Tokenized Securities: EU Regulation pushes Asset Tokenization forward
What is MiCA?
MiCA, or Markets in Crypto-assets as it’s called, may be heard of by those into blockchain and crypto on a European Level. This is the proposed legal framework meant to address crypto-assets not covered by existing financial services legislation. It includes everything from payment tokens and NFTs to utility tokens and everything in between.
The idea is for MiCA to support innovation and fair competition of services related to crypto-assets with a high level of consumer and investor protection in mind. This also includes measures against market manipulation and prevention of money laundering, terrorist financing, and other criminal activities.
But what about Security Tokens?
Security Tokens, however, are a bit arbitrary as they in fact are securities that in turn are regulated under current financial services legislation. The only difference is the underlying technology of settlement and custody residing on a blockchain. So where do Security Tokens fall within the regulatory progress on the EU level?
Introducing Regulation (EU) 2022/858
Just a few days ago a new piece of legislation came into force, specifically for crypto-assets already covered by financial service legislation.
This new blockchain regulation is part of the EU commission´s broader digital finance package with MiCA being another part, proposed back in September 2020.
A package with “the goal to create a competitive EU financial sector that gives consumers access to innovative financial products, while ensuring consumer protection and financial stability”.
But it is the same principle of creating publicly tradeable securities out of an underlying asset that otherwise would not be categorized as such.
What does this mean?
As you can see in Brickken´s Whitepaper, we deal specifically with Securities. Namely Equity & Bonds that you can read more about here.
This regulation introduces just that, DLT financial instruments understood as traditional financial instruments that are issued, transferred, and stored on a distributed ledger.
As this new technology allows for real-time trading, transaction settlement, and self-custody, the regulation combines such activities alongside traditional structures.
Regulation 858 represents the first concrete action within this area and the aim is to create a Pilot Regime for market infrastructures based on blockchain and other DLT technologies. An action that aims to test the potential of moving away from the requirement of authorized investment firms, credit institutions, and other big entities having to act as intermediaries. And instead, towards a more dynamic approach where a temporary exemption from the obligation of intermediation is given to Pilot Participants provided that adequate measures are in place to protect the investor.
What is a Pilot Regime?
More commonly referred to as a sandbox approach some of you may recognize it as Brickken in fact participates in a similar venture in conjunction with the Spanish government.
This is essentially a term used in the fintech industry and refers to a tool for developing regulation that keeps up with technology. This approach allows regulators to build their regulatory response on the results of live experiments.
By giving participants an exemption from current legislation, entities are allowed to work with the new technology alongside and with supervision from policymakers to test it out in a secure environment before any actual laws that might prove to be technology inhibiting are passed.
In this case, the Pilot Regime allows for DLT market infrastructures to be exempted from provisions and requirements laid down in the EU´s financial service legislation, such as MiCA and intermediary requirements.
Given the limited experience in regard to trading crypto-assets qualifying as financial instruments (Such as Security Tokens), the European legislators will gain experience in identifying the targeted adjustments to European financial service legislation to enable full development of issuance, custody, trading, and settlement of these instruments.
What does this mean for Brickken?
This will open up a market amounting to 100s of billions of euros through Equity and Debt instruments. Albeit in a carefully tested environment, this shows the approach of the EU in realizing the importance of tokenized securities and the benefits they enable.
Through this method, the European Commission opens the door to tokenizing shares of a company with a market capitalization of less than 500 million euros; issuing bonds, or securitized debt, for up to 1.000 million euros, and even shares in a fund with a market value of less than 500 million.
Additionally, any new Security Token issued may not have a market value greater than 6.000 million at the time of issuance, or 9.000 million if appreciated. Limits that are set in place to protect the integrity of the market and financial stability.
As CEO & Fintech Lawyer Edwin Mata says;
The Pilot Project will come into effect in the first quarter of 2023 and will run over the course of 5 years. During which companies operating in the sector can apply to participate in leading the way for the new financial era of tokenized Securities.