Tokenization of everything in line with the Liechtenstein Token Act
Based on blockchain technology the concept of tokenization is expected to have a great impact on the capital market and its intermediaries. Providing the opportunity to digitally represent every value and right in the form of tokens offers enormous potential for the investment universe and is therefore rightly considered to be one of the future key innovations in the financial sector. But not for the financial sector it is assumed that tokenization will lead to far-reaching changes. In the future, tokenization will be used in many different areas. The new Liechtenstein Token Act, which came into force in January 2020, provides a legal basis that does justice to this development. Based on this legal certainty the emergence of the token economy is just a matter of time. Now, any right and any asset can be tokenized by companies and entrepreneurs without complex and time-consuming processes. Almost everything can be tokenized — mainly assets and related ownership rights, thereby creating a ‘new digital world’ functioning in synchrony with the underlying physical world. This gives software providers like Amazing Blocks the opportunity to offer a wide range of services and products. It is more than likely that ultimately hundreds, if not thousands of tokens will be issued in Liechtenstein over the next months. The era of tokenization has just begun and with the new jurisdiction in Liechtenstein, almost everything can now be tokenized. — Author: Nicolas Weber
Introduction to Amazing Blocks
Amazing Blocks was recently founded in Liechtenstein with the goal to offer the perfect solution for tokenization projects (e.g., real estate, cars, machines). To be precise, this means flexible tokens (e.g., equity tokens, debt tokens or tokenized participation rights) in accordance with the Liechtenstein Token Act. These tokens can represent a regular (un-traded) security and are regarded as such from a foreign point of view. All in all, the ‘digital AG in Liechtenstein’ enables an efficient and flexible tokenization for any desired use case. As this allows to significantly reduce the costs of a tokenization process a wide variety of tokenization projects are possible.
Introducing the legal framework
The legal framework provided by the Liechtenstein Token Act clearly regulates ownership. The owners have the power of disposal over the tokenized assets and rights at all times. In addition, the Liechtenstein Token Act can also be combined with EU passporting, allowing customers simplified market access, which in turn significantly allows a broad reach for tokenized assets. Especially the civil rights adjustments must be mentioned as an outstanding achievement. These adjustments integrate the fact that the physical world needs to be in absolute synchrony with the digital token economy at all times. This point should not be neglected, as it can always happen that tokens are lost or stolen. The Token Act also effectively regulates the direct and seamless transfer of equity tokens from one involved party to another without intermediaries like notaries.
Additionally, the tokenization of assets and rights without legal workarounds enables improved supervisory, transparency as well as automated and standardized processes. This leads to considerable time savings and reduced costs. The legal approach is technologically neutral in its design. The framework is intended to avoid becoming irrelevant or deprecated as it leaves room for further adjustments based on new information. An important aspect considering the fast pace of this technology.
The ‘Token Container Model’
The core element of the new legal framework is the ‘Token Container Model’. In this model a token serves as a container with the ability to contain rights of all kinds. It is possible to ‘load’ this container with a right that represents a real asset like shares, gold or real estate. Once tokenized, these assets are represented through a token on the Blockchain. The right provides the owner with an individually suited digital representation of their asset, as shown in Figure 1. The tokenization itself follows an ordered life cycle, as do the resulting tokens. As stated before, this gives software providers like Amazing Blocks the opportunity to offer a wide range of services and products. The cycle in general consists of the following elements: Generating the token, issuing (normally through ETO, STO, IEO or ICO), trading against other tokens and placing the token in an investment portfolio for diversifying purposes.
Not only the Token Container Model is new, there are also other new roles that are being introduced for the first time due to the new regulations. One of these new roles is the so-called physical validator. His role is to integrate the physical world into the digital world. His job is to permit the tokenization of a pre-existing right and to identify the respective token owner. Furthermore, the physical validator ensures contractual enforcement of the represented entities and obligations. This establishes a correct business process for all parties involved. Token transfers make unnecessary paperwork obsolete and can not only be attributed to a person, but also to machines and intellectual property. Thus, they can be a major driver in the development and adoption of IoT. Moreover, the token´s private key can be delegated to a representative, boosting security who acts on behalf of the actual owner. Also copies of the key can be made, enabling owners with the authority of disposition, but not the right. The rights embedded into the token will never change but can be adjusted or transferred. The rights of certain tokens can even be divided and allocated to several different ‘sub-tokens’ under the umbrella of the original token; consequently providing more flexibility than traditional assets and rights like securities.
