Present in decentralized finance for many years, the tokenization of real-world assets (RWAs) is now attracting the attention of traditional institutions. This technological advancement requires special attention from authorities, especially due to its hybrid nature.
For educational purposes, this article will illustrate the current Brazilian regulatory landscape and how it’s adapting to the trend. There are a few details that need to be considered before bringing real assets into the digital universe via blockchain technology.
Legal Classification of Tokens
An RWA refers to a digital representation of a physical or financial asset that is already well-established. The way these digital assets are processed can drastically alter their legal nature.
For example, real estate can be partitioned into very small units and traded on a stock exchange or crypto exchanges. Similarly, public debt securities can be tokenized, making them more accessible to the general public.
Here are some practical examples of real-world asset tokenization:
- Securities: Tokens that grant voting rights, profit-sharing, or the expectation of a return on an investment are directly regulated by the Brazilian Securities and Exchange Commission (CVM).
- Movable/immovable property: If a property is fractionalized, understanding how the tokens correlate with traditional registry systems, like public notaries, can raise discussions.
- Medium of exchange: If the token is also designed as a medium of exchange, its regulation is no longer exclusively within the scope of the Brazilian Central Bank (Bacen), and it can fall under specific norms and rules of the Central Bank of Brazil (BCB).
Some projects incorporate several features simultaneously, which can cause confusion during the licensing and registration process. The Brazilian regulatory framework, while advanced, still needs to iron out some details to prevent future problems.
Real-World Asset Tokenization: Key Considerations
According to Transfero Controller, João Carlos Almada, “It’s essential that we have clearer and more specific rules for the asset tokenization market, especially for real estate. There is still a lot of regulatory uncertainty today, which naturally deters more serious initiatives or drives them abroad.”
The bureaucratic process is still an obstacle, according to Almada, and affects both the registration of assets and how they are distributed and traded in Brazil. “Simplifying the public offering application, for example, would make a big difference,” he noted.
Another point is the tax issue. Developing clearer and more efficient collection systems would allow this new data infrastructure to be integrated into the essential needs of the Federal Revenue Service.
The Type of Technology Matters
Each blockchain ecosystem has a unique architecture for handling tokenization. The proper regulation of each project depends on the correct choice of architecture. The examples below are among the most used architectures today (within the Ethereum network):
- ERC-20 (Fungible Tokens): Ideal for representing assets that can be divided into equal and identical parts, such as commodities (gold, silver, copper, etc.). However, in general, ERC-20 tokens don’t meet regulatory compliance needs (KYC/AML).
- ERC-721 (Non-Fungible Tokens): Suitable for representing unique and indivisible assets, such as works of art, entire properties, and collectibles. Like the ERC-20, the ERC-721 requires additional layers to meet regulatory needs.
- ERC-1155 (Multi-Standard Tokens): This architecture allows you to manage both fungible and non-fungible tokens in a single smart contract. It’s one of the most suitable for the real estate sector, as fungible tokens can represent fractions of a building, while a non-fungible token would represent the complete property.
- ERC-1400 (Security Tokens): This architecture is used to represent traditional securities, incorporating the necessary functionalities to meet regulatory compliance. Stocks, bonds, and debentures can be tokenized and issued under strict control.
- ERC-3643 (Permissioned RWA Tokens): In this standard, the identity and compliance of digital representations are highlighted. It’s becoming increasingly relevant in the RWA market, as identity verification and anti-money laundering checks can be natively incorporated into the token.
“The ERC-20, for example, is ideal when you want to represent fractions of a property or a tokenized real estate fund,” said Almada. “It is very secure and interoperable within the DeFi ecosystem, but it offers little direct representation of the property itself. The ERC-721, being non-fungible, works very well when the goal is to tokenize a specific property as a unique asset with its own metadata, such as registration, location, and documents.”
On the other hand, the ERC-1155 architecture requires a more sophisticated level of implementation, which can lead to additional technical and operational challenges. The search for a balanced cost-benefit depends on understanding each available architecture and the needs of each project.
Real-World Asset Tokenization: Brazil Seeks References
Both the Bacen and the BCB are looking for inspiration from international models to build the right legislation. FINMA (the Swiss Financial Market Supervisory Authority) is a global reference on the topic, with a friendly approach to emerging technologies.
To test some of the practices already executed abroad, Brazil has been using regulatory sandboxes. These controlled environments allow authorities to verify the viability of certain law applications before they are officially incorporated.
Regarding real estate tokenization, Almada believes that the integration of the sector with DeFi is promising. “The moment we can represent tokenized properties in a safe and reliable way, they become collateralizable within the DeFi ecosystem. This opens up space for a series of innovations, such as collateralized loans for tokenized properties, liquidity via pools, and even staking of real estate tokens to generate profitability,” he analyzed.
According to the expert, the country is in the initial stages of this integration process. However, if things continue to go according to plan, it will be possible to observe several decentralized protocols incorporating real-world assets in a more robust way.
