Key Takeaways

• Documentation Core to Digitization/Tokenization: Both digitization and tokenization processes are fundamentally about documenting the existence or ownership details of an asset.

• Tokenization as Blockchain-Based Documentation: Tokenization leverages blockchain infrastructure for documenting assets but requires additional solutions to address the lack of legal causality inherent in blockchain events.

• Limitations of Gen2 Blockchains: Second-generation blockchains do not offer the necessary features to effectively tokenize Real World Assets (RWAs), indicating the need for a third-generation system that incorporates legal causality by design.

• Beyond Legal Wrapping: The absence of causality should not be addressed merely by legal wrapping but rather through legislative efforts to establish national or international blockchain-based ownership registers with embedded legal causality.

• Risks of Blockchain Dependency: Tokenizing assets on the blockchain introduces a dependency on private agreements and data records, potentially managed by private parties or anonymous organizations. This can lead to challenges in proving ownership, especially in the event of technical issues or the use of decentralized blockchains, where there is no entity accountable for compensation.

• Implications for Mass Adoption: Global acceptance of blockchain for asset tokenization should not entail substituting direct ownership rights for private agreements documented on potentially anonymous or private blockchains. Such approaches place asset owners in a precarious legal position, contradicting claims about enhanced liquidity or ownership benefits through fractionalization.

• Inherent Risks of Entity Wrapping: Using entity wrapping exposes asset owners to significant risks, as illustrated by hypothetical scenarios where legal and regulatory challenges could nullify the perceived ownership rights conveyed through NFTs or similar tokens, leaving owners vulnerable to legal liabilities and without recourse.