The Asset Tokenization Lifecycle Process (ATLP) is an Information Governance (IG) model that formally defines how a real-world asset is designated by a new digital, cryptographic token on a blockchain network.
Information Governance is a holistic approach to managing corporate information by implementing processes, roles, controls and metrics that treat information as a valuable business asset. The goal of a holistic approach to the Asset Tokenization Lifecycle Process is to make information assets available to those who need it, while streamlining management, reducing administrative costs and ensuring compliance.
This, in turn, enables the organization to reduce the legal risks associated with unmanaged or inconsistently managed information and be more agile in response to a changing marketplace.
An important goal of the Asset Tokenization Lifecycle Process is to provide people with the complete body of data they can trust and easily access. Often, the need for a holistic approach to managing information does not become evident until a major event occurs such as a lawsuit, compliance audit or corporate merger.
The Asset Tokenization Lifecycle Process provides a wide range of benefits. It ensures the following:
- whoever requires access to certain information can receive it
- underlying data is properly managed, stored and secured
- regulatory requirements are correctly observed, where necessary
- risk management is in place to minimize any issues that might arise
ATLP Phased Approach
The ATLP is broken into three phases, which includes the entire lifecycle of an asset as it moves through the process of origination and Primary Offering to Secondary Market trading and transfer, through all layers of management and administration, and finally Disposition when the asset might be retired from existence. Each of the three phases are further broken into segments within each phase.
The Primary Offering Phase represents the stages of activity that must be undertaken to 1) convert an existing asset to a tokenized format; or, 2) complete a Primary Offering of the asset for sale to the market. Each stage builds on previous stages and is a necessary step to fully completing the initial effort to represent the asset in a token format.
Information Governance Structure
The Structure stage starts with Information Governance Structure, which defines the records management framework for the asset – and, also how the asset relates to transactions between entities. This establishes the foundation for the risk and compliance processes related to conditions and actions comprising the administration of the asset. The Structure phase also defines the Master Data Management (MDM) policy for all information, data, and records pertaining to the asset, offerings, and transactions.
Asset and Offering Structure
In the next step in the Structure stage, crucial decisions need to be made regarding the terms and conditions of the asset, which correlate to the token. Offering structuring is an integral part of any tokenized asset offering, irrespective of the technology employed. Tokenization is not meant to be a way of avoiding compliance with applicable legal and regulatory requirements. Rather, the use of technology is intended to fundamentally improve operational processes to enable innovative financial solutions.
The form and structure of a tokenized asset is crucial in determining the rights and obligations that the investor has in the underlying asset as well as ultimately what form of return they will receive; it will also be the starting point in analyzing how gains and losses on the tokenized security should be taxed. Asset owners and managers should consider the main objectives of the product and the rationale underlying the structure to evaluate how tokenization technology may complement the purpose and enhance utility.
Compared to traditional issuances, a tokenized asset issuance benefits more from streamlined operations and automated post-issuance corporate action management.
The issuer of tokenized assets must also seek professional advice to make informed decisions about which jurisdictions to include in the structure of the product. The regulatory framework governing tokenized securities will vary between jurisdictions while the different tax regimes across jurisdictions could have a significant impact on the price of the tokenized securities and its cost-effectiveness. Further, issuers should also seek advice regarding the location of target investors, as this will introduce regulatory considerations related to the marketing and offer of tokenized securities.
The Configure stage is where the necessary portals to support the offering and subsequent management are established and built to meet the requirements of the asset. Whether the portals are issuer-owned or third-party, this is the stage where the initial applications and data repositories are defined to support all of the subsequent stages.
Primary Offering Portal
The primary offering portal is the location where the issuer provides investors with the ability to review and subscribe to the offering. This may be an issuer-owned portal that manages the investor experience and provides the necessary KYC/AML identity verifications, accredited investor status checks, subscription documents signatory, payment facilitation, and other investor-facing activities. In the event of a legacy asset that is being tokenized, a primary offering portal is not used.
