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Tokenization: the post-pandemic state of the art

Summary of round table: Legal & Regulatory dilemmas

July 5, 2022

After a 2-year drought induced by the COVID-19 pandemic when it comes physical meetings, it was finally time to organize a 2Tokens round table sessions again on the 10th of May (2022). The announcement was well-received, and over 80 people gathered to discuss the current state of tokenization and to look back at what has happened (or what not) in the past two years.

Over 7 tables with 7 different themes, the participants discussed why do we need tokenisation? What is required to achieve value from tokenisation? And how should we move ahead with it?

The big why for tokenization

There are many reasons as to why tokenization works, but the specifics depend mostly on the sector of implementation or on the lens used to see tokenization. Tokenization can contribute to:

  • a. reduce the gap between people andtechnology
  • b. make procedures and governance more efficient and inclusive
  • c. accelerate investments
  • d. incentivize bottom-up organizations
  • e. increase transparency

7 tables, 7 discussions

Finance and tokenization

Tokenization in finance can fragment the ownership of assets, allowing the creation of new business models as well as lowering the barriers for entry for micro-investors.

Connecting security tokens to finance can bring the following advantages:

  • Accessibility: the blockchain allows to implement a universal whitelisting, as there is no platform identification required at every broker in that case.
  • Efficiency: reducing settlement time for issuers and investors.
  • Disintermediation: reducing lending and money printing from traditional financial intermediaries
  • Improving governance and the voting rights distribution
  • More transparency in funding societal projects due to its decentralized technology and governance

Frictions for tokenization

One of the main limiting factors of innovation is the presence of regulation, even though this
kind of instrument assures standardization. Other kinds of fictions were:

  • The risk of a “tokenize everything hysteria”.
  • A lot of copying and rebuilding is done, while there is need for innovative ideas
  • Lack of traceability for governments
  • Legal uncertainty is still on the table
  • Everyone should understand the technique nowadays, but it’s not yet the case
  • There is a lack of understanding of the best practises from a monetary perspective

How to accelerate

Having a clear view on what to tokenize in finance is a first step. In addition, we need to have a
clear framework that is supported by the regulator. MICA is one of such frameworks that has started to change the EU market. Some proposed to establish a working group for the Dutch interpretation of the European rules.

Within the finance groups, stakeholders have highlighted the need of “increasing the community and make all the information publicly available (e.g. podcasts, education) to everyone so that we all can build and learn.”

In a branche with little standardization, linking other benefits to the possible security (or any other
tokens, such as NFTs, utility tokens, flexible ownership, or even royalty income) can attract investors.

Tokenize for Energy

Today, one of the most important problem we are facing is how to speed up the energy transition. In order to comply with the needed carbon neutrality for saving the possibility of a decent life on the
planet, energy production is moving from fossil fuels to renewable and from centralized to decentralized systems.

One of the main areas where tokenization can contribute to the energy transition, is by digitizing solar or wind parks, EV charging stations, and to create smart grids. Tokenization can allow fractional ownership of solar farms which increases access to solar panels for micro-investors and local communities under the umbrella of energy communities. 

In Europe, players are studying or piloting this type of tokenization. For instance, Riddle and Code
and Wien Energy have launched MyPower, a product defined as a scalable, agile, and regulatory compliant blockchain-based energy tokenization platform which allows consumers to benefit from using green energy. Not only companies, but also municipalities can play a great role: they have access to critical data and can use this to understand how to prioritize energy transition projects.

In general, the main driver of tokenization in the energy market is to use data for its democratization, commercialization and to ease the upcoming energy poverty.

Frictions

Naturally, the term 'green washing' found its way into the discussion: many companies are required by shareholders to use local green energy for their own consumption to compensate an overall low environmental performance.

How to accelerate

The most needs are related to standards for machine identities, registries, financing, tokens, regulations and acceptance support, machine regulations, and decentralized marketplaces.

