Source: Renmin University of China Financial Technology Research Institute
Author: IMF José M. Garrido
Compiler: Hou Jinyi, Hong Caixuan
Recently, the International Monetary Fund published an article "Digital Tokens: A Legal Perspective" linking tokens with the traditional business tool doctrine and analyzing the extent to which tokens can function as existing instruments in commerce and finance. effect.
The article mentioned that tokens show great potential in the new digital economy. Tokens are not just self-referential virtual assets like Bitcoin, but can also provide access to digital services and assets. Eventually, it can also connect offline assets and services. In this regard, it can perform functions similar to business tools, and tokens have greater possibilities because they are not restricted by some of the basic principles of business tools.
At the same time, the article also mentioned that tokens provide the possibility for updating business and financial laws. If tokens can be legally connected to offline assets and services, tokens will become a tool to improve the efficiency of various economic activities.
The following is the full text of the article:
I. Introduction
2. Token Revolution
3. Business Tools and Tokens
Table 1 Types of instruments designed to exercise and/or transfer rights
The various functions performed by tools explain their different categories. Table 1 shows that the most basic types of instruments are those designed for legalization (such as wardrobe tokens and airline tickets), while more complex instruments are designed for the transfer and exercise of rights in commercial and financial transactions, such as negotiable instruments (such as bills of exchange, cheques, promissory notes and letters of credit), financial contracts (derivatives, financial instruments, swaps), securities (stocks, bonds, warrants and fund units) and documents of ownership (such as bills of lading, terminal warrants, terminal receipts and goods delivery orders).
Although paper money is historically associated with these instruments, it has a different legal nature. Originally, money was based on the intrinsic value of coins (so-called commodity money, which relied on the value of the metal in the coins). However, a series of transformations occurred: In the beginning, paper money was based on the same structure as commercial paper - a document that included a promise to pay the bearer a certain amount of commodity currency. Over time, the right to receive commodity money was waived and eventually abolished. Since then, money has no intrinsic value, nor does it contain the right to receive anything. Currency is a means of payment that performs basic economic functions as a store of value and a unit of account, but it does not have the characteristics of a commercial tool.
Different regimes for the transfer of instruments illustrate the trade-off between negotiability and security. In essence, it can be said that the easier the transferability, the less secure the transfer. Documents that are more difficult to transfer are documents that reflect the name of the holder ("nominal" documents), but these are also more effective at preventing illegal transfers and the exercise of rights. On the other hand, there are "bearer" instruments, where the mere transfer of the physical document implies a complete transfer of rights. As the ease of transfer increases, so does the risk of illegal transfer and exercise of rights.
In situations of increased transferability, intermediaries and custodians tend to play a more important role because they provide additional security to holders.
However, the trade-off between transferability and security is affected by technological developments. Traditional documents are designed using paper and signatures. Paper facilitates dissemination and transportation, and the use of signature and printing technology makes counterfeiting more difficult. The interplay of these elements allows for various combinations of transferability and security. With dematerialization and encryption, transmissions become faster and more reliable, the loss of physical documents is no longer a risk, and passwords replace signatures as a technology that shows the authenticity of one's actions. This means transmissibility is easier and safer. Still, there's always a trade-off between transferability and security. Even with the protection provided by cryptography, and ease of transmission online, there are risks of key loss, fraud, and the use of coercion in transmission.
The main purpose of commercial instruments is to facilitate the transfer of rights, but they also need to include protection against risks. The inclusion of documentary rights creates the risk of loss of rights arising from the loss of the document and, from a third party's perspective, the risk of forgery. These measures show that "company registration" is more of a metaphor than the real equivalence of rights and documents. Otherwise, this approach will inevitably equate rights and documents. connect together. Against the risk of forgery, instruments often have built-in protections (such as watermarks or serial numbers), and parties must check the signature to verify its authenticity.
Principles of business instruments assist in the creation of securities. However, there are some significant differences: compared to traditional business instruments such as bills of exchange, securities tend to be imperfectly literal (i.e., shareholders' rights arise from legislation and the company's articles of association and are not usually described in the stock title itself), and they are issued continuously, sometimes in large numbers, whereas instruments in commercial practice tend to be drawn up for a specific situation (i.e. a bill of lading for a particular ship's cargo) rather than as part of a series.