Records Management / Digital Asset Securities Portal
Ongoing investor relationships and communications are generally best served by using a portal environment to provide ongoing investor news and communications, as well as investor services such as transfer agent needs, fiduciary custody connectivity, and linking to secondary markets where trading may take place. Individual investor accounts and related documents are stored here, and becomes the primary go-to repository for records management and information governance. Ideally, this is linked to an investor’s accounts and wallets with other third-party service providers for transfer agent services, fiduciary custody management, exchanges and ATS trading.
In many cases, the asset registration or exemption will require the use of a transfer agent to maintain the book entry of shareholders, which is the official system of record of ownership of the asset.
The Tokenize stage is where blockchain tokens are created to represent the units of account bound to the security interest of the asset. The token and how it is bound to the security itself becomes subject to jurisdictional regulation and compliance. Because of the variation in laws and requirements, this may be simple or can be more complex. The primary focus for the ATLP is U.S. & Canada, which becomes more complex based on regulatory interpretation.
At present, the U.S. does not recognize a Layer One public blockchain as a suitable control location for a security, thus the requirements and structure for the token must conform to a layered architecture. An issuer or a transfer agent is generally deemed an acceptable control location for book entry cap table management of securities, which means they must maintain a separate ledger to track investors and ownership apart from the public blockchain network. This requires a separate side chain Layer Two chain to function as the book entry system of record.
Tokens can be created on the Layer Two chain to represent the unit of account and tracking method at the issuer or the transfer agent level. Those tokens are held in the issuer’s account to represent treasury until such time they are issued to investors by moving those tracking book entry tokens to the respective account and wallet at the investor level.
Layer One tokens can be created at this stage as well. However, in the U.S., when the book entry token is converted into a form of certificated, electronic record, the resulting Layer One token becomes the unit of exchangeable value (i.e.. the value is transferred in a form of exchange external to the book entry). This is generally not necessary until the Secondary phase where listing and trading begins.
Launch phase is where the primary offering campaign is initiated to include marketing and promotion of the offer to invest. This can be brokered under properly licensed third-party efforts or, under the appropriate exemptions or registrations, can be conducted directly by the issuer.
Generally, the campaign leverages the Primary Offering portal and, in the instance of online marketing, drives investors to the location to register and complete the subscription process.
The Launch stage is not contemplated for already existing legacy assets being converted to a tokenized platform.
Upon completion of the Primary Offering, the Close stage is where the final activities are conducted to end the process. This may involve breaking escrow and taking receipt of the proceeds of the offering and any other filings that may be required such as state Blue Sky law exemptions.
The Close stage is not contemplated for already existing legacy assets simply being converted to a tokenized platform.
The Intake stage is where information traditionally stored in paper or document form is uploaded to the blockchain and encoded into encrypted hash values. Thus, we are transforming the body of recordation and evidence to hash-based metadata. The Intake phase is also where workflows are developed and even automated with secure logging to meet governance, risk, and compliance policies.
Encoding the body of recordation helps to streamline processes by allowing separate stakeholders to have secure access to the same copy of data, which cannot be altered without validation from other stakeholders. The data that is central to tokenization is a digital record of membership or shareholders for the asset to be tokenized, which is uploaded to the blockchain as a complete record of ownership.
Immutable transaction records enable a high degree of automation to deliver much-needed process optimization and efficiency to investments. Other actions that are programmable throughout the investment lifecycle include investor and corporate action management, such as distributing dividends and holding shareholder votes, which are covered under the Manage phase.
Technology enables fractional ownership to be securely managed as a digital record, investor due diligence and compliance protocols to be automated, and transaction settlement to be completed digitally. The cumulative effect of these changes is to significantly reduce the time and economic costs associated with trading previously illiquid assets, which benefits asset owners and investors alike through unlocked liquidity.
As regulatory regimes across the globe evolve to meet these technological developments, secondary market trading for tokenized assets will continue to grow and thrive.
