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Alexander Curry
Partner | Legal
Jersey
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Alexander Curry
Partner
Jersey
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Insight
04 September 2024
Jersey
4 min read
ON THIS PAGE
Ogier has welcomed the publication of new guidance on the tokenisation of real world assets, published by the Jersey Financial Services Commission on 28 August.
The Commission (JFSC) has also updated its guidance on initial coin / token offerings (IC / TOs), which was originally published in July 2018, to reflect evolving language and create a clear distinction between the issuance of virtual assets and tokenised real-world assets (RWAs).
This development marks a significant step in recognising the evolving landscape of digital assets and their integration into the financial system. It reflects Jersey's commitment to staying at the forefront of legal and regulatory advancements in the rapidly changing world of blockchain technology.
In this article, partners Alexander Curry and Matt McManus, managing associate Tom Hall and associate Michael Ogilvy Watson provide an overview of the new guidance.
Tokenisation refers to the process of issuing a digital representation of an asset, typically on a blockchain (see section 2.1 of new guidance). This process is increasingly being applied to RWAs, that is physical assets and more traditional financial assets, allowing for fractional ownership and improved liquidity. Tokenisation makes these assets more accessible to a broader range of investors (section 2.3).
Tokenisation can transform asset ownership and investment by enhancing market efficiency and inclusivity. Tokenisation is influencing traditional finance and investment sectors with various assets such as real estate, fine art, commodities, securities, and intellectual property rights being tokenised (section 2.4).
The assets that can be tokenised include, but are not limited to:
securities
bonds
commodities
currencies
units in a fund (section 2.2)
This broad range of assets highlights the versatility of tokenisation in representing physical and traditional financial assets as digital tokens on a blockchain. Specifically, stablecoins (meaning tokens where value is tied to a fiat currency – being a national currency that is not pegged to the price of a commodity such as gold) are not considered virtual assets and the issuance of stablecoins should therefore comply with the new guidance (section 7.1).
The guidance applies to issuers. An issuer, in the context of tokenisation of RWAs, refers to an entity that issues digital representations of assets, typically on a blockchain (section 2.1). These entities would need to comply with the IC / TOs guidance issued by the JFSC.
Yes, an issuer needs to be based in Jersey and registered as a Jersey company or limited liability company (section 5.1).
The issuer is responsible for meeting specific regulatory and operational requirements which are set out in the new guidance.
Among other obligations, an issuer must (section 5.1):
Before a TCB is appointed by the issuer, and on an ongoing basis, the TCB must ensure it has the appropriate level of knowledge, skills, and experience to carry out the necessary steps and provide the agreed services to the issuer, taking into account the activities carried on by the issuer (section 8.3 and 8.4).
This includes being able to assess the issuer's approach to:
customer interests
the adequacy of its financial and non-financial resources
the effectiveness of its corporate governance arrangements
its systems for managing and controlling its business effectively (section 8.3)
For most TCBs, they will already have appropriate policies, procedures and controls in place pursuant to their existing regulatory obligations, including those set out in the JFSC's Code of Practice for TCBs.
However, given that the use of coins / tokens by clients as an investment vehicle is a relatively new concept, this is likely to require upskilling (in the form of training) by TCBs to ensure their staff have sufficient knowledge, skill and experience to manage these investments in the best interests of their clients and in compliance with their obligations under the new guidance.
The TCB is also responsible for ensuring that the issuer's arrangements for the protection of client assets and money are adequate and effective.
The new guidance does not concern funds specifically. However, the tokenisation of units in a fund will be subject to any existing Jersey funds regulatory regime which applies. This means that when tokenising units in a fund, issuers must consider the underlying regulatory framework applicable to the fund and its functionaries –whether this be the Jersey Private Fund regime or a more regulated structure – and in turn whether those functionaries rely on an exemption or are themselves regulated.
Under the IC / TO guidance any application must be accompanied by analysis prepared by the issuer's legal advisers covering, among other things, relevant Jersey legal and regulatory aspects of the structure (section 4.2).
More generally, an issuer of a tokenised RWA should consider the appropriate regulations which apply to the service and / or activities of the underlying business. Issuers should consider the relevant sections of the JFSC's separate guidance on Securities Issues by Jersey Companies.
If you have any questions about the new guidance, please do not hesitate to contact any of the authors of this briefing.
Alexander Curry
Partner | Legal
Jersey
Alexander Curry
Partner
Jersey
Contact Alexander
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Matt McManus
Partner | Legal
Jersey
Matt McManus
Partner
Jersey
Contact Matt
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Tom Hall
Managing Associate | Legal
Jersey
Tom Hall
Managing Associate
Jersey
Contact Tom
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Michael Ogilvy Watson
Associate | Legal
Jersey
Michael Ogilvy Watson
Associate
Jersey
Contact Michael
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Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
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