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What Is Tokenization?

Blockchain attorney Dr. Nick Oberheiden

Attorney Nick Oberheiden
Tokenization Team Lead
Blockchain attorney Alina Veneziano

Attorney Alina Veneziano
Tokenization Team Lead

Why You Should Hire an Experienced Tokenization Law Practice

Tokenization is a new way of sharing ownership in one asset, property, business, artwork, etc. This makes it possible for anyone to participate/invest in property they would have otherwise been unable to acquire alone due to the huge capital investment.

However, tokenization projects involve issuing tokens that can qualify as securities as per the SEC. To avoid compliance issues, you should speak to a tokenization attorney immediately. Legal expertise on tokenization should be sought out before launching a project as it may require SEC registration if there is no exemption.

Non-compliance with SEC rules on securities-related projects can attract hefty fines, penalties, injunctions, disgorgement orders, reputation damage, and possible jail term if the tokenization project involves criminal activity attributable to specific individuals.

Don’t wait for a federal investigation, charges, and penalties. Speak to our experienced team of tokenization lawyers and consultants at Blockchain Lawyer. Our team has blockchain attorneys and consultants who understand tokenization projects and more.

Let’s evaluate your tokenization project for compliance obligations like SEC registration, FinCEN compliance, IRS reporting obligations, and more.

Definition: Tokenization

Tokenization can be defined as a process that involves converting a valuable asset like physical property into tokens that are then stored on the blockchain. As mentioned, the tokenized asset can be many things. Once tokenized, the asset can be sold through an ICO (IPO for tokens/crypto) or STO (Securities Token Offering) for regular business and transactions.

Tokenization and SEC Compliance

Most tokenization projects qualify as securities offerings subject to SEC registration. You need an attorney experienced in tokenization matters to ascertain your project isn’t subject to SEC registration. A legal expert on tokenization can also advise on designing your project to bypass SEC registration or taking advantage of exemptions.

The SEC uses the Howey Test to decide if offerings are security offerings. A tokenization lawyer can assess if your project meets the four conditions in the Howey Test, such as if there is a money investment in an enterprise with an expectation of profiting from third-party efforts.

Applications of Tokenization and Blockchain

Many industries are already benefiting from tokenization. Here are the main industrial applications of tokenization and blockchain technology in general.

Tokenization in the Accounting Industry

Tokenization is one of the many blockchain uses. The process uses blockchain to store sensitive account data to ensure customer data, business data, and other parties to accounting records are assured of safety and security.

Accounting records are safe from tampering and unauthorized access. The underlying blockchain technology that powers tokenization also helps automate the records and processes handled by accountants which reduces errors, theft, and fraud risks.

Tokenization Application in Aviation

Blockchain can help organize and store sensitive passenger information, among other information like flight paths. The technology can track planes, and store customer information securely. The aviation industry can also tokenize assets like planes. Instead of looking to traditional financiers, tokenizing aircraft can lower the barrier for leasing or purchasing planes as one plane can be financed by multiple individual investors.

Tokenization/Blockchain in Banking

Banks store sensitive customer information. They also handle multiple transactions exposing them to many risks. With blockchain, banks can safeguard customer account data better and use cryptocurrency to offer faster transactions.

Tokenization in Construction

Construction involves many professionals (developers, managers, architects, electricians, builders, etc.) and countless documentation. The industry has had challenges in storing documents like contracts and authenticating professionals. Through blockchain technology, issues surrounding the accuracy and security of information are no longer a problem.

Tokenization in Healthcare

The healthcare industry also handles sensitive customer information (patient records, health history, prescriptions, etc.). Healthcare professionals like pharmacists, dentists, therapists, etc., also handle many bureaucratic tasks with different levels of approvals and recordkeeping. Blockchain prevents errors in such processes. It also safeguards sensitive information allowing access to authorized persons only.

Tokenization in Real Estate

Real estate transactions involve hefty amounts reserved for traditional players. By tokenizing real estate, it is possible for many individuals to be lenders of one property. Funding can also be sought out from many individuals as opposed to one bank or venture capitalist firms. Tokenization allows splitting of one property into many tokens that can be bought as a representation of fractional ownership in property.

Tokenization in Shipping and Trucking

Ships and trucks carry valuable assets nationwide and globally. They are also valuable assets in themselves. The industry also involves multiple transactions and tracking shipments. Blockchain can handle sensitive records and payments, allowing automation and unmatched safety and security. What’s more, the technology is bound to improve the efficiency of the shipping and trucking companies.

Tokenization/Blockchain in Elections/Voting

Blockchain also has some voting benefits. Currently, users vote after verifying their identities and submitting a ballot. Blockchain can verify a voter’s identity and votes before storing them permanently from the blockchain where they are transparent for everyone to see and can’t be tampered. If applied universally, the technology is bound to improve how states and governments manage voting and elections. Most importantly, there will be increased trust, less fraud, and more efficiency.

Tokenization/Blockchain on the Internet

Fraud, identity theft, and many other scams and wrongdoing plague the internet as we know it today. When applied effectively in many areas like verification processes online, the technology stands to have a great impact. If internet users can be verified at different stages, the internet will be safer.

Benefits of Tokenization

Entities and individuals stand to enjoy the following from tokenization:

  • Increased security linked to blockchain use
  • Increased trust/transparency
  • Lower barriers of entry – tokenization allows people to own a tiny fraction of a large asset.
  • Increased funding opportunities since many individuals can also fund large projects like mortgages
  • Automated transactions
  • Faster transaction time
  • Lower data breaches and cyber risks

There’s obviously more to tokenization benefits. Reach out to us for more insights on how tokenization can benefit your business and the compliance issues you should be concerned about.

Professional Advice on Tokenization

Tokenization increases transaction speed, funding options, and security; lowers risk of fraud; and offers many other benefits.

However, the tokenization project in question can qualify as a security as per the SEC. This automatically introduces SEC compliance issues. If you engage in a tokenization project without complying with the necessary federal regulations, you risk being subject to federal investigations, charges, and penalties like hefty fines. Your reputation can also be damaged. What’s more, you may be forced to surrender the profits you make using your tokenization or blockchain project.

These scenarios aren’t new. Messaging giant, Telegram, has been subject to such SEC actions before. Don’t wait to face federal investigations or enforcement actions.

Our tokenization lawyers and consultants have the experience to handle compliance issues relating to digital asset projects and other blockchain ventures. Contact us today and we’ll offer you a free tokenization consultation.