The incorporation of documentary rights was crucial to establishing financial markets, but became a victim of its own success. While incorporation made securities markets possible, the growth of the market resulted in the sheer volume of paper documents representing securities, which eventually became cumbersome for market participants (the "paperwork crisis").
Fixation and dematerialization emerged as two alternative approaches to the problem of handling large volumes of paper documents. Fixation still depends on the existence of physical documents, but these stock or bond certificates are deposited with intermediaries and modern systems can be deployed for securities trading. Securities do not need to be liquidated in order to be transferred - the intermediary records the transfer in the system and the security vests in the new owner without the certificate of ownership changing hands. In these systems, the management of intermediaries and the contractual relationship between intermediaries and investors become crucial. Further in this process is dematerialization. The dematerialization regime does not rely on paper documents at all: securities exist only as electronic entries in the registry.
With the advent of dematerialized ownership, the legal system of negotiable instruments, documents of title, and securities experienced a serious crisis. The replacement of physical shares and bonds with digital entries in the register calls into question the principles of “incorporation” (since there is no longer a physical element) and forces a reformulation of these conceptual principles to fit the new reality.
Dematerialization affected not only large-scale fungible ownership (securities) but also other commercial instruments (such as checks or bills of exchange). In most cases, traditional business instruments continue to be created as documents but become fixed after creation and are replaced by digital images or records (fixed or incompletely dematerialized).
In many legal systems, the traditional principles of commercial documents have been partly replaced by registration techniques. These processes of immobilization and dematerialization increase the speed of processing commercial documents and reduce the cost of processing commercial documents.
Registration has a similar effect to registering, but is structurally different. Registration also "incorporates" this right, i.e. any change in registration means a change in the right or the person entitled to exercise that right. The law provides that a change in registration determines a change in ownership. In addition, in a fixed-based system, the certificates are fixed, and intermediaries play a leading role in the establishment and transfer of security rights, which are carried out through accounts with these intermediaries.
The principles and evolution of business tools provide useful lessons for the emergence of tokens. Tokens share the common goal of business tools: they are designed to facilitate the transfer of rights and enhance the security of these transfers. But the technology that enables tokens is completely different than the technology that creates business tools, and tokens allow for far more flexibility than business tools. In any case, experience with commercial tools helps to understand the underlying functionality of tokens. The dematerialization of tools can be seen as an intermediate step between traditional paper business tools and tokens. Both tokens and dematerialized instruments lack a physical carrier and operate using digital records. The difference is that tokens are embedded in a ledger that records all transactions, which ensures the integrity of the transaction database. This is not necessarily guaranteed in a dematerialized system. Dematerialized systems require a depository or similar body to track dematerialized titles and ensure the integrity of the system.
Tokens work differently than traditional business tools. The main difference between tokens and traditional business tools is the lack of incorporation. Since the token is irrelevant, it is impossible for the merger to play a role in its configuration. This affects how the rest of the principles work when considering tokens. Tokens are not included in the document, so the regime of transfer of movable property does not apply - at least in the absence of special legal rules in this regard - does not apply. Since the consolidation principle does not apply, the remaining principles are also affected (see Table 2). However, the fact that the principles are applied differently does not pose a problem for the operation of the token; quite the contrary, the token has the opportunity to benefit from its greater flexibility.
Table 2 Application of business calligraphy principles to tokens
Tokens represent different technologies for exercising and transferring rights and represent improvements to existing tools. Since the token is based on advanced technologies of digitization and cryptography, its operation has clear advantages compared to using documents. As mentioned above, the tokens do not need to be merged. Tokens can operate at lower costs and with greater security than traditional business tools. There are other, less obvious advantages: literalness and autonomy can be tailored in a way that is not possible with commercial documents.
