Digital Assets are “digital representations of value or rights which may be transferred and stored electronically, using Distributed Ledger Technology or similar technology”.
From a regulatory perspective, Digital Assets can be categorized in two main subsets: Digital Assets that qualify as financial instruments and Digital Assets that do not:
- Digital Assets that qualify as financial instruments under applicable regulations are commonly called “Security Tokens”.
- Other types of Digital Assets encompass different subtypes: Utility Tokens, Stablecoins (asset-referenced tokens, e-money tokens), crypto-currencies.
The CAST Framework provides solutions compatible and compliant with traditional banking practices, frameworks, and standards to deal with Security Tokens.
According to the European proposal for a regulation on a pilot regime for listed Security Tokens, the “tokenization of financial instruments, that is to say their transformation into crypto-assets to enable them to be issued, stored and transferred on a distributed ledger, is expected to open up opportunities for efficiency improvements in the entire trading and post-trading area.” Besides, and as stated in the European proposal on Markets in Crypto-assets (“MiCA”), crypto-assets “have the potential to bring significant benefits to both market participants and consumers. By streamlining capital-raising processes and enhancing competition, issuances of crypto-assets can allow for a cheaper, less burdensome and more inclusive way of financing notably for small and medium-sized enterprises (SMEs).”
The potential efficiency gains arising from the use of Digital Assets are indeed tremendous, provided existing complexity is not integrated into DLT-based infrastructure solutions. Otherwise, complexity could even be magnified through DLT integration. The CAST Framework was thus designed to provide streamlined solutions that are compatible and compliant5 with traditional banking practices, frameworks and standards, aimed at avoiding increases in complexity.
For this reason, for now, the CAST Framework’s scope is limited to so-called ‘native’ Security Tokens and does not deal with ‘non-native’ Security Tokens, as dealing with these might involve importing the complexity inherent to the legacy systems. Native Security Tokens are based on Smart Contracts used to natively manage Investor rights and obligations in respect of financial products and are considered to be financial instruments. The EU implicitly follows a "substance over form" policy on the characterization of Security Tokens as financial instruments, as does the US federal regulator, the SEC. Indeed, in 2019, in its consultation document on EU regulation of Digital Assets, the European Commission stipulated that “where security tokens meet the necessary conditions to qualify as a financial instrument, they should be regulated as such”.
In contrast, non-native Security Tokens are DLT representations of pre-existing financial instruments issued outside of the DLT. Dealing with non-native Security Tokens could thus mean dealing with the existing complexity embedded by the underlying asset, in addition to the DLT integration. On the contrary, handling native Security Tokens streamlines processes and aims at reducing the complexity of current mechanisms.