Here, the most important aspect is the standardization of the kwh token. The Energy Token use-case is working on this at the moment and will continue doing so in phase II. Furthermore, it would be also important to link local markets to the regional markets in order to eliminate arbitrage.

ESG criteria and tokens

The main dilemma of this table was "Crypto infrastructure does not conform with ESG criteria". There are two reasons for this to happen:

  1. The ecological footprint of crypto mining. Even though there are better technologies than the proof-of-work algorithm (e.g., Bitcoin), the energy consumption is still excessive.
  2. The second issue is related to the "E" aspect of the ESG- environment; tokenization in the offset business gives leeway to greenwashing activities.

Why yes

Tokenization allows for transparency; making compliancy to the ESG criteria a more transparent process. Moreover, tokenization can provide social inclusion and enhanced accessibility, promoting the development of renewable energy resources and a social contract at a global level.

Frictions

Governance refers to the diversity, inclusion, and stakeholders you address. It can be claimed that blockchain companies increase the diversity of their stakeholders, making it challenging to know the interests of stakeholders that are being served. Thus, this creates tension with the G of the ESG criteria and the crypto infrastructure, which is still not very well regulated.

How to accelerate

All members have agreed that solid standards need to be put in place in the blockchain and crypto world for reporting purposes.

Data can be put on the blockchain and then used for reporting purposes, allowing more transparency.

The ESG group has considered threepotential data sources: oracles, algorithmic, and crowd. There is need of metadata as well as their proof of origin of the source. Additionally, solid standards are fundamental; this includes the data aspect and the hardware being used. Multiple data sources are needed, and organizations need to learn from other industries that have done similar exercises, particularly within Europe. Standards are critical; in terms of indicators there are several options of
international standards that could be adopted.

Applying the EU approach to health data

The members of this roundtable have mentioned the DARWIN EU Project as a best practice to be copied and implemented in the crypto world. Specifically, the European Medicine Agency has launched a coordination centre to provide timely and reliable evidence on the use, safety and effectiveness of medicines for human use, including vaccines, from real world healthcare databases across the European Union (EU). The participation to the project is open to all EU Citizens, who can access valid and trustworthy data. The governance defines the purpose and ensures that everyone has the same
rights, approach, and metadata.

Who should regulate the quality of the data and assurance?

Society needs to steer away from relying ongovernmental bodies to verify data because the public trusts the lowest denominator rather than the highest denominator such as the governments. There
should be a decentralized platform in which the crowd should choose with little governmental interference. The government can propose certain measures, and then the crowd decides whereby everyone has a role to play.

This can happen with the use of an openplatform, a decentralized marketplace, verified by consensus. The Wikipedia model is an excellent example of knowledge democratization and governance by
the crowd.

Crypto and the E: a possible solution forclarity from the EU Parliament

To reduce the high carbon footprint ofcrypto-currencies, particularly of the mechanisms used to validate transactions, MEPs have asked to the Commission to present a legislative proposal to include in the EU Taxonomy for Sustainable Activities any crypto-asset mining activities that contributes substantially to climate change, by 1 January 2025.

Stablecoins: who should lead the agenda?

Stablecoins are tools that try to keep astable value: they can be defined as asset-referenced token, or e-money token. They often aim at being used by their holders as a means of payment to buy
goods and services and as a store of value. Another kind of stablecoins is defined as algorithmic stablecoins that aim at maintaining a stable value, via protocols, that provide for the increase or decrease of the supply of such crypto assets in response to changes in demand (EU Mica 26.). According to the Commission, stablecoins can be spread globally and have an impact on financial
stability.

How to classify stablecoins? How about their governance?

The group discussion was focused on whoshould be responsible and lead the process of regulation and acceptance of stablecoins.

The Commission in the MICA report tends to propose a separate specific regulation for stablecoins but harmonised with the E-Money directive. The group at this roundtable has been more inclined to
associate stablecoins with e-money.

