An Investment Perspective on Tokenization — Part II

This report is the second in a two-part CFA Institute research project that explores the tokenization of real-world and financial assets. “An Investment Perspective on Tokenization — Part II: Policy and Regulatory Implications” focuses on the legal and regulatory changes needed to support the responsible growth of the tokenization industry while ensuring investor protection and market integrity.

The first report, "An Investment Perspective on Tokenization — Part I,” is a primer on the use of distributed ledger technology (DLT) to tokenize real-world and financial assets. It introduces tokenization and explains DLT, including its benefits, limitations, and potential impact.

One of the key challenges in the tokenization space is determining the legal framework for digital assets. Establishing clear laws is essential for several reasons, including defining personal property rights, ensuring compliance across borders, enabling enforcement of rights, and clarifying jurisdictional authority. Without a solid legal foundation, tokenized assets may face uncertainty, limiting their adoption and growth.

The premise of this second report revolves around the necessity of determining the applicable legal framework for digital assets and provides four key reasons why identifying the applicable law for tokens is essential, including:

• personal property rights,
• cross-border recognition and compliance,
• rights of enforcement, and
• jurisdictional remit.

Our analysis continues with an examination of key international and supranational standards and proposals established by non-governmental bodies responsible for identifying an appropriate global framework. These include recommendations from the International Monetary Fund (IMF), UNCITRAL Model Laws, and UNIDROIT Principles on Digital Assets and Private Law. These efforts aim to create a standardized approach that jurisdictions can adopt to facilitate the integration of digital assets into existing legal systems.

In addition to international frameworks, this report provides a comparative analysis of the regulatory approaches and digital finance developments taken by key jurisdictions. The markets and regions we examine include:

• Switzerland
• European Union
• United Kingdom
• India
• Mainland China
• Singapore
• Hong Kong SAR
• United Arab Emirates
• United States

Each jurisdiction has adopted different strategies, ranging from fully integrating digital assets into existing laws to imposing strict limitations. This diversity in regulatory approaches highlights the need for harmonization to support the global adoption of tokenization.

One of the most significant regulatory tools we explore in this report is the concept of regulatory sandboxes. Several jurisdictions have established sandboxes that allow businesses to test tokenization technologies in a controlled environment under regulatory supervision. These initiatives help regulators understand emerging risks while allowing companies to innovate with greater legal certainty.

Looking Ahead

Our report concludes that for tokenization to succeed, a robust legal and regulatory framework is essential. Clear regulations will build trust, encourage investment, and promote innovation in tokenized assets. Establishing the legal status of digital tokens will reduce uncertainty and enhance market confidence. In addition, adopting global models, such as the UNCITRAL Model Law and the UNIDROIT Principles, can provide a foundation for integrating digital assets into legal systems while ensuring consistency across different regulatory regimes.

As digital assets continue to evolve, regulatory cooperation across jurisdictions will be crucial to maintaining financial stability and legal integrity. Markets must work together to align their regulatory frameworks to support seamless cross-border transactions. At the same time, regulators need to stay flexible and adapt to technological advancements while ensuring strong investor protection and market oversight.

Regulatory efforts must also prioritize market surveillance and disclosure requirements to protect investors and maintain trust in tokenized assets. Policymakers should work toward globally harmonized rules for digital assets, ensuring that regulatory definitions and property rights are aligned across jurisdictions.

Going forward, CFA Institute intends to explore key issues that remain unresolved in digital finance. One of these issues is custody in the digital asset space. Regulators are still debating whether digital assets require new safekeeping rules or if existing principles should apply. Greater clarity is needed to ensure that investors' assets remain secure and protected.

Another key issue is the impact of digital finance on financial stability. Organizations such as the Financial Stability Board have studied the risks posed by crypto assets, but as the market grows, a deeper analysis is required. Understanding the connections between digital and traditional finance will be critical, particularly in managing risks associated with leverage and financial contagion.

Overall, tokenization has the potential to transform financial markets, but its success depends on a clear and consistent regulatory framework. Governments and regulators must prioritize global coordination while allowing room for innovation. By implementing well-defined legal structures, fostering regulatory cooperation, and maintaining market oversight, tokenized assets can become a stable and reliable part of the financial system. The future of digital finance will depend on striking the right balance between innovation, investor protection, and financial stability.

Key Takeaways

• Legal clarity is essential for tokenization to thrive, ensuring personal property rights, cross-border compliance, enforcement, and clear jurisdictional rules.
• Different markets have taken varied approaches, from full acceptance to restrictive policies, affecting the global adoption of tokenization.
• Interoperability is critical, requiring regulatory cooperation and technological alignment.
• Regulations must be adaptive and technology-neutral, ensuring innovation while maintaining market integrity.
• Investor protection remains a top priority, requiring stronger market oversight and disclosure standards.