Tokens have advantages over existing business tools because of their greater flexibility and versatility. A comparison between tokens and existing business tools reveals their similar functions and some different characteristics. If we look at the functions performed by commercial law books, tokens can perform all of these functions. In fact, tokens may have the potential to perform all of these functions. Tokens can be used as functional substitutes for legal tokens or documents, and can be used as negotiable and title documents, security notes, securities, and also as currency. Additionally, certificates of deposit can be replaced with tokens.
The token can also coexist with existing business tools, but it is worth noting that it can perform additional functions that cannot be achieved by business tools. The link to smart contracts means that tokens can have anything and thus are not restricted by a limited number of instruments, as is the case in commercial law. Tokens also do not experience the typical limitations of literal principles. For example, through smart contracts, complex suites of rights owned by shareholders can be included. In this way, the entire contractual relationship or the full status of a shareholder can be contained in the token. This overcomes the literal limitation: every acquirer of a token can know exactly what all the rights related to the instrument are.
In the field of negotiable instruments and ownership certificates, the emergence of the concept of "electronic transferable records" has opened up the way for the use of tokens. Successive reforms to the Uniform Electronic Transactions Act (UETA) of 1999 and the U.S. Uniform Commercial Code (UCC) introduced the concept of electronic transferable records, which recognizes the need to replace paper documents electronically for a variety of business purposes. possibility. Fundamental innovations include allowing the replacement of paper documents with electronic alternatives and then replacing the concept of possession with the concept of control. Tokens used for the functions of negotiable instruments and certificates of title are consistent with both this general framework and the UNCITRAL Model Law on Electronic Transferable Records.
Additional legal changes may be needed to maximize the token's potential. The emergence of tokens requires another fundamental legal shift to integrate and absorb this innovative technology within the conceptual framework of business tools and to extend similar technologies to other areas of business and finance. The experience of dematerialization can provide valuable lessons, but may require additional changes.
4. Token Classification
The token was developed in a short period of time and is independent of legal institutions. Tokens are used in a variety of contexts and in connection with a variety of economic activities, but their rapid transformation and versatility make classifying them according to established legal or economic categories particularly challenging. Tokens, due to their unique characteristics, cannot be classified according to traditional commercial law types.
A taxonomy is an attempt to understand the nature and function of tokens. Taxonomies provide some order in rapidly changing areas. Some taxonomies are very granular in seeking to understand the various technical and business aspects of a token. In other cases, the motivation is to create uniform technical standards for the industry. Furthermore, taxonomies are often incorporated to inform legal reform and regulatory guidance: in these cases, taxonomies can have important legal consequences beyond token characteristics, as they form the basis of regulatory architecture.
The taxonomy combines private law and regulatory approaches. A major problem with taxonomies is that they may be aligned with financial regulatory classifications, combining classification criteria based on private law categories with criteria based on private law categories. In many cases, the overall thrust of the classification is to place some tokens under the authority of securities regulators, others under the jurisdiction of central banks or payment systems regulators, and then omit the rest.
Some taxonomies are based on functional criteria. These taxonomies look at the functions that tokens perform and establish some basic differences between them. This is the preferred approach by regulators as these taxonomies help delineate the scope of the regulatory regime. According to these functional taxonomies, there are three types of tokens, namely: 1. Payment or exchange tokens; 2. Utility tokens; 3. Security tokens.
The difference between various tokens is the functionality assigned by each party to a specific token. Payment tokens are accepted by parties to settle obligations between them. Security tokens have the same functionality as traditional securities such as bonds or stocks. Utility tokens can be similar to vouchers: tokens are redeemable against services or goods provided by the issuer.
Functional taxonomies are helpful in understanding the flexibility of tokens and placing them under certain regulatory regimes, but they do not address key legal issues. In practice, functional classification is asymmetric. While classifying a token as a security has legal consequences, it is unclear whether classifying a token as a “payment token” or a “utility token” has any impact. Tokens in these categories are based solely on actual usage of the tokens by market participants. Since tokens are very flexible and can perform multiple functions, any classification based on functional criteria has limitations. In fact, tokens can perform many more functions than those captured in the functional taxonomy (e.g., due to non-transferable identity tokens, tokens can be used as a means of proving one's identity), and tokens can also perform multiple functions simultaneously. functionality (e.g. utility tokens can also be used as payment tokens). Tokens can also become "hybrid" by adding more content to the typical content of the instrument (for example, a security token that works as a stock can also give the holder additional rights, such as a discounted price on a product).
