DC Landscape as of January 28

A Primer: Understanding Tokenized Real-World Assets by: Lilya Tessler (Partner), Andrew Sioson (Partner), and Erika Cabo (Senior Managing Associate) at Sidley Austin, LLP Tokenization of real-world assets (RWAs) is revolutionizing the way we perceive and manage assets. This article aims to provide an overview of RWAs, debunk common myths, and outline the legal considerations and risks associated with tokenized RWAs. What Are Tokenized RWAs? The term “tokenized RWAs” refers to the digital representation of physical or intangible assets utilizing a token recorded on a blockchain. This innovative approach allows for the efficient recording, trading, transferring, and management of tangible assets in a digital format.  A wide range of RWAs can be tokenized, including real estate, commodities, art, and intellectual property. By recording ownership of these assets using digital tokens, they can be more easily tracked and traded on blockchain platforms. This is similar to the e-commerce trend in the 1990s, when online shopping sites were developed to allow consumers to buy physical goods by seeing digital images on the internet, instead of physically going to a brick-and-mortar store in a shopping mall to see, feel, and buy the items.  The primary benefits of tokenizing real-world assets include increased liquidity, fractional ownership, and enhanced transparency. Tokenization allows for the division of assets into smaller, more affordable units, making it easier for a broader range of purchasers to participate. Additionally, the use of blockchain technology ensures a transparent and immutable record of ownership and transactions.  Debunking Myths: Tokenized Assets vs. TGEs and STOs Tokenization is not a new concept. Digital records have existed for years from digital shopping sites, digital concert tickets, and digital securities. Tokenization of RWAs is simply recording these digital records on a blockchain as opposed to other centralized databases. Tokenizing an asset does not change the nature of the asset and it is not to be confused with token generation events (TGEs) or security token offerings (STOs). Below are some of the common myths regarding asset tokenization that need to be clarified. Myth 1: Tokenizing an Asset Changes the Nature of the Asset Tokenizing an asset does not change the nature of the asset itself. Tokenization is the process of creating a digital representation of a physical or intangible asset using a token recorded on a blockchain. This digital token serves as a record of ownership and can be traded or transferred on blockchain networks. However, the underlying asset remains the same, whether it is real estate, art, commodities, or intellectual property. The token merely provides a more efficient and transparent way to manage and transfer ownership of the asset, without altering its fundamental characteristics or value.  Myth 2: Tokenized Assets Are TGEs TGEs are a mechanism used by new blockchain protocols to distribute tokens to potential users of the network. These tokens, such as ETH (Ethereum) and AVAX (Avalanche), are designed to provide functionality within the blockchain ecosystem, enabling users to interact with the network, pay for services, or validate transactions, among other uses. TGEs are not a form of fundraising, but they are also not tokenized RWAs, because the token associated with the TGE represents utility on the network and not a digital representation of an actual asset. In contrast, tokenized RWAs are digital representations of actual, tangible, or intangible assets. The value of these tokenized RWAs is directly linked to ownership of the underlying assets, which can be verified and audited. Myth 3: Tokenized Assets Are Just Another Form of STOs STOs involve the issuance of tokens that are classified as securities and are subject to regulatory oversight. These tokens are backed by assets that generate income or have equity-like features, such as dividends, voting rights, or profit sharing. Although tokenized RWAs can be tokenized equity or fund interest, they are not limited to securities and have many more benefits when representing a wide range of other physical or intangible assets. The primary focus of tokenized RWAs is on the digital representation and fractional ownership of these assets, rather than raising capital through the issuance of securities. Legal Considerations Regulatory Compliance: Navigating the regulatory landscape is crucial for tokenized RWAs. Compliance with U.S. securities and commodities laws, anti-money laundering regulations, commercial laws, and know-your-customer requirements is essential to ensure the legality and legitimacy of tokenized assets.  