes most of the time we think about

eum smart contract and nc20 but there are many other options so it shouldn't be the only way of uh thinking about that there are tokenized asset that use utxo on bitcoin there are many options to to do that so yeah something that's important for o talk today is the fact that tokenization is not only a technology so there is a technology part in blue but there is also legal aspect and also it's not about just putting on the blockchain you and you're done you have a full life cycle of the assets to manage so you have to prepare your asset you have to distribute it uh and find people that buy it so it's a big challenge when once you have toonize like who's going to buy and then uh interact with it you have a lot of

operation doing the line of the assets and for people that have toonize assets I realize that it's quite a challenge because during a life cycle of like a bond you have different event that happen and you need different actors to interact and different action to to to happen uh and then the end of the asset also like so what happens like you destroy the token but like you need to unwrap all the legal aspect also um another problem is the standard I already mentioned it a little bit like we need align different actors on the same standard so there is a pile of standard that are opening there is some sort of competition that's happening um among different actors to try to be the

one proposing the standard that's going to be used for toonize asset but at the moment it's a bit detrimental because not everyone using the same most are kind of esc20 compatible but it's not enough like the fact that you have the basic function doesn't is not enough to then build the infrastructure that interact with all the aspects and standard all is not only the toen standard it's also a lot of other standard like how you identify the assets so you need some sort of identification number so some agencies are working on that how you have the same legal term because if the assets even if they look similar but they are two different type of fund they are not really easily fible so it's it's a lot of thing that needs to be aligned um and the last thing about uh B tokenize I said that's important in the

in the context is to see that there are different options between the type of network the type of assets that we can expect that tokenized um asset will be some will be built on private blockchain initially but I think more and more what we are seeing is that all the option are on the table and I can tell you that I've been working with banks central banks for a long time didn't want it to hear about public blockchain a few years ago I think now it's everyone is okay how we do it so it's not done yet uh um probably we need years before we will see more things happening but there are already some banks that issue things on the public blockchain and and many other are considering how to do it so yes but the main point of the talk is a paper I just

wrote and which I need to finish tomorrow to read but to review but the paper is just to simplify different type of tokenization because when we talk about tokenizing an assets there's often a confusion that that comes if we talk about first um to tokenizing the assets and putting directly on the blockchain or creating some sort of infrastructure in legal structure between the two so when we have an asset so in blue that's a I mean it's token sorry that's on a platform so that's the technical part we have on one side um the the ownership so how you relate the ownership of the

token I won't talk about that today but it's also a question because for for the crypto asset we are used to own the keys and you control the asset and you have it or you own it for financial asset it will never work like this so you will have custody you for some asset you need to have the name your name that's registered somewhere so how we manage this part of the equation is one problem but the part I will focus is the other part like you have a token nice but like what do you own on the other side of the of the um equation so how there is a link between the token that you control somehow or through your custodian and the asset so this is where I distinguish direct organization or also like native assets where the asset is directly on the blockchain so it's

really simple I think for most of you uh this distinction is quite clear but I've seen that there are different choices of project so direct organization is you directly issue an asset on chain for instance you can already do that in France for unlisted shares of companies uh companies of yeah shares of unlisted companies anyway um uh where you you are smalles you can create your um put your shares on the blockchain you can do that for bonds also corporate bonds it's quite easy to do um but for most assets we need regulatory change for cash on chain you cannot do it at the moment for

treasuries on chain you will need to have the treasury issuing directly on chain and for a lot of different Financial instrument at the moment there is a specific register they need to be on so they cannot be on chain at the moment so what the ecosystem has came up with is a solution of indirect tokenization so you create a legal structure the legal structure on the asset and then the token is a share of this legal structure so for instance for Real Estate we have um a company that do that in the US they create a series of companies each company own the real estate so it's like a building in Chicago the building is owned by this one company and then the share of the company on chain so then when you buy a

token what you buy is a share of the company that own the real estate it's there are problem with that so the great thing is like it allows you to tokenize everything because as as long as you can create a SPV of a Fone and this fund can have that share on as a token and many legislation allow for it especially in Switzerland is one of the most uh advance for this you can then have anything on chain but you have this this intermediary structure if you do it well like if it's a regulated fund for instance it's quite super secure like there's a lot of rules on how you manage the asset and you guarantee that when you own the token and a share of the fund you own uh the financial asset when

it's a company for instance it's really more shady like if anything happen there is some sort of liability that because the building I don't know like for some legal reason you get to to have to pay a fine on the building then you don't really own uh anymore uh the same value of the asset and and quickly you can totally your token can have absolutely no value so that's the problem um so yeah we have many example of how it's done in robust manner through through font so this is ano which is used by cuge so it's they created a sort of spin-off company that creates the fund that then they can toonize most of them are using a lot of traditional Financial companies as