Other taxonomies include other categories of tokens. In some cases, a fourth category has been added, including so-called "asset-referenced tokens" or "asset-backed tokens." This category refers to tokens that are linked to a commodity or any other asset and used for indirect transactions therein (e.g. tokens backed by a currency or basket of currencies, gold, diamonds or real estate).
This suggests that the use of tokens is not clearly reflected in the basic functional taxonomy and raises legal issues. The EU treats asset-based tokens as a separate token class, along with utility tokens, e-money tokens and crypto-assets. Switzerland is also considering a category of asset-backed tokens (FINMA, 2018). In many cases, asset-backed tokens overlap with the “stablecoin” category, i.e. tokens designed for payment purposes that provide price stability by being pegged to a price-stable currency or any other asset.
The Market Regulation for Cryptoassets (MiCA), adopted in May 2023, includes the following definitions in its Article 3:
"Crypto-asset" means a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology or similar technology.
"Asset Reference Token" means a cryptoasset that is not an electronic currency token and is designed to maintain a stable value by reference to another value or right, or a combination thereof, including one or more official currencies.
"Electronic Currency Token" or "Electronic Currency Token" refers to a cryptoasset designed to maintain a stable value by reference to the value of an official currency.
"Utility Token" means a cryptoasset that is used solely to provide access to goods or services provided by its issuer.
The main outcome of the classification is to regulate the offering of crypto-assets and establish a regulatory regime for companies providing token-related services.
As part of the legal reform, a number of taxonomies are being developed. For example, the European Union devised a legal regime establishing a special taxonomy of tokens. The motivation for this taxonomy is the need to define the legal and regulatory regime for financial activities. As with other legislative designs, there are categories that fall directly within the legal regime (e.g., the electronic money regime), and there are categories that do not fall within the existing financial regime, such as “utility tokens,” about which the proposed regulations are silent. In this regard, the main purpose of this taxonomy is to define the application of special regimes under the principle of “same activities, same risks, same supervision”.
The alternative classification looks at other characteristics of a token, such as fungibility and divisibility. Functional taxonomies tend to highlight fungible tokens, but tokens can be fungible or non-fungible. This distinction is similar to that in tangible assets. Fungible assets are substitutable with other assets of the same class (for example, commodities such as oil or coffee are fungible), while non-fungible assets have individual characteristics that prevent their substitution (for example, artwork or trademarks). Similar to tangible assets, tokens can also be indistinguishable from each other or have a unique identity. Tokens can also be divisible or indivisible. In principle, fungibility and divisibility are related, but there are exceptions: fungible tokens are often divisible, but this is not always the case (e.g. Rights - such as the right to receive a specific instrument), divisibility may have limitations (even hyperfungible tokens, such as "cryptocurrency", can be divided to the point where fractions are effectively worthless, often referred to as "dust" ). Indivisibility, on the other hand, is a technical feature of non-fungible tokens (NFTs), but fungible and divisible tokens can be created, representing fractions of non-fungible tokens.
The non-fungible token market has experienced rapid expansion. The main difference between fungible tokens and non-fungible tokens is that non-fungible tokens are unique and cannot be replaced by other tokens and their properties are also unique, while all fungible tokens offer the same rights , can be replaced by other fungible tokens of the same category.
Among other commercial uses, NFTs are being used to market digital art. The fact is that NFTs themselves are not works of art - NFTs often contain hyperlinks to digital or physical works of art, but this does not mean that the owner of the NFT is actually the owner of the artwork. The only idea the buyer gets is the token itself, and the artwork can only be found through the link included in the token. The lack of legal connection between NFTs and actual artworks can cause confusion and frustration among buyers.
On the other hand, it should be possible to establish a real connection between an NFT and an artwork (or any other single object, such as a building), with the same characteristics as fungible tokens related to assets and services. If the NFT is subsequently divided into fungible tokens, legal issues may arise regarding its classification as a collective investment scheme.
