What is Tokenization?
Experienced Tokenization Law Firm
Tokenization is quickly becoming the new norm for sharing ownership interests in a single piece of property, business, or artwork. They are very popular due to their ability to give every investor a chance to participate without requiring a massive capital outlay.
Nevertheless, many tokenization projects involve the issuance of tokens that meet the SEC´s definition of a “security.”
If you issued such token in your tokenization project without registering or being exempt from compliance, you can face fines and penalties, disgorgement orders, injunctions, and reputational harm.
Do not let this happen to you and your project without first speaking to an attorney. At Oberheiden, P.C., we have a dedicated team of Blockchain Attorneys experienced in tokenization projects.
We can evaluate your project for possible compliance obligations, including registration issues with the SEC, investment advice, broker-dealer registration, compliance with FinCEN rules, and even tax reporting requirements for tokenization projects.
Put Oberheiden, P.C. on your side today to resolve these compliance issues.
Tokenization: Definition and Examples
Tokenization is defined as the process of converting sensitive pieces of data into non-sensitive tokens. A specialized database stores the original form and the corresponding token.
In other words, the asset to be “tokenized” is converted into a token and transferred, stored, and permanently recorded on the blockchain.
Once the asset is tokenized, it can be offered and sold to the public in an ICO or STO (if the asset satisfies the SEC´s definition of a “security”) and can be used for regular business activities and transactions.
Examples of assets that can be tokenized include businesses, artwork, real estate, and virtually any other asset.
SEC Compliance Implications
It is important to retain a lawyer experienced in tokenization because many tokenization projects are “securities” in the eyes of the SEC and must be registered.
For instance, if the tokens associated with the tokenization project involve (1) an investment of money, (2) in a common enterprise, (3) with the expectation of projects, (4) derived solely from the efforts of others, then this could be a “security.”
This test—called the Howey Test—is being used by the SEC to evaluate whether certain digital asset projects—such as the tokenization of assets—are “investment contracts,” “securities.”
Industry Applications of Blockchain and Tokenization
Tokenization relies upon and is dependent on blockchain technology. Tokenization projects and developments are occurring in multiple industry sectors.
Below is a brief list and description of how blockchain technology and tokenization are changing various industries:
- AccountingIndustry: Using blockchain technology for storing sensitive accounting data ensures the public, accounting firms, federal agencies, and businesses that their accounting records are secure and safe from tampering. Accountants have traditionally had to deal with mounds of paperwork and documents. With blockchain technology, everything is automated and properly compiled and stored. This reduces the possibility of error, fraud, and theft.
- AviationIndustry: The aviation industry benefits substantially from blockchain technology. Blockchain technology can help with organizing the details of millions of passengers and flight paths. It can track plane progress and ensure customer security in a way that builds a network of trust. Further, the aviation industry can take advantage of asset tokenization. With tokenization, entry barriers to purchase and/lease aircrafts are reduced because these aircrafts can be tokenized via fractional shares and provide individuals with more investment opportunities.
- Banking Industry: Banks are the powerhouses of storing not only customer finances but also value. Many banks have already adopted cryptocurrencies and are relying on blockchain technology. Therefore, the use of blockchain technology and decentralization enhances the security of individual account data and funds because no single entity, government, or person controls it. The confidential data is stored on a distributed ledger—the blockchain—across a network of computers, called nodes.
- Construction Industry: This industry can involve complicated projects and involve professionals in many different areas such as builders, architects, electricians, managers, developers, and so on. Storing contracts or validating the identities of these individuals has traditionally been a cumbersome and lengthy task. Blockchain technology changes the game by streamlining these processes to ensure accuracy, immutability, and the security of information.
- Healthcare and Medical Industries: These industries are highly regulated due to the sensitive nature of the information they control such as patient medical records, prescriptions, health histories, and so on. In addition to doctors, individuals within this industry include dentists, pharmacists, and therapists, as some examples. Traditional activities in these industry sectors are sometimes bureaucratic and can involve many parties at different levels for various tasks such as approvals and recordkeeping. Blockchain technology prevents errors in various stages of this industry´s operations. Many companies are even developing specific mobile apps to help themselves and their patients keep track of their records.
- The Internet: The Internet is riddled with fraudulent scams and false identities not to mention unauthorized access. Blockchain technology stands to make a meaningful impact within the Internet. Company login information and verification procedures are streamlined. Further, blockchain technology can verify user identities for necessary matters before proceeding. This helps with Internet security.
- Real Estate Industry: The traditional real estate industry involved wealthy investors and large amounts of capital to purchase and sell properties. In short, real estate had one of the highest entry barriers compared to all the other industries. Tokenization and blockchain technology changes this. For instance, a seller could split their property into multiple pieces and sell individual tokens to many buyers. This helps smaller investors by allowing them to pool their funds, lowering entry barriers, and providing them with access to capital for their start-ups like never before imagined. It also allows individuals and businesses to avoid the need to rely on venture capitalists to fund their operations. Tokenization gives all investors access to participate in investment opportunities via fractional ownership.
- Trucking and Shipping Industries: This industry also stands to benefit from blockchain technology. For instance, trucks may be carrying valuable assets across state lines. In addition to being able to track the whereabouts of the truck and your shipment, the blockchain would record updates regarding the transaction. Ancillary issues include optimizing the routes of the shipments—thus increasing efficiency.
- Voting and Elections: Voting stands to benefit tremendously from the use of blockchain technology. At present, users generally cast their ballot by verifying their identities and giving a paper ballot. With blockchain technology, a user´s identity and vote are verified and stored on the blockchain. There can be no election tampering or changing of one´s vote. States and governments can manage voting systems in a more efficient and trustworthy manner and, at the same, ensure that fraud and corruption are virtually eliminated.
What are the Advantages of Tokenization?
The tokenization of assets offers individuals and companies numerous advantages, especially the following:
- Increased security because of the use of blockchain technology;
- Lowers entry barriers for individuals wishing to participate in certain projects such as selling or buying real estate;
- Greater investment opportunities and portfolio investment opportunities through partial or fractionalized ownership;
- Enhanced liquidity;
- Automation of transactions;
- Greater transaction speed and ease;
- Facilitates financial transactions and innovations;
- Transparency because everything is visible and stored on the blockchain;
- Less likelihood of cyber-attacks and data breaches;
- Faster payment solutions;
The above are only a few examples of the advantages of tokenization.
If you are curious as to how tokenization can affect your business, give us a call today.
Need Advice with Tokenization?
Tokenization offers greater liquidity, more investment opportunities, lower entry barriers, faster and more inexpensive transactions, and transparency.
At the same time, many tokenized projects satisfy the SEC´s definition of “security” and must be registered. Despite the many benefits of tokenization, if the SEC determines that you and your company are selling unregistered securities, you could face substantial fines and penalties, injunctions, disgorgement orders, and reputational harm.
Do not let your tokenization project get dragged into a federal investigation. At Oberheiden, P.C., our team of Blockchain Attorneys are experienced in digital asset projects and tokenization.
We can help evaluate your project for potential compliance issues and develop ways to boost your compliance. Do not wait.
Call or contact us today for a free and confidential consultation.