With the rise of asset tokenization, India is undergoing a transformative shift in its real estate and infrastructure sectors. Leading this evolution is Gujarat International Finance Tec-City (“GIFT City”), which is paving the way for the nation’s first regulated platform dedicated to real estate and infrastructure tokenization. This development represents a critical moment for both India and the global real estate landscape, as tokenization promises to unlock significant new opportunities for investors, developers, and financial institutions.
RWAs can include physical, financial, and intangible assets that exist outside the digital realm but can be tokenized using blockchain technology. These assets include real estate, commodities, equities, bonds, intellectual property, and fine art.
Regulatory Approach towards Tokenization of Real-World Assets (“RWA”)
International Financial Services Centre proposes a regulated framework for public consultation (“Consultation Paper”)[1] for the issuance, custody, and trading of tokenized real-world assets and has sought public consultation on the same. This includes:
- Issuance protocols ensuring compliance with financial regulations.
- Custodial safeguards to protect investor interests.
- Trading, clearing, and settlement mechanisms to facilitate secure transactions.
- Risk Management Framework: The consultation paper emphasizes risk mitigation strategies, covering:
- Cybersecurity and fraud prevention measures.
- Investor protection mechanisms to ensure transparency.
- Regulatory oversight to prevent financial instability.
What is RE tokenisation?
- The Consultation Paper explores the tokenization of RWAs which mainly include real estate assets (“RE Tokenisation”), aiming to enhance liquidity, transparency, and accessibility in property investments.
- RE Tokenization involves digitizing ownership rights of real estate properties using blockchain technology. This allows investors to fractionally own high-value assets, making real estate investments more accessible and tradable.
- Some of the key legal and compliance frameworks that have been proposed for RE Tokenisation, includes:
- Ownership Recognition: Ensuring tokenized real estate assets have legal validity.
- Custody & Trading Mechanisms: Establishing secure platforms for issuance, trading, and settlement.
- Investor Protection: Implementing AML/KYC protocols to prevent fraud and ensure transparency.
- Cross Border Real Estate Transactions: IFSCA’s approach could attract institutional investors, enabling cross-border real estate transactions. By integrating smart contracts, tokenized real estate could facilitate automated rental income distribution and efficient asset management.
Key aspects of the Consultation Paper Asset Categorization and Legal Recognition
The framework aims to define and establish the legal status of tokenized assets, ensuring alignment with existing financial regulations. A clear taxonomy will classify eligible assets, distinguishing between securities, commodities, and other financial instruments to facilitate structured oversight and compliance.
Issuance Protocols and Custodial Safeguards
The issuance of tokenized assets necessitates a robust governance structure, incorporating stringent due diligence, issuer accountability, and compliance mechanisms. Custody arrangements must adhere to regulated trust models, ensuring asset security, traceability, and adherence to investor protection mandates.
Market Integrity and Transactional Governance
To uphold market fairness, the regulatory framework will implement transaction validation standards, AML/KYC requirements, and real-time monitoring mechanisms. Settlement structures must comply with cross-border regulatory norms, fostering seamless trade execution while mitigating systemic risks.
Way forward
From the proposals and questions posed in the Consultation Paper the following considerations may be made for the purpose of implementing a comprehensive framework for Tokenization:
- Establishing clear taxonomies for tokenised assets aligned with global standards.
One of the main proposals under the consultation paper is the asset classification of tokenised assets. It is interesting to look at the regulatory approach that is taken by other jurisdictions in categorisation of the tokenised assets.
Regulatory Approach in the USA
In the United States of America, the Securities and Exchange Commission classified tokens based on the economic reality of the arrangement and not the structure of the contract. Even if a token has utility, it may still be a security if marketed or sold as an investment. Exchanges and intermediaries dealing in such tokens must comply with registration and disclosure requirements.
Regulatory Approach in Singapore
Similarly Monetary Authority of Singapore (MAS) classifies tokenised assets based on their economic function and underlying asset type, rather than their technological form. Accordingly, MAS applies existing financial regulations to tokenised versions of traditional assets.
Identifying key risks pertaining to Tokens
Implementation of tokenisation under the consultation paper is the implementation of a proper risk management framework. In jurisdictions like Singapore the risk management framework is based on analysis the counterparty risk, market risk and the cybersecurity risks for the tokenised asset. We suggest that a similar approach should be taken when implementing the risk mitigation framework for tokens to be traded in GIFT City.
Regulatory Sandbox
Certain other considerations may include creating regulatory sandboxes to pilot real-world use cases and collaborating with international regulators to ensure cross-border interoperability.
In conclusion, the IFSCA’s consultation on tokenisation marks a pivotal step in shaping India’s regulatory landscape for digital assets, particularly within the GIFT City. By adopting a principle based and consultative approach, the IFSCA demonstrates a commitment to fostering innovation while safeguarding market integrity and investor interests. The flexibility in asset classification, emphasis on legal recognition of tokenised rights, and openness to stakeholder feedback position for India to build a robust and future-ready tokenisation ecosystem.
Authors:
Smrithi Nair
Partner, Juris Corp
Email: [email protected]
Kshemya Nair
Associate, Juris Corp
Email: [email protected]
Disclaimer:
This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.
[1] IFSCA Consultation Paper on Regulatory Approach towards Tokenization of Real-World Assets