Ownership and Transfer of Title: The digital representation of an asset must accurately reflect the legal ownership of the holder and their enforceable right to the underlying asset. Ensuring clear and enforceable ownership rights is critical to the success of tokenized RWAs. Smart Contracts: Smart contracts are self-executing agreements encoded on the blockchain and triggered by predefined conditions. While they play a vital role in automating and streamlining the tokenization process, one must consider whether smart contracts are enforceable, comply with existing contract laws and regulations, and adequately address potential disputes and contingencies.  Jurisdictional Issues: Tokenized assets can be created and traded globally, raising questions about cross-border jurisdiction and applicable laws. Being aware of the roles of regulatory bodies such as the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, European Securities and Markets Authority, Monetary Authority of Singapore, Hong Kong Monetary Authority, and others globally is of paramount importance in navigating different legal frameworks and standards for tokenization.  Risk Considerations and Management Security Risks: Blockchain technology is not immune to cybersecurity risks, such as hacking, phishing, or malware attacks. Tokenized assets may be vulnerable to theft, loss, or manipulation if the private keys, wallets, or platforms that store and access them are compromised. Ensuring the security and integrity of the blockchain and the tokenized assets is paramount to protecting investors and maintaining trust in the system. Market Risks: Tokenized assets are subject to market volatility and liquidity risks, depending on the supply and demand of the tokens and the assets, as well as the performance and stability of the blockchain platforms. Considering risk mitigation strategies is essential in order to protect investments and navigate the complexities of the tokenized asset market. Conclusion Tokenized RWAs represent a significant advancement in the management and trading of physical and intangible assets. They can unlock new value, efficiency, and innovation for both asset owners and investors. However, they also pose significant legal challenges and risks that need to be addressed and managed. Seeking guidance from law firms on regulatory compliance, ownership issues, and risk management, while engaging with experienced vendors and blockchain platforms, can provide the necessary technical knowledge and support to ensure the smooth operation of tokenized RWAs. As the landscape continues to evolve, staying informed and proactive will be key to leveraging the full potential of tokenized RWAs.

Audio show ushers in a new and necessary storytelling format for navigating the world of Web3, exploring themes of privacy, regulatory compliance, niche markets makers, and decentralized exchange ecosystems in blockchain. Web3 policy-focused podcast, Owl Explains, returns for a second season of ‘Crafting The Crypto Economy’ with leading academics to tackle timely regulatory challenges and the practical blockchain applications reshaping Web3. Focusing on critical topics from Decentralized Exchanges (DEXes) regulation, blockchain privacy, and MEV mitigation, ‘Crafting The Crypto Economy’ introduces academic thoughtleaders and papers from around the world with the latest research on blockchain technology and the crypto economy. With five substantive episodes, Season 2 drops in with well-timed topics to equip policymakers and stakeholders with valuable insights on Web3 regulation and emerging challenges. The hosts of this series, Professors Andreas Park (University of Toronto) and Fahad Saleh (University of Florida) are leading authors in Blockchain Economics and Finance and are part of the Crypto and Blockchain Economics Research (CBER) Forum. The group producing the podcast, Owl Explains, is a trusted blockchain policy resource driven by the expertise of Ava Labs’ Legal team. This partnership between Owl Explains and the CBER Forum seeks to bridge the gap between academic rigor and actionable insights for policymakers. As the SEC increasingly scrutinizes decentralized finance (DeFi) platforms, Episode 1, ‘Regulation of Decentralized Exchanges,’ with Professors Campbell Harvey of Duke University and Joel Hasbrouck of NYU Stern, dives into the novel risks for traders who trade at DEXes and why standard regulatory approaches are not well-suited for addressing those risks. In Episode 2, ‘Blockchain Privacy and Regulatory Compliance,’ Professor Fabian Schär from the University of Basel discusses how blockchain users may attain privacy in their transactions while also remaining compliant. Despite the perception of anonymity, most blockchain transactions are traceable, leading to a rising demand for privacy solutions. The episode explains how blockchain identities are not anonymous and what methods may be implemented to achieve both privacy and regulatory compliance. Detailing the economic values presented in the concepts of Maximal Extractable Value (MEV) and Loss-Versus-Rebalancing (LVR), Columbia University’s Professor Ciamac Moallemi discusses associated mitigation methods such as expedited block times and auction mechanisms for extraction in ‘Mitigation Methods for MEV and LVR.’ Moving into intent-based markets (i.e., Uniswap X, CoW Swap) as a hot topic, ‘Decentralized Exchange (DEX) Aggregators and Solvers,’ with Professor Mallesh Pai of Rice University, explores the economic implications of these niche markets, potential outcomes for traders, and the impact of their underlying economic structures. The World Economic Forum predicts that 10% of global GDP will be tokenized on the blockchain by 2027. Wrapping up the Season 2, ‘Deep-dive on the Avalanche Blockchain’ features Ava Labs’ Chief Protocol Architect Stephen Buttolph to discuss how Avalanche’s blockchain can be used for the tokenization of real-world assets, specifically through the lens of Avalanche’s consensus protocol. Owl Explains and the CBER Forum are committed to helping regulators navigate the world of Web3 and break through the hype. In an always-on blockchain landscape, ‘Crafting The Crypto Economy’ breaks through the noise, leveraging curated perspectives and mental models from top minds in the space.

At Owl Explains, we believe the future of blockchain and crypto lies in the conversations happening today between industry leaders and policymakers. That’s why our Congress Series is dedicated to bringing you the sharpest voices in US policy, offering insights on the regulatory and legislative shifts shaping the blockchain landscape. From bipartisan collaboration to bold individual initiatives, our guests tackle the tough questions about self-custody, tokenization, and market structure clarity. These are the policymakers from both at the heart of the debate—ready to share their vision for the role of blockchain in America’s economic future. Meet the Voices of Change: Ep. 17: Congressman Mike Flood Kicking off with Rep. Mike Flood, this episode takes a close look at the difference in perspectives on crypto policy between the House and the Senate and how Congress can build momentum for lasting change. Ep. 32: Congressman French Hill Rep. French Hill shares his take on bipartisan efforts to move blockchain forward, touching on key themes like self-custody and market clarity. Ep. 30: Congressman Wiley Nickel As the political landscape evolves, Rep. Wiley Nickel brings fresh perspective to the table, discussing tokenized markets and their potential to boost US innovation. Ep. 35: Congressman Shri Thanedar (D-MI-13) Rep. Shri Thanedar explores blockchain’s potential to create equity and opportunity, focusing on how technology can drive meaningful policy change. Ep. 36: Congresswoman Yadira Caraveo (D-CO-08) Colorado’s Congresswoman Yadira Caraveo examines the intersection of policy and technology in her state, emphasizing the potential for decentralized systems to support local economies. Ep. 40: Congressman Dusty Johnson (R-SD) Rep. Dusty Johnson offers a refreshing take on blockchain’s role in rural America, highlighting how innovation isn’t just for Silicon Valley. Ep. 42: Congressman Warren Davidson (R-OH-08) Rep. Warren Davidson doesn’t shy away from the big issues—self-custody, tokenization, and why market structure clarity is critical for the U.S. to reclaim its crypto leadership. A Growing Series, A Growing Dialogue As the Congress Series grows, so does the urgency of the topics at hand. Whether it's legislation like the FIT21 Act, the fight to protect self-custody, or debates on token taxonomy, these episodes are more than conversations—they’re a front-row seat to the policies that will define blockchain’s future in America. Cryptocurrency and blockchain technology are rapidly transforming the global economy. As these technologies become more widely adopted, governments are increasingly grappling with how to regulate them. Crypto policy is important because it will shape the future of the crypto industry and its impact on society. The United States is at the forefront of the global crypto policy debate. At Owl Explains, we’re proud to bring together voices from both sides of the aisle to discuss solutions, challenges, and the road ahead. The series is just getting started, and there’s so much more to come. Catch up on the Congress Series today and hear directly from the policymakers shaping the future of crypto, on Spotify, Apple Podcasts, or right here in our owl website.