IFSCA Seeks Public Feedback on Regulatory Framework for Tokenization of Real-World Assets

The International Financial Services Centres Authority (“IFSCA”) has published a consultation paper, dated 26 February 2025, titled ‘Regulatory Approach towards Tokenization of Real-World Assets’ (“Consultation Paper”), to invite public feedback on key regulatory considerations regarding tokenization of real-world assets in the International Financial Services Centre (“IFSC”). Tokenization involves converting of a physical or financial asset into digital tokens using blockchain and distributed ledger technology (“DLT”). It is gaining popularity as a way to enhance liquidity, transparency, and efficiency in the financial markets globally. Recognizing its potential, the IFSCA aims to establish a comprehensive legal framework to facilitate tokenization while ensuring investor protection, financial stability, and compliance with existing regulations.

The Consultation Paper does not contain specific proposals but has instead outlined 4 (four) sets of questions on topics ranging from asset classification, issuance, trading mechanisms, risk management, and regulatory oversight, and seeks inputs from industry participants and experts to introduce a regulatory framework that balances innovation with risk mitigation. Public comments are invited until March 20, 2025. Some of the key questions presented in the consultation paper are:

• What are the classes of real-world assets that may be considered for tokenization? (Question 1.1a.1)
• For each of the given real-world asset classes, what are the key legal and regulatory challenges that need to be addressed prior to enabling tokenization of the same? (Question 1.1a.3)
• What are the possible legal structures that may be employed for the safety, upkeep, and maintenance of real-world assets, by third-party service providers, for the benefit of token holders/investors? (Question 1.1b.1)
• What are the possible legal structures that may be employed for ensuring legal recognition of changes in the ownership/beneficial interest of the real-world asset, as a consequence of successfully executed trades in tokens of the underlying real-world asset? (Question 1.1c.1)
• What are the possible safeguards/measures that may be mandated for ensuring that investors/token holders can exit their investment (by way of cash settlement) or redeem their tokens (by way of change in ownership of underlying real-world asset), without significant loss of time or detrimental impact to the value of their holdings? (Question 1.1d.1)
• What are the possible types of rights that digital tokens may be allowed to represent? What factors may determine whether a given right can be tokenized, effectively traded, and ultimately enforced, in a safe and reliable manner? (Question 1.2.1)
• What are the possible mechanisms for ensuring that the rights represented by digital tokens are transferred in an efficient and reliable manner, as and when the trades in the digital tokens occur? (Question 1.2.2)
• Should the ownership of digital tokens entitle the token holders to rights to participate in the decisions pertaining to the underlying real-world asset (such as administration or sale of the asset, de-tokenization of the asset/extinguishing of the tokens, etc.)? If yes, what are such decisions which are relevant to the token holders, and what mechanisms can be employed to give effect to such decisions? (Question 1.2.4)
• Should the ownership form of digital tokens be restricted to registered form, to bearer form, or shall encompass both types? What are the factors influencing the suitability of a given form of ownership to the digital tokens of a particular type/given real-world asset class? (Question 1.3.1)
• Do you agree that issuance of digital tokens should be a regulated activity? Give reasons in favor of your opinion. (Question 2.1.1)
• What are the appropriate regulatory requirements that may be imposed on the Issuer of digital tokens, in order to ensure that genuine assets are tokenized by legitimate owners of the underlying real-world asset? (Question 2.1.3)
• What are the key governance risks in market infrastructure institutions and market participants in a digital token market for real-world assets? Are they different from the governance risks in respective institutions in the traditional securities market? (Question 3.a.1)
• What are the key investor protection concerns in a digital token market? Are they different from the investor protection concerns in the traditional securities market? (Question 4.a.1)
• What are the key due diligence requirements to be imposed on market participants in the digital token market for ensuring investor protection and awareness? Are they different from the due diligence requirements on the market participants in the traditional securities market? (Question 4.a.4)
• What are other possible measures that may be adopted for fostering innovation in the digital token market? (Question 4.c.4)

Since the Consultation Paper does not have any specific proposal, it is too early to envisage the form and substance of the regulations that will be instituted to regulate the tokenization of real-world assets. There was a phase, in the recent past, when non-fungible tokens (“NFT”) built on block-chains had taken the world by storm and were offered as a viable investment class. The NFT market experienced rapid growth during 2020, but faded by 2023. Let’s hope that the proposed tokenization of real-world assets has better luck than NFTs.

The Consultation Paper can be found here

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Zaynali Badami, Advocate – Email – zaynalibadami@elp-in.com