Unlocking the Potential: Tokenisation of Real-World Assets in GIFT City

Introduction

Tokenization is rapidly transforming the financial sector, allowing traditional assets like real estate, commodities, securities, and intellectual property to be digitized and traded efficiently. With the rise of blockchain and distributed ledger technologies (DLT), tokenization is making financial markets more inclusive, efficient, and liquid. Recognizing its potential, the International Financial Services Centres Authority (IFSCA) has released a regulatory consultation paper to establish a structured approach to tokenisation of Assets in India’s GIFT IFSC.

What is Tokenization?

Tokenization is the process of converting real-world assets into digital tokens that are stored and managed on a blockchain or distributed ledger. These tokens can represent ownership, rights to income, or claims on physical or financial assets. By leveraging smart contracts, transactions in tokenized assets become more transparent, secure, and efficient.

IFSCA’s Vision for Tokenisation of Assets

The IFSCA aims to develop a regulatory framework that:

1. Legally recognizes digital tokens representing ownership or interest in real-world assets.

2. Facilitates issuance, custody, trading, clearing, and settlement of digital tokens in a regulated manner.

3. Implements risk management frameworks focusing on governance, technology, cybersecurity, and anti-money laundering (AML) compliance.

4. Ensures investor protection through transparency, disclosures, and grievance redressal mechanisms.

5. Encourages innovation while maintaining regulatory oversight to prevent misuse and financial instability.

Key Regulatory Considerations

1. Definition and Characteristics of Digital Tokens

IFSCA highlights the need to define digital tokens clearly, ensuring that they:

• Represent real-world assets like stocks, bonds, real estate, commodities, and intellectual property.

• Have legal enforceability, ensuring asset ownership changes are recognized in the real world.

• Provide liquidity and investor protection through regulatory oversight.

• Maintain transparent transaction records to reduce fraud and disputes.

2. Issuance and Custody of Digital Tokens

The process of issuing and holding digital tokens must be safeguarded against fraud, unauthorized creation, and cyber threats. The IFSCA proposes regulating token issuance and appointing third-party custodians to ensure secure asset maintenance.

Key considerations include:

• Issuance Framework: Clear guidelines on who can issue digital tokens and the necessary compliance requirements.

• Custodial Services: Regulation of custodians handling digital tokens to ensure security, transparency, and investor protection.

• Verification and Authentication: Ensuring that only verified assets are tokenized and legally recognized.

3. Trading, Clearing, and Settlement of Digital Tokens

A robust secondary market is essential for liquidity in tokenized assets. IFSCA suggests:

• Establishing regulated digital exchanges for secure token trading.

• Differentiating between DLT-based and non-DLT-based market infrastructures for appropriate risk management.

• Implementing finality in settlement mechanisms to avoid transaction disputes.

• Ensuring legal recognition of digital token transactions across jurisdictions.

• Regulating intermediaries involved in digital token trading to maintain market integrity.

4. Risk Management in the Digital Token Market

Given the evolving nature of tokenization, IFSCA identifies several risk areas:

Governance Risks

• Establishing corporate governance standards for token issuers and service providers.

• Implementing accountability frameworks for organizations handling digital tokens.

• Addressing potential conflicts of interest in tokenized asset management.

Technology Risks

• Ensuring robust cybersecurity measures to protect against hacking and fraud.

• Addressing scalability and interoperability issues among different blockchain networks.

• Regulating the role of smart contracts and automations in transactions.

• Mandating regular security audits of blockchain infrastructure.

AML & KYC Compliance

• Implementing stringent identity verification and anti-money laundering policies.

• Ensuring traceability of transactions to prevent illicit financial activities.

• Establishing cross-border regulatory cooperation for enhanced oversight.

Encouraging Growth & Innovation

To foster innovation while maintaining oversight, IFSCA proposes:

Regulatory Sandboxes

• Allowing companies to test new tokenization models in a controlled environment.

• Providing regulatory exemptions for pilot projects while ensuring risk mitigation.

Industry Collaboration

• Encouraging financial institutions and blockchain developers to collaborate on industry standards.

• Establishing best practices and guidelines for responsible tokenization.

Disclosure-Based Regulations

• Reducing compliance burdens while ensuring transparency and investor confidence.

• Implementing tiered disclosure requirements based on asset type and risk level.

Conclusion

The regulatory framework proposed by IFSCA is a significant step towards integrating tokenization into mainstream finance. By addressing legal, technical, and investor protection concerns, India’s GIFT IFSC is positioning itself as a global leader in digital asset regulation. As stakeholders, businesses, and investors prepare for this transformation, it’s crucial to participate in the consultation process to shape a robust and inclusive tokenization ecosystem.

With a balanced approach to innovation and regulation, the future of tokenized finance in India looks promising.

Respondents are requested to submit their responses vide email to Mr. Praveen Kamat,. General Manager, Department of Capital Markets, IFSCA, at praveen.kamat@ifsca.gov.in with a copy to Mr. Matam Satya Prateek, Assistant Manager, Department of Capital Markets, IFSCA, at prateek.matam@ifsca.gov.in, latest by March 20, 2025 in the format specified below. Respondents are also requested to indicate the organisation/ interests they represent and include their contact details. In case a respondent wishes to remain anonymous, they are required to explicitly state the same in their email.

<Name and details of the organization represented>

Format for questions

<Contact details of the respondent>

Regulatory Approach towards Tokenization of Real-World Assets

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