Can regulation keep up with the tokenization boom?

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Imagine a world where ordinary investors could own a portion of underground oil reserves or a stake in a skyscraper with a single click. This is the promise of tokenizing real-world assets; A technology poised to unlock trillions of dollars in traditionally illiquid markets like real estate, commodities and infrastructure. But while this innovation will revolutionize global finance, the regulatory frameworks needed to support it are often left behind by rapid developments in the field.

Security tokens that represent RWAs such as real estate, commodities, or oil and gas have the potential to transform the way we invest, but they also come with strict regulations that must be followed.

Growing market for tokenized assets

According to Boston Consulting Group and the World Economic Forum, the tokenized asset market is expected to reach 16 trillion by 2030. Another report suggested that the market value of tokenized assets could rise to $10 trillion or $3.5 trillion in a ‘bull case’ scenario. This forecast covers a wide range of real-world assets, from real estate to commodities such as oil and gas, and demonstrates the growing appetite for fractional ownership models that allow day traders to participate in predetermined markets. It was previously the domain of corporate players.

But for all their promise, the path to tokenizing these assets is paved with regulatory hurdles.

Challenges of fragmented regulations

Specifically, one of the key challenges facing tokenization today is the fragmented nature of regulatory frameworks across different jurisdictions. While some countries, such as Liechtenstein and Switzerland, have developed clear regulatory structures for security tokens, many other key markets remain unclear or lag behind in defining how tokenized assets fit into existing securities laws.

For example, the European Union Crypto-Asset Markets Regulation, which will come into full force by 2024, provides clarity on how certain digital assets, including tokenized securities, should be regulated across the bloc. Such a regulatory framework is crucial to building investor confidence and ensuring that these new financial instruments comply with established legal norms. But while MiCA’s approach is promising, it is still limited geographically and global markets are fragmented. Furthermore, there is ongoing debate within the legal community regarding the interpretation and application of MiCA, particularly its application to tokenized assets, underscoring the complexity of aligning regulatory frameworks with the rapid pace of innovation.

In other regions, regulatory uncertainty is more pronounced. In the United States, the Securities and Exchange Commission has signaled that many tokenized assets fall under its jurisdiction as securities. However, the lack of definitive rulings on specific tokens has left many in legal limbo, unsure of whether they comply with U.S. securities laws. This uncertainty poses a significant challenge to global interoperability, an important feature for widespread adoption of tokenized assets.

The role of compliance and security

The regulatory uncertainty surrounding security tokens is not only a compliance issue but also a security issue. Blockchain technology promises greater transparency and security, with tokenized assets recorded on an immutable ledger that can be easily audited. However, these benefits depend on ensuring that the platforms that facilitate tokenization comply with anti-money laundering and know your customer regulations.

An important consideration for tokenization platforms is to comply with financial rules set by local and global authorities. To do this, many platforms use private blockchain systems or permissioned blockchain models to track who uses them and prevent illegal activities such as money laundering. However, the lack of standardization across jurisdictions creates significant friction in cross-border transactions, which is a key value proposition for the tokenization of global assets.

Additionally, ensuring the security of blockchain infrastructure and underlying assets remains a top priority. The potential for hacking, fraud or mismanagement of tokenized assets could undermine the credibility of this emerging market. Robust security measures, transparency and compliance are essential for tokenization to gain traction, especially among institutional investors.

Innovation opportunities in regulatory sandboxes

Despite these challenges, tokenization platforms are already finding success by collaborating with regulators in regulatory sandboxes (controlled environments) where they can test innovative financial products. Regulatory sandboxes in places like Singapore, the United Kingdom and Switzerland provide a testing ground for blockchain projects, allowing developers to identify compliance issues before rolling out to the full market.

For example, Switzerland’s SIX Digital Exchange has successfully issued tokenized bonds in a fully compliant manner, demonstrating how traditional securities can be brought to the blockchain. In May 2024, SDX issued a digital bond worth CHF 200 million in collaboration with the World Bank, further demonstrating how traditional securities can be brought to the blockchain while adhering to regulatory standards. ​

In Singapore, the Monetary Authority of Singapore’s regulatory sandbox has allowed projects such as BondEvalue, which tokenizes government bonds, to test their platforms under regulatory oversight. BondEvalue rebranded as BondbloX in 2023 and expanded its platform to allow bonds to be bought and sold at smaller denominations, making bond investments more accessible to retail investors. These examples show that innovation and compliance can work hand in hand, laying the foundation for a more secure and accessible market for tokenized assets.

The way forward: Collaboration and global standards

Ultimately, the future of tokenizing real-world assets will depend on global collaboration between regulators, developers, and investors. Security tokens present a tremendous opportunity to reshape how we view and access traditional assets, but this can only be achieved if the regulatory environment evolves alongside technological innovations.

A unified global regulatory framework would be ideal, but in the short term clearer guidance from national regulators and further development of international standards such as MiCA are essential. Moreover, ensuring interoperability between blockchain platforms can facilitate cross-border compatibility and enable tokenization to reach its full potential in a decentralized global economy.

For now, businesses need to proceed with caution as both the opportunities and challenges in tokenizing RWAs come into clearer focus. The winners in this space will be those who embrace both innovation and adaptability and strike the right balance as the market continues to mature.

Dave Rademacher

Dave Rademacher is the co-founder of OilXCoin, where he leads the company’s strategic vision, growth initiatives and marketing efforts. With extensive experience leading global organizations and managing large-scale budgets, Dave seeks to evolve the crypto investment landscape through real-world assets backed by natural gas and oil. Over 20 years at the BMW Group, including the roles of Global Vice President and regional leader in EMEA and APAC respectively, Dave has extensive experience scaling businesses (both in enterprise environments and startups) across four continents, leveraging diverse markets and cultures increases its ability. Dave focuses on connecting experienced crypto investors with opportunities in the established oil and gas sector and integrating crypto investment expertise with real-world assets. It is also trying to bridge the gap between traditional investors and the crypto space. It envisions providing new avenues of financing for leaseholders through tokenization, providing wider access to oil and gas investments, and promoting a more democratic and sustainable approach to asset ownership.