Cryptoassets, tokenization and their implications for law

In an article published in the newspaper Valor Econômico, Dr. Matheus Puppe, partner in the TMT, Privacy & Data Protection area at Maneira Advogados, addresses issues related to the cryptocurrency market, the tokenization of assets and the implications of this new business model for law.

Cryptoassets, tokenization and their legal implications

The legal impacts of this decentralized economic system are enormous, but they are part of our near future reality

By Matheus Puppe

05/01/2023

With the expansion of business on a global scale, a series of new opportunities and solutions have emerged on the market, but also new challenges. Such solutions arising from technological disruption have started to directly impact business, presenting unimaginable opportunities, and it is up to legal professionals and their legal solutions to evolve together with such solutions to embrace these challenges, in order to provide modern managers, startups and businesses in general with mechanisms to take advantage of them and expand their businesses.

Are you familiar with chaos? Chaos theory is a branch of mathematics that focuses on those dynamic systems whose apparent randomness and disorder are governed by deterministic patterns and laws. Chaos theory describes that within seemingly random complex chaotic systems there are underlying patterns, interconnectivity, loops, repetition, self-similarity, fractals, and most importantly: self-organization/self-regulation.

Certainly, we can consider the internet – or, more importantly, the digital economy – as a chaotic system: despite its apparent randomness, however, the apparent chaos merges into patterns and laws and organizes toward order.

The legal impacts of this decentralized economic system are enormous, but they are part of our near future reality

The digital economy is no different from a mathematical system, as previously perceived as a random set of rules, global chaos of norms without predictability and without security or legal integrity, it becomes, in fact, a legal and economic system independent of an organized non-linear state. The system does not need to be linear to work, as we only need the intrinsic principles that are based on its own behavior.

So why not mathematically organized chaos as a truly global economic and legal system functioning within our interconnected “society”? To evolve along this path, new disruptive technologies are constantly emerging.

Traditional project finance was long-term financing of an independent capital investment, which are projects with cash flows and assets that can be clearly identified. Examples of project financing include construction, mining, oil and gas, and buildings and construction.

These large-scale projects were subjected to a series of challenges, including structuring and financing issues; government regulations; construction, raw materials, offtake and other contractual issues; local legislation and other cross-order elements, including political risks.

These previous types of financing were too large to handle medium-sized companies – which restricted it to large corporations.

Blockchain and tokenization came, however, to change this scenario, as with the growth of this solution, financing cross-border projects at an incredibly low cost, with easier dissemination and rapid capitalization and expansion has become viable for different types of businesses.

However, asset tokenization requires a legal professional adapted to this new environment and knowledgeable in digital law to close the gaps and contractually address all issues and objections that may arise, in addition to avoiding money laundering, pyramid schemes and data protection issues within the project.

One of the main issues in digital project finance and asset tokenization is supply. While some nations may frame and restrict the public offer, others may allow it, and it is up to the digital economy lawyer to bring together the marketing team and the technology team, framing excesses and sanctions or avoiding fines that could harm the complete project. In Brazil, for example, the Securities and Exchange Commission (CVM) restricts public offerings, requiring prior registration. However, for now, we only have CVM Guidance Opinion No. 40, which is still very preliminary.

We need to consider that law and economics are fundamental parts of society, encompassing all of its duties, regardless of its advances. Law is the crucial metatechnology for this data-driven, algorithmic society we live in, where market forces are reshaping social norms. Law – and if we can add the economy – are reflections of societies, now mirroring and framing a system of harmonized mathematical-legal chaos, in which solutions such as blockchains and tokenizations emerge to fit new needs, as well as finance new ventures.

Once established, the seemingly chaotic system reveals a much more coherent financial system, where power is actually distributed effortlessly. Indeed, the impact of this monetary technological shift is measurable and lasting.

The legal impacts of this decentralized economic system are enormous, but they are part of our near future reality, and this needs to be addressed by regulators and the law, in order to organize the chaos of the digital economy.

Matheus Puppe is a partner in the TMT, Privacy & Data Protection area at Maneira Advogados and a member of the Compliance GT of the CNJ and the Judiciary Integrity Committee (CINT).

https://valor.globo.com/legislacao/noticia/2023/01/05/criptoativo-tokenizacao-e-suas-implicacoes-no-direito.ghtml