April 26, 2024
Tokenisation of Real World Assets
Introduction
The Client is a pioneering organization in the blockchain and distributed ledger technology space. The Client sought to establish a platform and ecosystem for tokenising real-world assets (RWAs) that seamlessly connect the web3 realm with traditional finance. Their goal is to tokenise various RWAs, including bonds, invoices, and treasury bills, thereby unlocking new financial and investment opportunities while significantly expanding access to these assets. The primary objective was to bring yield-bearing assets on-chain and integrate them into the Client’s cutting-edge decentralised finance (DeFi) ecosystem.
Challenge
To achieve the Client’s objective within the Abu Dhabi Global Market (ADGM), they required a regulatory-compliant structure that aligned with the framework of the ADGM Financial Services Regulatory Authority (FSRA). This intricate challenge involved several key components: establishing a fund to acquire the underlying assets, issuing asset-backed tokens representing ownership in the fund, and operationalising various use cases such as lending, trading, and staking platforms built on the Client’s Layer 1 protocol.
Navigating the regulatory landscape posed significant hurdles, including determining the optimal entity structure, outlining necessary licenses for the proposed activities, and ensuring comprehensive compliance with the FSRA’s regulations.
Strategies, Tactics, and Solutions
Our team embarked on a comprehensive analysis of the FSRA’s regulatory framework, meticulously examining the viability of the Client’s proposed use cases, entity structures, and licensing requirements.
Firstly, we recommended establishing an Exempt Fund as an open-ended incorporated cell company (ICC) to facilitate efficient asset segregation, risk management, and operational flexibility. Additionally, we provided a detailed overview of the FSRA’s guidance on the treatment of asset-backed tokens, particularly Digital Securities. Our analysis concluded that since the Client’s proposed token representing ownership in U.S. Treasury bills will be created by tokenising traditional government securities, it would be categorised as a Digital Security under the FSRA framework.
Furthermore, we explored the various use cases envisioned by the Client, such as lending, trading, and staking platforms. Our team identified the necessary licenses required for each use case, including licenses for providing credit, operating a multilateral trading facility (MTF), and potentially managing assets for staking activities.
Finally, we outlined the corporate structuring options and associated costs, encompassing the establishment of the Client’s Fund, issuance of Digital Securities, and the creation of entities to facilitate the proposed use cases. This included estimates for application fees, annual supervision fees, and capital requirements, ensuring that the Client had a comprehensive understanding of the financial implications.