TOKENISATION OF FINANCIAL ASSETS AND WHAT IS THE ROLE OF MICA REGULATION IN ALL THIS?

INTRODUCTION

The concept of tokenisation is quite broad and can mean many things. However, we will focus exclusively on one type of tokenisation, namely the tokenisation of financial assets, in particular financial instruments. In this case, it will mean creating a virtual equivalent (token) of a given asset, e.g. a share or bond, on the blockchain. The token is intended to represent ownership of the asset or the economic rights associated with it.

Recently, tokenisation has become the subject of enormous interest, no longer just as a technological curiosity, but as an instrument that could revolutionise the financial market, among other things. The entry into force of the EU’s MiCA regulation, which regulates the crypto-asset market, including some tokens, has changed a lot in this regard. This is also where a certain controversy arises regarding their legal classification within the EU – some tokens, despite being crypto-assets, are subject to MiFID II rather than MiCA regulation – more on this later. According to experts from the World Economic Forum, tokenisation is the next „stage of development” for securities, which have already transitioned from physical to dematerialised form. This is primarily intended to streamline the entire market and increase its transparency. However, the benefits do not end there – tokenisation opens up new opportunities, which will be presented below, along with a presentation of the individual financial instruments undergoing this process.

The first of these will be shares, which are currently enjoying the greatest interest. This is largely due to the activities of entities such as Robinhood, Gemini and Kraken, which recently obtained CASP licences, required by the MiCA regulation, in the EU and have thus undertaken a number of innovative tokenisation activities. Interestingly, shares and tokens based on them, as financial instruments, are regulated by MiFID II, not the MiCA regulation. However, it was the introduction of the latter that, in a sense, „legitimised” the token market in the eyes of investors. The aforementioned platforms began offering their European users the opportunity to purchase tokenised US shares (and ETFs). It is worth noting that the US Nasdaq stock exchange is also interested in share tokenisation.

From a technical point of view, these tokens are in fact a virtual representation of derivatives designed to reflect the price of the underlying asset, which in this case are individual American shares. It is therefore a contract concluded on a basis between the service provider and the user, involving a cash settlement obligation – on the part of the user if the share price falls, or on the part of the provider if the share price rises. The user does not own the shares constituting the underlying asset and is not entitled to any rights associated with those shares. The aforementioned Nasdaq exchange has declared a different approach to tokenisation. In its case, the token is actually intended to represent equity in the company and all associated rights.

Token trading is possible on a 24/5 basis, and ultimately 24/7 (in the case of the Robinhood platform). This allows European users to trade the virtual equivalent of American shares during the hours when European markets are open. Other advantages of tokenisation in the case of shares include low commissions (the Robinhood platform charges only 0.1% commission for currency conversion), the possibility of fractional ownership, and thus a very low entry threshold, as well as receiving the equivalent of dividends. The general idea and economic rationale behind tokenisation seems to be a desire to further simplify stock trading by removing barriers for users and reducing the number of intermediaries involved.

The market for „equity” tokens is currently very diverse, and each platform offers its users tokens on different terms. This lack of standardisation should make users more cautious, especially since tokens are often unsecured and do not directly represent the company’s shares, but only reflect their price. That is why it is so important to use proven and trusted service providers – i.e. those who have obtained a CASP licence in one of the EU Member States.

SHARES OF PRIVATE COMPANIES

Directly related to the tokenisation of shares is the issue of tokenising shares of private companies, i.e. those whose shares are not offered on the public market. Good examples of such companies are OpenAI and SpaceX, whose tokenised shares are offered for purchase on the Robinhood platform. This move caused quite a stir in the market, including objections from both companies, and attracted the attention of supervisory authorities. The situation has not yet been fully clarified, but it is worth explaining how it works from a technical perspective. Shares in private companies cannot be traded on the public market. For this reason, the tokens only represent a certain share in the equity of an external company, which in turn owns shares in a private company, e.g. OpenAI.

There are several problems associated with the mechanism described above. Firstly, tokens do not provide direct exposure to the asset they are supposed to represent. Secondly, the lack of public listings prevents transparent valuation of the company and exposes users to serious risk. Private companies also do not have the same reporting obligations as public companies , which can make it very difficult to make an informed investment decision. Despite these problems, tokenisation of shares in a pre-IPO formula provides an opportunity for smaller investors to gain access to a market that was previously unavailable to them. This obviously involves much greater risk, but also greater potential returns.

