Tokenization of Securities vs. Real-World Assets (
Published on December 05, 2023
Author : Greg Hauw, Founder & CEO, Ohanae, Inc

In the dynamic landscape of finance and Web3 technology, the concepts of tokenization have emerged as transformative forces, reshaping traditional investment paradigms. This article delves into the distinctions and implications of the tokenization of securities and real-world assets ("RWA"), considering the Howey Test as a gold standard and highlighting the regulatory framework, including the Reg A+ exemption, as the ultimate customer protection.

Tokenization of Securities: Unlocking Liquidity and Access

What is Tokenization of Securities?

Tokenization of securities involves the conversion of traditional financial instruments, such as stocks into digital tokens on a blockchain. This process creates a digital representation of ownership or a security interest, enabling fractional ownership and facilitating trading on blockchain-based platforms.

Key Advantages:

Enhanced Liquidity: Fractional ownership makes high-value assets more accessible, increasing liquidity in traditionally illiquid markets.

Continuous Trading: Decentralized blockchain networks enable 24x7 trading, offering investors flexibility beyond traditional market hours.

Global Accessibility: Tokenized securities can be traded globally, providing investors worldwide with access to a diverse range of assets.

Reduced Intermediaries: Peer-to-peer transactions on blockchain reduce the need for intermediaries, enhancing operational efficiency and reducing costs.

Smart Contracts: Integration of smart contracts automates processes, ensuring transparent and efficient execution of predefined conditions.

Tokenization of Real-World Assets (RWA): Democratizing Ownership

What is Tokenization of Real-World Assets?

Tokenization of Real-World Assets ("RWA") involves digitizing tangible assets like real estate and art, creating digital tokens representing ownership. These tokens facilitate efficient trading on blockchain platforms, offering fractional ownership opportunities.

Key Advantages:

Fractional Ownership: Investors can own fractions of high-value, tangible assets, democratizing access to exclusive investment opportunities.

Diversification: Fractional stakes in various real-world assets enable portfolio diversification, reducing risk and providing a hedge against market volatility.

Efficient Trading: Blockchain ensures secure and transparent transactions, reducing fraud and enhancing the efficiency of trading real-world assets.

Democratization of Investments: RWA tokenization opens exclusive investment opportunities to investors with varying financial capacities.

Increased Liquidity: Similar to tokenized securities, RWA tokenization enhances liquidity by allowing fractional ownership to be bought and sold.

The Howey Test: A Regulatory Benchmark

The Howey Test, established by the U.S. Supreme Court, is the gold standard for determining whether a transaction constitutes an investment contract and, therefore, a security. The test examines four key elements:

Investment of Money: Participants invest money with the expectation of making a profit.

Common Enterprise: The investor's fortunes are linked with those of the promoter or other investors.

Expectation of Profit: Investors expect profits from the efforts of others, typically the promoters or managers.

Efforts of Others: The success of the investment relies on the efforts of others, indicating a passive investment.

Challenges and Considerations: While the tokenization of securities and real-world assets offers promising advantages, adherence to regulatory frameworks such as the Howey Test is crucial. Regulatory considerations, standardization, and security concerns are paramount in ensuring the legitimacy and acceptance of these digital financial instruments.

Regulatory Safeguards: The Reg A+ Exemption

The Regulatory A+ (Reg A+) exemption provides a legal framework for certain public offerings, offering enhanced investor protection and access. Reg A+ offerings, commonly known as mini-IPOs, allow companies to raise capital from the public without the stringent requirements of a traditional IPO. This exemption includes tiered offerings with specific disclosure requirements, providing transparency and mitigating risks for investors.

Challenges and Considerations

While the benefits of tokenization are evident, regulatory adherence, standardization, and security concerns are critical considerations. The Reg A+ exemption serves as a crucial component in ensuring investor protection and fostering confidence in tokenized securities and real-world assets.

Conclusion: Navigating Future Finance

Tokenization of securities and real-world assets signifies a paradigm shift in financial instruments, leveraging blockchain for enhanced liquidity, accessibility, and transparency. Regulatory frameworks like the Howey Test and the Reg A+ exemption play vital roles in providing legal clarity and customer protection, contributing to the legitimacy and acceptance of these digital financial instruments. As these innovative trends evolve, they are set to shape the future of finance, offering investors unparalleled opportunities within a robust regulatory framework.

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Disclaimer

Ohanae Securities LLC is a subsidiary of Ohanae, Inc. and member of FINRA/SIPC. Additional information about Ohanae Securities LLC can be found on BrokerCheck. Ohanae Securities LLC is in discussions with FINRA about exploring the expansion of business lines for the broker/dealer.  Any statements regarding abilities of Ohanae Securities LLC are subject to FINRA approval and there are no guarantees FINRA will approve the broker/dealer’s expansion.

Ohanae Securities is seeking approval to be a special purpose broker-dealer that is performing the full set of broker-dealer functions with respect to digital asset securities – including maintaining custody of these assets – in a manner that addresses the unique attributes of digital asset securities and minimizes risk to investors and other market participants. If approved, Ohanae Securities will limit its business to digital asset securities to isolate risk and having policies and procedures to, among other things, assess a given digital asset security’s distributed ledger technology and protect the private keys necessary to transfer the digital asset security.