What is tokenisation in the financial space?

Establishing regulatory legal Fintech frameworks, and an awareness of the underlying assets attributing value to tokens is crucial in assessing risk appetite for tokens and similar securities.

Written by Nicolene Schoeman-Louw, Managing Director SchoemanLaw Inc, for LexisNexis South Africa.

A tokenised security is a tradable, blockchain-based financial asset representing an investment in another asset. The concept of tokenisation could include a coin (but is not limited to that) and involves creating a virtual token that represents ownership of a particular type of asset.

For example non-fungible tokens ("NFTs") and stable coins (cryptocurrrency) which are linked to assets and underlying value and not linked to "perceived" value.

"Security" is a negotiable financial asset that holds some value; there are three main types:

• Equity
• Debt
• Investment funds

Security tokenisation is when the ownership of security is materialised through the issuance of a "token” registered on distributed ledger technology (“DLT”) infrastructure or blockchain.

What does this mean?

A token becomes a record that has legal consequences and an economic value. Moreover, a blockchain can verifiably track ownership status and changes through auditable records. There can be no contradictory records in this immutable record. This follows once a transaction has been recorded and confirmed on the blockchain.

Furthermore, since a blockchain is a public registry, all transactions will be transparent to the public.

In South Africa

The Financial Sector Conduct Authority is actively considering the concept in a financial instrument context (“FSCA”) and the Intergovernmental Fintech Working Group (“IFWG”) with the South African Reserve Bank (“SARB”) through what is termed Project Khokha.

According to the latest report published a few weeks ago:

"Even in following an activity-based approach to regulation, it is important not to be technology blind, particularly as the decentralised nature of DLT and its implications raise several questions which challenge existing policy and legislative or regulatory frameworks.”

This indicates that we have a long road ahead in establishing regulatory frameworks, and an awareness of the underlying assets attributing to the value is crucial in assessing risk appetite.

Nicolene Schoeman-Louw
Managing Director SchoemanLaw Inc