The age of tokenized ecosystems has begun – the shift from centralized to decentralized blockchain-based creation and transfer of assets is ongoing. Our current world is full of different asset classes ranging from money (in a narrow sense) to gold, real estate, securities, rights and others, many of which are difficult to physically trade or subdivide. Distributed ledger technology, or more specifically blockchain technology, is increasingly providing solutions to this problem.
Blockchain technology can design digital information units that contain elements of a property right (according to civil law concepts) to which an owner has direct and exclusive access that can be defended against third parties (right in rem). It contains the tools to program a unique set of information that attributes a property right and enables a secure and registered public transfer of the new type of digitally-defined property: Blockchain Crypto Property (“BCP”).
In addition, the introduction of Smart Contract Systems (“SCS”) at application levels of the blockchain have added immutable functions and property terms to BCPs, enabling not only the execution of bilateral and multilateral programs in accordance with contractual terms and conditions, but also the ability to create co-ownership-like organizations. A BCP is therefore defined as a digital property that can be registered on the blockchain and, in addition, may carry out coded functions governed by an SCS, following coded or manual input by an agreed party (called an “Oracle”).
In order to consistently assess the legal and tax implications, associated risks and investment suitability of BCPs in the tokenized ecosystem, a reliable classification model and risk assessment criteria are indispensable. By applying an assessment method based on functionality, rather than on a particular country’s legal concepts, the classification and risk assessments can be considered in all jurisdictions, regardless of national legal and regulatory frameworks. Though the BCP classification may ultimately lead to different assessments in each jurisdiction, it may facilitate the multijurisdictional understanding of existing and new applications in the tokenized ecosystem, as well as identify coins which may not have the essential characteristics of digital property (i.e. not a BCP). The objective of the risk assessment and resulting BCP rating is to increase awareness and serve as a basis for establishing governance and diligence standards for all different aspects of creating, offering, transferring and holding tokens.
With the above in mind, MME and its team of technology, banking, corporate law, tax and Anti-Money Laundering (“AML”) experts have developed a first draft proposal of a “Conceptual Framework for a Legal and Risk Assessment of Blockchain Crypto Property”.
This paper will:
- Provide functional classification leading to three different BCP Classes; and
- Provide a risk assessment model for BCP, resulting in BCP Risk Categories.
Go Crypto! :)