Blockchain tokenization: the cold drop of private international law

La liberación onchain 24/7 de la venta de activos digitales ajustados al S&P 500 ya tiene forma jurídica de tokenización. Tras el reconocido impacto jurídico del blockchain sobre los factores de conexión del DIPr de hace algunos años, la gota fría cayó sobre las regulaciones de los mercados de capitales.

The 24/7 on-chain release of S&P 500-linked digital asset sales now has the legal form of tokenization. Following the recognized legal impact of blockchain on the connecting factors of private property rights a few years ago, the cold shoulder has fallen on capital markets regulations.

What culture will it have in the capital market? The ability for people, especially in less developed countries, to access useful, low-volatility, responsible, and sustainable financial products; to obtain credit, an account, save, purchase insurance, and enjoy decentralized payment methods—have gained a new ally in on-chain tokenization. Just weeks ago, one of the leading Web3 exchanges, Solana, began distributing a line of cell phones for $500 in 50 countries, programmed with the Seed Vault, a hacker-protected hardware wallet, so that everyone can freely and securely transact with tokens. Designed as non-fungible and non-transferable (NFT), the Seeker Genesis Token grants exclusive access to these wallets and calls into question the connecting factors of the blockchain: Did they get it wrong?

S&P 500 Licenses On-Chain Tokenization. Two months ago, S&P Dow Jones Indices licensed the S&P 500 Index to Anemone Capital, a subsidiary of Centrifuge, authorizing the creation of a tokenized fund with the potential to operate on the blockchain in real time, 24/7, programmable and automated, capable of providing permanent transparency, liquidity, and interoperability. The RWA tokenization revolution on the blockchain has doubled since last year and, following the GeniUS Act, reached a volume of $29 billion . Major financial institutions migrated billions of assets for on-chain tokenization. The S&P 500 underpins the global capital market, representing, without on-chain tokenization, $1 billion a day in ETFs and other equities. Transporting this index on-chain allows investors to trade continuously, keeping tokens in custody and even using them as collateral for their trading operations. Anemone Capital was conceived within Web3 and from this license emerged the Janus Henderson Anemone S&P 500 Index Fund Segregated Portfolio.

The license allows for the application of the S&P 500 index to real-world investment funds on the blockchain in four transaction groups:

• Constant 24/7 transactions increasing arbitrage opportunities;

• DeFi loans, which can be secured with stablecoins and other digital assets;

• Elimination of intermediaries and, in particular, of the T+1, 2 or 3 waiting periods for clearing regulated by the SEC;

• Automates complex transactions to structure new financial products, such as baskets of combined indices or the tokenization of FAANG stocks (securities combining stocks from Facebook, Amazon, Apple, Netflix, and Google).

Blockchain connections went out early . The various uses of blockchain had varying impacts on IPr., although four principles were identified:

• Decentralized (DLT) technology offers unmediated, automated, global connectivity with multiple parties operating from different jurisdictions, dividing the applicable law. 

• The actions of the parties outside the smart contract are not subject to interference. The rule of the code is supreme and cannot be assigned a connecting factor.

• The immutability of DLT transactions prevents intermediation, so international contractual principles regarding exceptions to non-performance such as force majeure or certain hardships do not apply.

• The lack of identification and the use of pseudonyms between the parties make it difficult to identify the place of execution, which triggers the use of analogies in IPrD, approximating intellectual property rules, for example, such as those on goodwill for intangible assets. 

On-chain tokenization: the cold snap has arrived . When we combine other technologies like AI, new exchanges can be generated in on-chain tokenization, such as computing token holder votes and even automating them.

• The lex situs factors disregarded the functioning of blockchain and the digitalization or immateriality of tokens to focus on DLT and, from there, decide the applicable law. They developed the PREMA or PROPA laws, linked to the primary residence of the master key holder or administrator, respectively.

• Lex contractus factors simplified regulatory competition by allowing for the law chosen by DLT participants, without considering the difficulties of applying it to decentralized systems or the disconnection of laws applicable to blockchain and tokens.

• The electio situs and habetur electio factors considered the jurisdiction of multiple regulators, those where the DLT and/or users choose or are presumed to operate. They have been strongly opposed for inhibiting contractual freedom as opposed to an abuse of the public interest.

• The electio iuris factors prioritized the law chosen for transactions and the transfer of digital assets, recognizing a freedom infected by the constant fragmentation of the applicable law.

• The factors that bind the law applicable to users, such as variations in the lex situs , focused on governing grouped transfers of digital assets, avoiding multiple due diligence processes. They have been criticized as tax-based, accused of making it impossible to determine the law for transmission chains and of failing to consider changes in residence or joint tenancy.

• The lex disceptatio factors innovated in assimilating the applicable law to the one regulating the claim, aligning with the European Convention of Rome I.

Does he take me or do I take him? The latest creation of IPrD was the lex digitalis . Without further reflection, the connection with the residence of the generator of the original DLT code is tenuous and unstable. The libertarian push for party autonomy and technological neutrality made it possible to distinguish between on- and off-chain, but it also failed to consolidate the choice of applicable law.

• IPr experts prefer to rely on traditional connections to peacefully govern insolvency, competition, and consumer protection. For ICO class actions, for example, the Northern District of California court ruled in the 2022 Tezos case by aligning the location of the server hosting the pooled sale with that of the individuals operating it, and the validation nodes were mostly located in the United States.

• Advocates of multilateralism, arbitration, and harmonization advocate considering some of UNCITRAL's model laws.

• The on-chain tokenization of NTFs (non-fungible tokens) opens even more doors for DIPr analysis, because it accumulates the factors that connect the tokens (financial, collateral, and realization) to those of the blockchain.

Onchain, just to offend? It's not true that automation and disintermediation are scary when it comes to determining applicable law and jurisdiction, because the transparency gained improves the liquidity, custody, and traceability of token transactions, distancing themselves from legal currency clearing.

It's true that on-chain tokenization relies on a central authority to connect to the real world, primarily across borders. Therefore, it should be connected in stages:

• NTFs can serve as a reference for a new factor ( lex token?) because they are publicly registered, unique, and interchangeable, providing transparency and proof of ownership. When they represent a real asset, their location also serves as an effective connection.

• The lex contractus could then be added to characterize the type of transaction, distinguishing between securities or commodities, to ensure the ownership right of the token.

• Native on-chain tokenization will follow the unavailable Bitcoin, held directly in a special wallet or indirectly held in custody by a capital market intermediary. The lex contractus governs, except when Bitcoin is claimed in kind, where the lex rei sitae will apply.

• Finally, if it is a DAO (decentralized autonomous organization), without legal capacity as confirmed by some judicial precedents, it remains to admit a transaction between users, whose only connecting factor would be, if it could be revealed in the dispute, their actual location.

If blockchain openly challenges any possibility of balancing the regulatory harmonization of its cross-border operations with the principle of technological neutrality, on-chain tokenization adds a timid exception linked to investor protection, detached from the transparency and efficiency of DLT, to which the financial world has already surrendered. Not even this exception is sufficient to contain a dynamic and fragmented approach to the connectors of the DIPr..