Milbank Financial Institutions Regulatory partner Douglas Landy and associates James Kong and Jonathan Edwards co-authored a chapter in the 2nd edition of Global Legal Insights' Blockchain & Cryptocurrency Regulation 2020. The chapter, titled “Distributed Ledger Technology as a Tool for Streamlining Transactions,” provides an overview of distribution ledger technology (“DLT”) and Transfer Tokens and details how such a token should be characterized for the purposes of US securities laws and potential uses.
The chapter provides a high-level overview of the potential applicability of DLT to the transfer of assets represented by “tokens” or other digital assets (“Transfer Tokens”) and the regulatory environment developing around such tokens. Using a token as a means of representing an underlying asset (colloquially referred to as the “tokenization” of that asset) in order to facilitate transfers of that asset is a relatively new idea but has its roots in a very old and well understood principle: some things that have value are not easily transferred. Whether because of practical difficulties, regulatory hurdles or imperfect or outdated trading infrastructures, sometimes the easiest way to transfer an asset – whether it be title, an ownership interest, an entitlement, or a beneficial interest in that asset – is by transferring something that represents the asset.
Tokenization has potentially wide applicability to traditional markets. The trading of securities in the United States, for example, is beset with inefficiencies related to existing trading infrastructures. For example, repurchase transactions (“repos,” whereby one party agrees to sell securities to another party and then buy them back at a later time) traditionally involve transfers of ownership that are recorded on the books of a clearing bank or the Fedwire Securities Service. Recording these transfers takes time and relies on a central intermediary, placing operational bounds on a traditional repo’s minimum duration. Using Tokens to represent the underlying securities can potentially streamline this process, as parties could instead transfer (and have such transfer be reflected in a distributed ledger) Transfer Tokens that represent an interest in the securities, rather than the securities themselves.
Read the full chapter in Blockchain & Cryptocurrency Regulation.
