Tokenomics – Asset tokenizations, asset-backed tokens, fractional ownership
The new Thai ICO-REIT: The SEC has revised the real estate-backed ICO guidelines to be comparable to that of real estate investment trusts (REITs) due to similar funding and benefit schemes. Commencing March 1, 2021, Thailand allows digital fundraising for property developments that are 80% complete or valued no less than THB 500 million. Under the new regulatory requirements, digital token issuers have additional duties regarding asset management, the mechanism to protect investors’ rights, such as having readiness in the personnel and work systems. Also, effective measures to prevent and manage conflicts of interest, to monitor and oversee the management of the issuer’s assets, etc. have to be installed.
Real estate developers Sansiri and Ananda are rumored to try out such a digital micro real estate investment trust (REIT), based on a real estate-backed coin offering under Thailand’s new regulatory framework.
Asset tokenization develops to be one of the few cardinal applications and use cases for blockchain technology. Digital tokens or coins have the purpose to represent real-world assets. This includes tangible assets like real estate, gold, and silver, but also intangible assets like intellectual property rights. Under the Liechtenstein Blockchain Act, a token container model has been introduced, to be maintained by trusted third parties. Disposal over the token results in disposal over the tokenized rights (not over the asset itself). Thailand does not have similar legislation yet.
Tokenization projects in Thailand need to be carefully examined. This applies equally to the investor in Thai tokens as well as to the developer of such investment models. The legal and economic requirements are complex and not suitable for beginners. Tokenization structures that have been successfully accomplished in the U.S. markets, can’t be copied one-to-one to other jurisdictions. The St. Regis Aspen project, which allowed a trophy real estate asset in Colorado, USA to be crowdfinanced under U.S. regulations, has to be significantly amended to meet Thailand’s foreigner legislation, crypto regulations, and market requirements.
Fractional ownership: Tokenization can be applied to fractional ownership property developments. The tokenization of real estate does not mean fractional land ownership. The term “indirect fragmented equity ownership stake” sounds formal and awkward, but gives a much better impression of the tokenization structure. Under these “pay as you play” structures, the investor receives some form of fractional ownership rights for a fractional period. The investment is done with unconnected sharing partners, without mutual financial risks to combining resources by collectively own condominiums or other high-value real estates.
ERX praises itself as Thailand’s only digital-token-focused exchange. Aiming to become Asia’s leading digital assets exchange, the ERX platform focuses solely on digital tokens, which excludes cryptocurrencies. Based on a registered capital of THB 85 million and its digital asset exchange license from Thailand’s SEC, ERX plans to list one to three digital tokens this year, with some tokens related to the real estate business. Two types of digital tokens will be traded on the ERX platform: investment tokens as well as utility tokens.
Digital asset e-marketplace
The Stock Exchange of Thailand (SET) will launch in the second half of 2021 a digital asset trading platform, similar to Amazon, Lazada, or Shopee. Traded goods will be digital token assets only that pass certain qualifications as set by the SET. Examples of this are diamonds and title deeds. https://lnkd.in/gkZtAHF
This bold statement opens the door for private digital asset marketplaces to be established in Thailand for Thai and foreign tokenization projects that do not meet such SET-criteria but are demanded and accepted by the market. The SET will sooner or later have to compete with global players in international tokenization projects.
The SET-statement as published in the Bangkok Post does not mention the need for an ICO portal procedure to accept the trade of digital assets. Instead, it is stated that Thailand’s digital asset legislation is by far more flexible than the regulations that govern its stock and bond markets.
This announcement starts a new race apart from Thailand’s crypto exchanges, traders and brokers, and ICO portals under the 2018 digital asset decree.
Seven tokenization aspects of Thai assets that need careful considerations
Tokenization can come in several layers. Tokenization grants derived rights over an asset under a complex contractual and regulatory framework. Under a perfect scenario, the token represents the asset, can be easily acquired and freely traded. The token holder benefits from all asset cash flows and asset appreciations. The reality is different. Seven main aspects should be carefully developed and defined:
#1. Representation of the physical assets themselves: For what does the token really stand? Does it represent full ownership rights, fractional ownership, or something different? Does it stand for legal or economic ownership in the asset and transfers the transfer of the token the asset itself?
#2. Asset-backed token: How far is the token asset-backed? Does it provide valid legal title in the asset or only some sort of synthetic representation? How far is the structure comparable with milestone transactions in order legislations?
#3. Corporate structure: How to set-up the appropriate Thai and foreign legal entities for a solid tokenization project? Which corporate risks are shifted to the token holder?
#4. Thailand’s foreigner legislation: How can the foreigner legislation be implemented in Thailand’s tokenomics? Which restrictions apply for the property ownership, the shareholding, and else?
#5. Thai REIT legislation: How to distinguish from the real estate investment trust and its special legislation? What are the elements and implications of crowdfunding?
#6. Token offerings: How can the token be marketed and sold to the public? Private sale, digital asset transaction, listing at an existing exchange, handling similar to an IPO, or shifting of the project to abroad? Is the token qualified as a utility token or security token? What are the consequences?
#7. Trophy assets: what are the legal and the practical requirements for the asset that should be tokenized? Which restructuring is required before the whole project can be started?
Professional services in Thailand’s Fin-Tech sector
PUGNATORIUS Ltd. is the Bangkok-based specialist provider of legal services and tax advice on foreign investments in Thailand’s manufacturing and service industries as well as property acquisitions and developments. Sophisticated solutions in a complex business environment. Serious legal and tax advice in the land of smile. #advisoryexcellence
Tokenization advice: For developers and promoters, the law firm offers comprehensive legal and tax support for the whole scope and work-flow of the tokenization project. The support starts with a review of whether the specific asset is capable of tokenization and the required design and mechanism of the token, apart from purely technical aspects. PUGNATORIUS Ltd. analyzes the legal and economic connection between assets and tokens, the corporate and ownership structure, including cross-border aspects. It assists in the design and content of the whitepaper and could be available to be included in the whitepaper as the gatekeeper. The counselor assists in legal and regulatory aspects in the marketing of the project, the negotiations with ICO portals – if required, and the negotiations with Thailand’s SEC and other authorities. Also, it monitors the whole process and protects against disturbances and, finally, assists in the allocation and distribution of the tokens and proceeds.
Token due diligence: PUGNATORIUS Ltd. offers a “tokenization due diligence” as the basis for investments in asset-backed token and other tokenization projects. The devil is in the detail. Does the token holder bear the trustee’s counterparty risk on the asset? May the asset be confiscated or the ownership in such an asset (gold, etc.) generally declared illegal. May the rights of the token holder be withdrawn if the acquisition was made illegally, for example, in violation of an embargo or by a blacklisted seller? Might the asset owner (trustee) be prohibited by the government from surrendering the asset to the token holder?
Fintech & crypto: With respect to Thailand’s fintech and financial service sector, the law firm offers mainly these seven legal and tax services: (i) Thai crypto-compliant company formations, (ii) regulatory-avoiding and tax-efficient cross-border structuring, (iii) digital asset and financial services licensing, (iv) blockchain and ICO/STO advisory services, (v) Thai and cross-border tax structuring, (vi) cryptocurrency transaction support services, and (vii) legal opinions and professional statements