During the Intake stage, new individual investor accounts and wallets are created in the book entry system to correlate with the subscriptions and ownership records to reflect the cap table structure.
The Issue phase is the step in the tokenization process where digital tokens representing the assets are distributed to the ownership accounts and wallets on the audit blockchain network. This phase typically takes place after the completion of the primary offering campaign and the gathering of necessary information from investors, as discussed in the Launch and Close stages.
During the securities offering, investors purchase the security interests and their information is recorded in the digital record of security holders, members, or shareholders, which is the cap table structure. This allows for the efficient tracking and management of the securities, and enables the automation of compliance, governance and risk processes.
The issuance of the security tokens to investors’ accounts can take place when all business, legal, and regulatory components are in place, and all the requirements in the Structure phase have been met. This includes defining the asset, parameterizing it, and binding it over to a custodian who maintains independent audit and controls, and completing all necessary legal documentation.
Once the offering is finalized, the asset tokens are distributed to the respective accounts of the investors, who can now hold and manage their investment through the use of the tokens in the audit structure. It’s worth noting that in case of tokenizing legacy assets, the issuances process is typically different, and the process mainly concerns updating the records and systems to the tokenized form, but not necessarily a fundraising process.
The Secondary Phase is an important step in the tokenization process that encompasses all the stages required to enable and facilitate the listing, trading, management, and reporting of the tokenized assets in the secondary markets. This phase typically starts after the completion of the primary offering and the distribution of tokens to investors’ accounts.
During this phase, the tokenized assets are listed on one or more secondary marketplaces, such as digital asset exchanges or alternative trading systems (ATS), which allows for the trading of the assets among investors. Additionally, a transfer agent is typically engaged to maintain the book entry of the shareholders, which serves as the official system of record for the ownership of the assets. This allows for the efficient tracking and management of the assets and facilitates compliance with legal and regulatory requirements.
The Secondary Phase also includes the establishment of investor relations programs, regular reporting to investors, and implementing corporate actions such as dividends or shareholder votes. This helps to keep investors informed and engaged, and to provide them with the necessary information to make informed decisions about their investments.
In addition, this phase helps to provide liquidity to the tokenized assets, which benefits both the asset owners and the investors, making it easier to buy and sell the assets, and allowing for the efficient management of the assets. Furthermore, this phase allows for the creation of a more transparent and efficient market, which helps to increase the adoption of tokenization technology, and increase the participation of different market players, from retail to institutional investors.
The Connect phase is an important step in the tokenization process that connects the efforts from previous stages to external business information and data ecosystems, typically through the use of API-based services middle layer. This includes connecting to external systems such as fiduciary custodians, digital asset exchanges or alternative trading systems (ATS).
The Connect phase typically involves a level of custom enterprise software integration between organizations, which establishes, agrees, and complies with the common metadata structures defined in the Configure stage. This allows for the seamless integration of the tokenized assets within existing systems, and enables the automation of compliance, governance, and risk processes, and increases the efficiency of the tokenized asset ecosystem.
Additionally, during the Connect phase, public blockchain network smart contracts are developed, if not already created, to consume the information governance, risk, and compliance metadata developed in the Build phase. This allows the smart contracts to operate in accordance with the established governance and compliance rules, and enables the automation of compliance-related processes, making it a crucial step in the tokenization process.
Moreover, the Connect phase also enables the integration of different systems and services, like transfer agents, know-your-customer (KYC) providers, anti-money laundering (AML) providers, that are needed for the tokenized assets to be traded on the secondary markets. This integration helps to provide a seamless experience for the investors, and it allows for the automation of the compliance process and the reduction of the cost and time associated with these processes.
The List stage is a crucial step in the tokenization process, where the security and its respective token are registered and listed for trading on a licensed exchange, Alternative Trading System (ATS), or broker-dealer network. This allows for secondary transactions between investors who wish to buy and sell the asset for investment purposes, and it enables the creation of a secondary market for the tokenized assets.