Legal analysis can be based on a taxonomy of tokens that distinguishes various "classes". Native tokens are regulated by the DLT protocol and exist only in the blockchain without any connection to any other reality outside of the virtual environment. The remaining tokens are connected to assets or services through smart contracts. Smart contracts determine the rights that token holders have. A further distinction can be made between tokens that reference services and assets that exist only in a virtual environment and tokens that provide permissions for services and assets that exist offline. These three categories (which we can call Level 1, 2 and 3 tokens – see Figure 1) are not only functionally and structurally different, but also raise different legal issues.
Figure 1 Tokens classified by level
These levels represent various classes of tokens, depending on whether they have ties to online or offline assets. While native tokens are not required to perform any specific function (e.g. Bitcoin), native tokens in a DLT may also be used as a means of payment for services in a platform - for example, ETH is used as a means of payment for deploying smart contracts in Ethereum. This way, the same token can function in both levels 1 and 2. However, the difference between Level 2 and Level 3 is clear: Tokens can entitle virtual services or assets (fully autonomous tokens) or real services or assets (which can be referred to as “synthetic” tokens). From a commercial law perspective, this is actually the most important distinction and raises different legal questions.
5. List of legal issues regarding digital tokens
Currently, our legal analysis of digital tokens is still in its infancy. International organizations are leading the way in providing guidance on legal issues arising from the use of tokens. UNCITRAL’s work on electronic transferable records provides a blueprint for the use of tokens in the area of negotiable instruments and documents of title. Following the approach adopted in the latest revision of the United States Uniform Commercial Code, the United Nations Commission on International Trade Law conducted a more general analysis of the private law aspects of digital assets, defining them as “controllable digital records.” This concept covers both tokens and other non-token digital assets.
A comprehensive list of laws can help understand how the law can respond constructively to the widespread use of tokens. An indicative list of questions focusing on issues of major economic significance includes the following:
1. Legal nature of tokens: Policymakers use a “level classification” to divide digital tokens into three levels, reflecting the different legal characteristics between tokens. This item enables us to recognize the nature of digital tokens as intangible property and the possibility of being linked to assets and rights.
2. Applicable regime for token transfers: This content allows us to establish the validity of transfers between Distributed Ledger Technology (DLT) addresses. At the same time, additional requirements can be defined.
3. Connection of tokens to offline assets or services: This content emphasizes that legal rules must grant the rights contained in tokens, which requires the establishment of mechanisms to ensure correspondence between offline and online realities. At the same time, the transfer of tokens takes precedence over the transfer of tokenized assets or rights.
4. Security interests in tokens: This item emphasizes that security interests in tokens based on trust transfers or pledges with transfer of control are allowed.
5. Loss, Fraud and Illegal Transfers: This item enables illegal or fraudulent invalid transfers to establish a method for recovering lost tokens in a centralized system.
6. Rights of token holders in bankruptcy: This content recognizes the possibility of property rights to tokens, allowing token holders to benefit from stronger protection in the event of bankruptcy.
7. Procedural Remedies: It sets out procedural remedies that adapt to the nature of distributed ledger technology.
8. Conflict of laws: This content identifies conflict of laws rules consistent with the specific characteristics of the innovative technology.
6. Tokens and Securities Laws
Since tokens can be linked to any type of entitlement, they can be securities to a certain extent. However, countries have different systems for classifying securities, and the fact that tokens are quite flexible and can perform multiple functions does not mean that all tokens are securities. At the same time, because tokens can contain rights that are different from those contained in securities, many of these tokens will not be securities. In fact, so-called utility tokens can include many other types of rights, such as the right to receive services or goods at a specific price. These tokens do not appear to share any functionality with securities.