BONDS

The corporate bond market is characterised by lower liquidity than the stock market. For this reason, the benefits that tokenisation can bring here seem relatively greater. First of all, issuing bonds on the blockchain would reduce the number of entities involved in the entire process and significantly speed it up. It would also increase the transparency and automation of the entire process. Another advantage would be a lower entry threshold, which for many types of bonds is relatively high due to their high unit price. As with equities, tokenisation could also allow for the possibility of owning fractional parts of them.

If bond tokenisation has so many advantages, why has it not yet become ubiquitous? It seems that the main reason for this is its relative novelty compared to the classic form of bonds. Standards have not yet been established in this area, and there is a lack of a clear legal framework, not only at the national level, but also internationally. Technological risks that may arise in a market as large as the bond market also give rise to certain concerns.

However, it is worth remembering that despite its relative youth, the tokenised bond market is growing rapidly, and many reputable entities have already taken advantage of the opportunities it offers. These include BNP Paribas, Siemens and the World Bank.

INVESTMENT FUNDS

The investment fund sector in Poland, as well as globally, is characterised by a fairly high degree of regulation and supervision. This is understandable given the desire to protect investors, especially retail investors. However, this situation translates into a high degree of complexity for the entire sector and an increase in the number of entities involved, and thus higher costs. These, in turn, translate into lower potential returns for investors. At first glance, it is clear that tokenising fund units could bring enormous benefits.

It could increase the possibilities for their acquisition and disposal, as well as faster settlement, and it should be remembered that both of these factors contribute to the growing popularity of ETFs. The use of blockchain itself would also make it easier to record all transactions and reduce the need to involve so many entities. However, this process would require significant legal changes.

The MFSA (the Maltese equivalent of the Polish KNF) recently published its opinion on this very subject. In it, the authority drew attention to the legal requirements applicable to funds, but also pointed out that even under the current legal framework in Malta, the tokenisation of fund units could translate into increased efficiency – e.g. through easier access to data that would be stored in a decentralised register. These conclusions can also be applied to the Polish legal situation.

OTHER ASSETS

It should be remembered that tokenisation can cover the underlying asset directly or indirectly, through the tokenisation of a special purpose vehicle (SPV) holding the asset. Thanks to the latter method, it is possible to make asset classes that have so far been limited to professional investors more easily available to the wider public. These include private equity, venture capital and private credit funds. The aforementioned pre-IPO formula can also be included in this class. The capital threshold required to enter these markets has always been very high, but tokenisation can significantly lower it. This would also allow smaller investors to gain exposure to this market, albeit only indirectly, which entails additional risk.

The concept of tokenising bank deposits is also very interesting – it has already been tested by the biggest players on the market, including HSBC and J.P. Morgan. The tokenisation process is primarily intended to streamline interbank and international trading, allowing for almost instantaneous settlement of transactions. This will reduce uncertainty in trading and increase its efficiency by eliminating delays. All this will have a real impact on reducing transaction costs for both banks and consumers. From a technical point of view, these tokens represent a claim against the issuing bank for the payment of a deposit. They are therefore quite similar to stablecoins, but with the difference that, as bank deposits, they are subject to the same collateral requirements.

All of the above-mentioned asset classes are generally less liquid than shares, and this is where tokenisation could be most helpful. The same is true for real estate, which for many people is the safest type of investment. Their tokenisation is possible in an indirect form. It can provide investors with the opportunity to buy only a small „fraction” of a property and sell it in a much simpler way than traditional methods. Investors could profit from renting such properties, as was the case with tokenised shares and dividends, and the tokens themselves would provide constant exposure to the property market.

SUMMARY

Tokenisation, understood as the transfer of specific financial instruments to the blockchain in the form of tokens, seems to be the next step in the development of financial markets. It will accelerate and automate processes, as well as increase their transparency. It may also prove to be a „window to the world” for smaller investors who have so far been denied access to private equity, venture capital or private credit markets. It may also make it easier to invest in shares that are not available on the public market. However, all this comes with increased risk, especially for retail clients. Currently, the name „token” is assigned to a whole range of financial instruments, often significantly different from each other – it seems that their only common denominator is the use of blockchain infrastructure. While some provide only exposure to the price of a given share, bond, etc., others actually provide 1-to-1 coverage and collateralisation in the asset they are supposed to represent. For this reason, as always, we advise particular caution, and if you have any problems or doubts, please contact us. MSD’s lawyers will be happy to help you! After all, tokenisation is not only a risk, but also an investment opportunity. You just need to know what you are dealing with. However, if you are interested in tokenising specific assets, we also invite you to cooperate with us. Our law firm works closely with entities that hold both MiCA and MiFID II licences. This enables us to provide you with the highest level of comprehensive legal services.