In brief, tokenization relates to the issuance by a central party of digital units (crypto tokens) through a blockchain such as Etherium. These programmable tokens can be used to provide solutions for many instances which involve the demonstration of a holder’s right or claim against a third party. Such instances include a property right, a right to take action or a right of control.
Tokenization in practice
One of the most familiar examples of tokenization in practise is the Initial Coin Offering (ICO) and Security Token Offering (STO). In both cases, tokenization and blockchain technology are used by the token issuer as an alternative method of obtaining financing. The tokens function as the digital embodiment of an obligation loan or a claim to a share of the issuer’s profits. Because the tokens are issued via a blockchain, they are easy to transfer and can potentially be traded.
There are many legal aspects involved with tokenization. This is certainly true when the tokens to be issued – as in the examples given above – serve as a means for the issuer to obtain alternative financing. How the tokens qualify within the existing framework of (financial) laws and regulations is just one of the issues to be evaluated. This qualification also has important consequences, such as a licence requirement for the issuer and/or the platform of the technical service provider who enables the issuance and trading of tokens. Privacy issues and the legal aspects of IT, among other factors, also play a role.
We would be pleased to examine with you the way in which tokenization can be deployed in your company. For more information about this, please contact Jelmer Baukema.