Some countries have established legal regimes where tokens can be used as securities. More typically, Switzerland passed the DLT Act in 2020, which introduced extensive reforms to private law and securities law. The law introduces DLT rights (Registerwertrecht), which provides the basis for the tokenization of assets and rights. Securities represented by tokens can be created in DLT. These tokens can be transferred via DLT without the need for physical transfers, paper transfers or custodian registration. Swiss law also addresses intermediary insolvency by allowing tokens to be segregated and returned to customers. In Germany, the Electronic Securities Act 2021 introduces a new category of electronic securities that includes dematerialized securities in a central registry and tokens in a “crypto-securities registry.” Bona fide acquirers are protected under the law, and restrictions on token transfers must be included in the registry or known to the acquirer to be effective.
The use of tokens as securities will significantly promote the development of financial markets. Tokens can provide more liquidity to many companies and support new business models. The use of distributed ledger technology (DLT) can bring advantages in terms of cost reduction, convenient settlement, transparency and operability, but there are also technical issues (such as the scalability or energy consumption of DLT) and, most importantly, generation To operate as a security, there must be no legal uncertainty. Therefore, securities laws and regulations need to be adapted to the issuance of tokens.
Despite the lack of a legal framework, it is possible to design tokens that operate as securities. If tokens can be classified as securities, then they will be subject to securities law rules. All systems would benefit from clear legal definitions for determining whether a token is a security. To define a token as a security, the key point is the content of the rights, i.e. whether the token includes rights with financial content: in theory, a token could include rights to receive payment streams (like bonds) or voting rights and dividends (like stocks ). The content of rights is an essential element of the definition of a security, but there may be other elements, including mass distribution and ease of circulation. The existence of a secondary market may also be a sign of a security offering.
In any case, investor protections are only effective if the risks of the token are typical investment risks. Securities laws ensure that information provided to the public is accurate and also eliminate serious information asymmetries. When a token is considered a security, the full spectrum of securities law should apply, including prospectus requirements, continuous disclosure obligations, trading rules, market rules and intermediary rules, as well as effective enforcement.
7. Tokens, Consumer Protection and Digital Economy
Tokens raise different issues beyond the realm of securities law, which does not provide all the responses needed for widespread use of tokens. However, many token transactions simply require commercial law rules. Tokens can be used in traditional business contexts (i.e. relationships between entrepreneurs, also known as business-to-business relationships (B2B)). Some uses of tokens may correspond to the use of commercial instruments (e.g., bills of exchange, warehouse receipts, bills of lading), while others may represent contractual rights incorporated outside of these instruments (e.g., tokens providing access to computing services, or tokens used to organize asset sales). As long as these tokens are involved in B2B transactions, the only rules required are those contained in commercial law. The same or similar rules can also operate in transactions between consumers (C2C): these rules are particularly important in decentralized networks.
As a first step, token transactions between businesses and consumers should fall under consumer protection laws. However, more fundamental reforms are needed to protect consumers in token transactions. The fact that these transactions take place in a digital environment does not change the rationale for the operation of consumer protection rules. In general, consumer protection laws should adapt to the new digital economy. This adjustment can update consumer protection laws to meet the challenges of Internet commerce, but some additional steps will also be needed to account for new practices. For example, a consumer's right to withdraw from a transaction needs to be adapted to distributed ledger technology (DLT), where a transaction cannot be "undone" and what is required is a reverse transaction to bring both parties back to their original positions. Furthermore, it should be taken into account that the token issuer may be located anywhere in the world, and the specific location may not even be identified, and consumers may not be able to bring lawsuits to enforce their rights. For this reason, we propose to incorporate Alternative Dispute Resolution (ADR) procedures into token contracts to provide consumers with an opportunity to resolve conflicts with issuers through alternative, cost-free mechanisms.
Legal and regulatory regimes need to be supplemented by rules specifically designed for the digital economy. In particular, the law needs to ensure the transparency and authenticity of token sales. Tokens are the core of the new digital economy, and it is necessary to formulate rules to ensure that consumers can know and understand the rights and content contained in tokens. At the same time, if the token is associated with an offline asset or service, it is necessary to ensure that it corresponds to its description in the digital material. This is one of the biggest consumer protection issues.