Listing the tokenized assets on a trading venue typically involves contracting with the exchange and meeting compliance with their reviews of the principles, the entity, and the security instrument. This process may include the submission of offering documents and other legal and regulatory filings, as well as the review of the underlying assets and the entity that is issuing the token.
In addition, investors seeking trading privileges on the exchange will require individual investor account applications, as well as Know-Your-Customer (KYC) and Anti-Money Laundering (AML) identity verifications. Ideally, these processes and their respective documentation should also be ingested and associated with the investor’s account information at the cap table level with the issuer or the transfer agent. This enables the efficient management of the assets and the automation of compliance-related processes.
Furthermore, with many forms of security registration, the use of a transfer agent is required, which means the custodian and the exchange must be able to seamlessly communicate trade and investor information to update the shareholder registry and the cap table, allowing for real-time management and oversight of the assets.
The Trade stage is the point where the true value of tokenization in enhancing liquidity is realized, through efficient secondary market trading. This stage enables the trading of tokenized assets on various platforms, allowing for a seamless and efficient trading experience for investors.
The information governance, risk, and compliance framework established in previous stages serves as the foundation to connect a common data set across the decentralized capital markets industry value chain. This enables the offering sponsors and issuers to enable trading of their assets across the spectrum of trading and trade enablement platforms, including over-the-counter arrangements, third-party exchanges, and even dark pool private equity.
The post-trade settlement process is also optimized through the automation of information and authorizations between entities and individuals. This helps to streamline the process and reduce the time and costs associated with trade settlements, increasing the efficiency and reducing the risk in the trading process.
Moreover, the Trade stage also facilitates the ability for investors to buy and sell fractional ownership of the tokenized assets, providing increased access and flexibility for small investors and also enabling institutional investors to optimize their liquidity and risk management.
Furthermore, the Trade stage also allows for the creation of different trading pairs and market making, providing investors with more choices of trading options, and allowing for the creation of more transparent, efficient, and liquid markets.
Post-tokenization management will continue throughout the life of the token until maturity or redemption and disposal.
In post-tokenization management, automated corporate action management processes, including dividend distribution and shareholding voting, can be enforced with business rules and smart contracts. Issuers retain control over the final approval or rejection of investors who pass automated restrictions before transfers are finalized.
Every transaction throughout the life of a token is recorded immutably on a blockchain.
The administration of the asset also includes every form of reporting to meet internal and external governance, risk, and compliance directed requirements.
As the trading and management activity ensues, invariably there are many forms of reporting requirements that must be met. Whether it’s reporting to investors by the issuer, or reporting by licensed intermediaries to the regulators, because all transactional data is captured and stored on chain, it is a matter of aggregating the information, filtering and sorting, and presenting the information in a format necessary for use.
With the appropriate application interfaces, reporting can be reduced from weeks, days, even hours, to a single click as the authorized administrator can provision the information and give permission to the export to any external party.
Reporting is no longer an annual or quarterly event. With the right configuration, reporting can become a near real-time function, providing unprecedented access to broad data sets.
At the end of an asset’s lifecycle, the Disposition phase is the final list of activities to terminate the asset’s digital information and data record existence.
These are the rules and workflow processes to ensure an orderly and compliant shutdown of the body of recordation.
For example, at the maturity of a limited partnership fund, there is a final disbursement of assets and dissolution of the entity. Traditional recordkeeping principles and requirements continue to apply to any digital records before deprecation.
Should the asset be listed on secondary markets, the Delist stage is where the process to remove the asset from each of the markets is undertaken. Each trading venue will maintain its own processes and requirements to remove the asset from their active listing.
All documentation pertaining to the proper closedown processes should also be captured and retained by the issuer to maintain a full scope of records.
Burn stage is where all the publicly exchangeable forms of tokens are removed from circulation, locked, and/or destroyed from further movement throughout any market ecosystem.
The book entry ledger of the final snapshot of the cap stack and structure should be retained, as well as any and all records pursuant to retention policies and laws required for regulatory supervision.