Protected Cell Company and tokenization in Liechtenstein
Protected Cell Companies enable targeted risk management, as the assets of the individual segments are clearly separated from each other and from the core. PCCs are not a legal form directly, but rather an organizational form that allows corporate bodies to be divided into different segments. The field of activity of the individual segments must be legally permissible and fit the purpose of the legal entity. Thanks to their ideal suitability for the structuring of financial assets, they can be found primarily in investment management. Especially for foundations this form of organization offers advantages. In contrast to an umbrella foundation, small individual foundations (e.g., tokenized equity of multiple assets) can operate separately in terms of liability and capital, despite being all managed by one company.
To tokenize equity capital, the Liechtenstein Token Act must be applied. This requires a legal entity based in Liechtenstein. A company limited by shares (Aktiengesellschaft) can be used for this purpose — organized within the PCC. The respective AG’s shares can be tokenized subsequently. Relying on a tokenization software, the first projects are already doing this which you can read here. These tokenized shares allow an easier administration of the legal entity itself, especially for changes of ownership or to onboard investors.
Tokenizing an asset with debt and equity tokens
Imagine, you place an asset in a legal entity, for example, a real estate object. As described above, this asset can be tokenized by debt tokens which are separated from the tokenized shares of the legal entity itself. Technically speaking, there are two smart contracts at work. One smart contract for the tokenized shares of the company and another one for the debt tokens of the real estate object. A tokenization software provider then allows multi-asset administration.
Another example is that of a tokenized machine. In that case equity tokens are a good choice. One would transfer the ownership of the machine to the legal entity and tokenize it. ‘It’ in this sense could mean equity. The token holder then owns a part of the machine. See Figure 2 below for more details.
Tokenizing multiple assets with multiple tokens per asset
Of course, it would also be possible that we transfer the ownership of multiple assets to the legal entity. Even more so, each asset could be represented by multiple types of tokens. For the machine, equity tokens could be issued while for the real estate object debt tokens could be issued.
Another very interesting model is if several tranches of tokens are issued for one and the same good. For example, it might make sense for the real estate object to issue both debt tokens and equity tokens. The investors of the debt tokens receive an interest payment for their investment; either a fixed interest rate or a flexible interest rate. Vice versa, the investors in the equity tokens own the asset and hold the equity value. Their reward is — simply speaking — the profit whereas the interest payments have previously been deducted. The multi-asset-multi-tokens issuance is illustrated in Figure 3.
The legal framework provided by the Liechtenstein Token Act will set standards in terms of the relationship and synchrony between the digital and physical world. With Liechtenstein being a member of the EEA (European Economic Area), it seems likely that the Liechtenstein Token Act will make a decisive contribution to the standardization of tokenization processes in Europe. Liechtenstein has secured for itself an exceptional position in the emergence of a token economy.
In 2020 alone, it is expected that hundreds, if not thousands of tokens will be issued in accordance with the Liechtenstein Token Act. The majority of tokens will be created for direct relationships (e.g., private placements during fundraising) or B2B purposes. Only some of them will be publicly announced as security tokens. This will soon change and a steadily growing number of corporations will eventually apply this model.
In conclusion, it is fair to claim that Liechtenstein has created one of the best legal frameworks in Europe with regard to tokenization and is therefore an interesting location for various projects and will be so in the future. The fact that all kinds of rights and assets can now be tokenized in a way that is hardly time-consuming and costly is unique in our view. No workarounds like in other countries are necessary. This standardization of the required processes is another important step towards the token economy. And Liechtenstein is at the forefront of this development.
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Amazing Blocks offers a tokenization solution that enables its clients to tokenize various assets according to the Liechtenstein Token Act (software-as-a-service). The software covers both the issuance of tokens and investing in tokens. It suits the needs for tokenizing all kinds of assets (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). Imagine that some asset should be tokenized. For this asset various tokens would make sense: Equity tokens, debt tokens, participation rights as tokens, ownership tokens, or any mixture of these tokens. The software of Amazing Blocks helps issuers to handle multiple assets and to issue multiple tokens for these assets. This is possible by integrating blockchain technology with the law (that is, the Liechtenstein Token Act). At the core, there is the “digital legal entity in Liechtenstein” based on “tokenized shares” which allows a very efficient foundation, a very efficient operation of the company and, thus, an efficient and flexible possibility to tokenize assets. This should now make a wide variety of tokenization projects possible, because the costs for tokenization are significantly reduced.
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