Figure 1 Legal framework of digital economy
Furthermore, protective rules require technical expertise to be effectively applied and enforced. Ensuring that consumer-facing tokens include a verbal description of their content requires regulators with technical expertise. Verifying the accuracy of information, including claims in white papers and promotional materials, requires IT expertise. As a result, some countries are establishing regulatory agencies with specific technical knowledge (eg Albania and Malta). Technology regulators can operate independently or in partnership with existing regulators.
8. Conclusion: A Comprehensive Approach to Token Regulation
Tokens show great potential in the new digital economy. The combined technological advances in distributed ledger technology and similar technologies, as well as smart contracts, offer new possibilities for tokens. Tokens are not just self-referential virtual assets like Bitcoin, but also provide access to digital services and assets. Eventually, it can also connect offline assets and services. In this regard, tokens can perform functions similar to business tools, and tokens have greater possibilities because they are not constrained by some of the basic principles of business tools.
The functionality of tokens illustrates the complex relationship between technology and law. Basic legal issues need to be addressed in the regulation of tokens. If tokens are to reach their full potential, a basic set of legal rules needs to be formulated to incorporate tokens into existing legal structures and provide solutions for the problems faced by tokens. Provide legal support. Among these issues, the law should recognize and define distributed ledger technologies and smart contracts, integrate them into existing legal mechanisms, and recognize their impact in transferring tokens and generating rights for parties. In this regard, it is necessary to ensure that there is a valid legal link between distributed accounting technology and offline assets and services. In addition, it is necessary to establish rules that allow the use of distributed accounting technology as evidence and to solve the problem of illegal transfers (loss, coercion and fraud). There must be remedies to protect the rights of legitimate token holders, while also protecting the rights of legitimate token holders. A bona fide acquirer of value.
Tokens provide the possibility for updating business and financial laws . If tokens can be legally connected to offline assets and services, tokens will become a tool to improve the efficiency of various economic activities. Legal policy addressing the use of tokens should focus on substance. Laws are crucial to ensure the smooth functioning of tokens in business and financial environments. Rather than following a formalistic analysis of existing legal frameworks, legal policies for tokens should focus on the substance of the functions performed by tokens to achieve a similar degree of legal certainty and protection. This is the approach that legislators and regulators should follow.
In the field of securities law, tokenization represents a further development of modern technology. Over the past few decades, the securities market has changed due to the introduction of modern IT systems. Tokens represent a step forward in the dematerialization of securities, which could ultimately lead to faster and more economical clearing and settlement models, although this will require laws regulating the market infrastructure. Because tokens are inherently flexible, they can be designed to provide access to services and assets, away from traditional security content. However, marketing techniques may resemble those used in speculative investing: it is necessary to establish a clear line to determine whether securities laws apply to token transactions. As noted above, consumer protection laws may apply to the sale of tokens. However, where token sales do not fall within the scope of securities laws, consumer protection rules should be adapted to supplement the operation of securities laws.
Legal and regulatory regimes may need to be supplemented by special regulation of the digital economy. Adjusting the securities law system and consumer protection system will still leave gaps in the supervision of digital activities. In particular, tokens can be transferred on currently unregulated markets. These markets must respect basic rules of integrity. Laws and regulations need to consider and integrate technical aspects. The creation of platforms, issuance of tokens, and token holders as users and enablers of new digital activities may require regulation and oversight based on technical knowledge, taking into account commercial, financial and legal issues.
With the right legal system in place, the potential for tokens in the new digital economy is extraordinary. Tokens offer new possibilities in various areas of finance and business. Coupled with the Internet of Things and artificial intelligence, there is room for profound changes in economic activities. Automated contracting for the provision of services and goods through tokens, due to connections to online manufacturing and distribution, could bring the prospect of change to all sectors of the economy. There are no clear losers from these changes, and all countries can benefit from these technologies. However, these technologies must be supported by a strong institutional framework and appropriate controls.
The evolution of technology will require ongoing assessment of risks and adjustments to legal responses. Using tokens as basic tools for economic activity is not without risks. A solid legal foundation will help minimize risks, but the rapid transformation of digital technologies will also require constant monitoring and development of legal technology to provide appropriate safeguards.
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