Provocatory questions have emerged from thegroup:

  • How do you ensure trust from consumers, businesses, and government?
  • In the particular case of the Euro stablecoins why should an organization who
    brings out a Euro stable coin not be better suited to better harbor the
    stablecoin than a government?
  • Isn’t legislation on stablecoins driving them to centralization?
  • Who can enforce the rules?
  • Who’s going to pay if everything goes wrong?

Overall, everybody agreed on the need for the creation of a widely accepted regulation which can allow the creation of specific frameworks related to the different models.

NFTs and the uncertainty of an emergingmarket

Non-Fungible Tokens, defined as unit ofdata stored on a digital ledger that keeps records of the purchase and prevents forgery (EU Commission), are unique sellable and buyable assets in a digital
world: it is possible to consider them as virtual proof of ownership. Introduced in 2014, the market represents still a niche in the crypto-asset world; nevertheless, several market studies position the market with a Compound Annual Growth Rate (CAGR) of 33%-35%between 2022 and 2030.

Why yes

The NFT brings a prove of ownership andinformation related to a specific asset such as real estate or cars. NFTs could bring value to raising capital in future platforms such as the metaverse.
Increased transparency could cut the middleman, lead to more trust and, in turn, to conceive loyalty programs for investors. NFTs have created a standard that can allow to share data and ownership between entities. They can be used for various industries. It is a fast and cheap alternative to physical items which is easily distributable. The following example will ease the understanding of NFTs:

Car market

Without NFTs: A potential buyer asks to the seller for copies of the service history, for details of any outstanding finance on the vehicle, if has the car ever been involved in any accidents. The information
typically will be in a paper format not chronologically ordered and some
information may be missing.

With NFTs: The seller gives you a digital certificate - aka NFT - which has all the above information logged on a blockchain, so the potential buyer can verify the registered vehicle's service history,
insurers, and claims record and what, if any, finance is outstanding on the vehicle.

Frictions s

The general audience does not know muchabout NFTs yet. Moreover, sometimes the NFTs reputation is not the highest and should be improved. This might be given by the fact that accountability within
the NFTs world is still difficult to define.

Regulation will help to define them but now it is not there.

Another challenge is given by the need feltby some participants of a trustable entity: who verifies the information on the distributed ledger?

Other concerns have emerged in the group about the solidity and the rights related to the NFTs: how can one prove that something is unique with an NFT? Who holds the rights of what is bought? Is a
digital NFT entailing a property contract? Do certain rights transfer when the NFTs are sold?

How to accelerate

Accelerating NFTs development makes sense only if NFTs creators will a guarantee real utility, different from collectible utility, and a good user experience. SS

Challenges/opportunities and beyond

Several roundtables on May 10th have shown how many challenges and opportunities circle around crypto-assets and tokens.

All groups have agreed on the greatpotential of distributed ledgers to:

  • Reduce the gap between people and technology,
  • Make procedures and governance more efficient and inclusive,
  • Increase transparency.

The possibility to incentivize bottom-uporganizations such as energy communities or the possibility to accelerate investments have been discussed.

The presence of best practices always helpsand the energy or the finance sector are starting to have use-cases to showcase with a strong utility. The latter was mentioned several times as conditio sine
qua for reaching success.

The implementation of the ESG criteria in the tokenization process and the use of tokens to improve impact and ESG KPIs measurement is still at the early stage: there is potential, there is need to
improve measurement but still few successful projects in Europe.

Consumer adoption is still tricky: the stakeholders in the token world should address the concerns about financial stability or the authentication issues but without hindering innovation. How to
do that? Educating or upskilling the market is probably the answer.

Overall, the main concerns are unanimouslyrelated about how regulation like MICA will affect the market and how local regulations can deal with a global market.

Finally, an often-undervalued transversal challenge has emerged: the lack of communication among stakeholders. We need to collaborate more, and act synergically. Therefore, 2Tokens exists. This is why
we will continue, beyond challenges and opportunities, proposing new use-cases, new sectors, and new methodologies to enable an inclusive path towards tokenization.