Partners so it's not totally made uh on outside of the financial world it's it's using different partners to custody the funds so here we are talking about the underlying funds and then all partner to facilitate the onramp most of the time they cannot directly use usdc for instance a stable coin and exchange it to the Token they need to convert it to cash to then put the cash in the reserve and then have the issuing the token so it's a bit hassle at the moment but it it kind of works and then the final case is what I call incomplete tokenization and it's many cases where when you own the token you own just something that's a bit symbolic and there are many cases of this one

example was the HSBC gold token totally like a PR stunt so there is gold that's stored in the UK and then they have created a certificate on the gold that you can buy through the um Hong Kong Branch but and then they have created a token on the certificates that you can exchange but having the token has absolutely no correlation to um the certificate what matters is your relationship your commercial relationship with the bank and the fact that you bought the certificate on the gold in the end there is no way for you to get the gold in the end it's just like a certificate that has the value of the gold that s somewhere um so yeah um doesn't mean that it's totally risky or

something like it it kind of it works legally but the it's not really organization there is other example of uh token created just to keep track of something um so that's Rec common already in the financial system where you have the real asset somewhere and then you have a representation of it to facilitate um operation and for you to keep track uh yes so that's the conclusion of my paper so why I that's why I use a font that looks more serious to make it more serious conclusion uh so distinguishing incomplete tokenization which I mentioned where it's just a miror account and complete tokenization which can be direct or indirect um and as I was saying like direct at the moment you

can R tokenize Bond especially corporate bonds um I'm talking generally right so depending on the jurisdiction there are differences and for real estate it's mostly indirect or it can only be indirect at the moment so thank you thank you for listening with a lot of attention I've seen and we have a few minutes thank you thank you very much yes we have time for questions uh around five minutes who would like to go first thank you so much for the speech really interesting I'm wondering if it's technically possible to for example put in a ER 20 a basket of assets of real world assets that ERC 20 in which like legally speaking what what is it like an

arc 20 filled with as a basket of assets like an ATF filled with real word asset yeah you can but so you can but you have two operations one is create the basket of asset and the other one is the sc20 one example of that I know in France a company is I really like it's called spico so they have created um a money market fund so the money market fund um is a legal structure that owns a basket of assets what they own is a lot of really liquid assets so treasury from the US and and sometimes a bit of cash and a couple of things like that and then they just created an esc20 that correspond to that Fone and that's it one interesting thing

is they chose an esc20 to make it simpler but the esc20 is just a list of function that they needs to have what they have added is function to revert to destroy asset for them to control so it's not fully like the typical decentralized esc20 because they need to keep some so they simplify the compliance by having just in the sc20 but keeping the the final control on the assets what about since there there will be like this huge trend of tokenizing assets so there will be like um assets of viability already tokenized on Shane and like for example if I want to build an arc 20 that directly take these a 20s that are actually already tokenized and put them in my a 20 that is a basket of

assets legally speaking am I doing something like that needs to be regulated it's a good question I would say I generally in Europe at the moment you know everything that defi is considered a bit under the radar so if you create in totally trust minimized manner you lock the different esc20 that exist that are aized asset and you create just a new verion toiz it I'm not sure you would be having too much trouble but I'm sure you should check thoroughly before launching these kind of things but to me that's where it will become interesting is like tokenizing one by one asset having a slightly better way of settling things it's nice but what really become interesting is

the moment we will be able to compose and then it's also use it in different lending protocol and so on and so yeah obviously it's the The Next Step but yeah my inition is that legally it should be a bit fine under the radar at the moment but obviously at some point you are some sort of a phone and there will be some question on how you you have some liabilities on this thank you so much you we have time for one quick question a big one could you T touch on transferability H could you touch on transferability of tokens so in the examples you've given why there are tokens that are not freely transferable because of legal

constraints I'm not sure I understood fully but transferability means that I can send the token to some address that is not necessarily kyc yeah so in in the in in traditional world you cannot do that that because most financial instruments are not beer instruments but tokens are be instruments um so first they're not fully beer instruments so it's like the way the blockchain works and we use it most of the time is as bar instrument but once you do a tokenized asset you can have a lot of controls that allows it to not be a fully bar instrument as I said like you can have a register of chain that says the name of each person every time there is a transfer you also

update your offchain uh record and so you it's not beer you know exactly the the person if something goes wrong you can have a revert function that allows you to do thing but this is the a really interesting question and actually the next project I'm going to be working on is this question of standard because there are different approach that have been taken by different projects some embed the compliance directly on chain so you have like a wh listing mechanism and you can only send it to people that have been WID listed and it's easier than to compose it works better in the more way of doing things some have the compliance of chain so when you do a transfer there is some sort of function you need to call and someone with an API is going to check if everything is is compliant and then out of the process

and some have a more um lean approach I would say to let you do everything but then they check expost and they always have the control to do something so it's definitely one of the key question at the moment because you cannot just transfer the way crypto works at the moment you need to adap indeed um the process and the way we Design This has consequences on how much we can do later on right so for a simple transfer it won't change anything at some point there will be some check by someone to make it work but if it's Expos exante and so on will make the difference in how much we can leverage all this to build more complex applications perfect timing thank you

very much savier big round of applause to him [Music]