Compliance & Regulatory
Introduction
This documentation focuses on the compliance and regulatory aspects of a tokenization platform designed to manage a diverse array of assets through unique tokenization contracts. The platform, launching in Frankfurt, Germany, aims to align with both German and European Union laws and regulations, ensuring seamless integration into the financial and legal frameworks.
On-Chain Securities
Definition and Classification: On-chain securities refer to digital assets that are legally recognized as securities and are managed on blockchain networks. Understanding their classification under EU law, particularly the Markets in Financial Instruments Directive (MiFID II) and the Prospectus Regulation, is crucial.
Tokenization of Securities: The process involves digitizing traditional securities or creating native digital securities (like tokens representing real estate or gold) on the blockchain. Each asset is divided into multiple NFTs, with a standard contract managing their distribution and rights.
Legal Requirements
German Legislation: Compliance with the German Banking Act (Kreditwesengesetz - KWG), the German Securities Trading Act (Wertpapierhandelsgesetz - WpHG), and other relevant financial regulations is mandatory.
EU Legislation: Adherence to EU-wide regulations, including MiFID II, Anti-Money Laundering Directives (AMLD), and the EU's General Data Protection Regulation (GDPR), is critical. These regulations govern financial services, investor protections, and data privacy.
EU Law
Prospectus and Disclosure Requirements: Understanding and complying with the requirements for issuing a prospectus under EU law, which outlines the specifics of the security offering, is essential.
Token Classification: Determining whether tokens are classified as transferable securities, units in collective investment undertakings, or other financial instruments under MiFID II.
Regulatory Sandbox: Utilizing the EU's regulatory sandbox frameworks to test and adapt the tokenization platform under regulatory supervision, if available.
Automated KYC with Paddle ID
Integration with Paddle ID: Leveraging Paddle's decentralized identity verification system for Know Your Customer (KYC) processes. This includes verifying users' identities while maintaining their privacy through advanced cryptographic techniques.
Compliance with AMLD5: Ensuring that the KYC process aligns with the Fifth Anti-Money Laundering Directive (AMLD5) requirements, particularly in relation to customer due diligence and transaction monitoring.
Data Privacy and GDPR: Maintaining GDPR compliance in handling personal data during the KYC process.
Token Parameters
Each token has parameters that need to be considered. It is crucial to determine the number of tokens and their individual values, which represent a certain share of the property. Additionally unique identifiers for each token must be included.
Moreover token holders have responsibilities and rights. They are required to communicate any redevelopment, construction projects or general changes concerning the asset to the subsidiary within one week providing a certified and official site plan. In case of any damages or factors that could significantly impact the assets value token holders must inform either the advising branch or headquarters within one week.
The user who possesses than 50% of the tokens is recognized as the primary owner of the asset. Users can request to define their information through their wallets; however changes to the pledge agreement will only occur if a user returns their tokens. The termination of the tokenization contract can only be initiated by the owner. If a user, with an ownership percentage wishes to utilize their tokens in real life scenarios they will need to wait until a new contract can be established.
Rights and Restrictions
It is crucial to have defined rights and limitations for every token holder. These rights encompass the ability to vote, share in profits (like income) and guidelines regarding the sale or transfer of tokens. Additionally there might be restrictions like minimum holding durations or specific regulations applicable, to foreign investors.
Ownership Record
A reliable method to track and update the ownership of tokens is to use blockchain technology for a decentralized, tamper-proof record of all transactions.
Dispute Resolution
There is a possibility of disagreements that may occur between individuals who hold tokens or between holders and the manager in charge of the property. The contract needs to define procedures for addressing such conflicts, which could involve seeking resolution through arbitration by a neutral third party or, by following predetermined rules specified within the contract.
Smart Contract Interactions
The contract should specify the interaction mechanism with other smart contracts in the system, such as an escrow contract, a vesting contract, or a contract to burn tokens.
Regulatory Compliance
The contract should comply with relevant local and international laws and regulations. This can be complex and may require expert advice.
Identity Verification
Mechanisms for verifying the identity of token holders should be included to comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations.
Network Parameters
Token holders have certain responsibilities and rules they must follow to ensure the integrity of the network.
Passwords: If a user decides to store his private keys by himself and cold, he cannot retire his wallet if he forgets his password, or key phrase and loses his main device.
Wrong Data: Incorrect data can always be discovered by the subsidiary or the rating model. In such cases, the user is locked from the network and potentially faced with a lawsuit.
Data Processing in the Network: To secure user privacy, only the wallet name is visible (public key). If you are a validator, you participate in a PoA algorithm where your data will be whitelisted if you break the rules.
Death: In the event of a user's death within a loan, the assets will cover the loan amount, and the difference goes into abandonment following the protocol mentioned in the documentation.
Tokenization Contract Sample: Real Estate Assets
AGREEMENT FOR TOKENIZATION OF REAL ESTATE ASSETS AND TRANSFER TO DECENTRALIZED LAND REGISTER
This Agreement ("Agreement") is entered into on this day _______ of , 20, by and between:
[COMPANY NAME], a corporation registered under the laws of Germany, with its principal office at [Company Address] ("Company");
and
[USER NAME], an individual residing at [User Address] ("User").
WHEREAS, the Company facilitates the tokenization of real estate assets, providing a legal and technical structure enabling the User to record their asset on a decentralized land register, known as the blockchain;
NOW, THEREFORE, the parties hereto agree as follows:
Purpose: To outline the terms for tokenizing the User's property via the Company's system.
Property Information:
Address: __________________________
Size: ______ square meters
Number of rooms: ______
Unique features: __________________________
Photographs: Annexure A
Inspection Reports: Annexure B
Token Parameters:
Token ID: Distinctive identifier for each token.
Token Value: Each token equates to a set value of the property, calculated as Asset_Price / Number of Tokens.
Rights and Limitations:
Token Holder Duties: Notification of renovations, damages, or changes within one week.
Ownership: Token holders with over 50% tokens are deemed primary owners.
Transfer & Termination: Token returns are mandatory for changing ownership; termination initiated by primary owner.
Blockchain Parameters:
Ownership Record: Blockchain ensures a decentralized, immutable log.
Smart Contract: Details interactions with other blockchain contracts, including escrow and vesting.
Network Provisions: Addresses data accuracy, processing, and password rules.
Reserved ID: Asset's designation in the new register is _______.
Legal & Compliance:
Dispute Resolution: Arbitration for disagreements among token holders or with property managers.
Regulatory Adherence: Compliance with local and international regulations, including KYC/AML standards.
Identity Verification: Company verifies token holders' identity.
Acknowledgment of Risks: User understands blockchain-associated risks, including potential loss of wallet access.
Transfer to Blockchain:
User consents to move their note from the traditional register to the decentralized one using the specified Reserved ID.
Governing Law: This Agreement is governed by and interpreted under German law.
Notary Acknowledgment:
This Agreement has been validated and witnessed by a notary public. The notary's stamp or seal and signature affirm the identity of the signatories and the veracity of this document.
Notary Stamp/Seal: __________________________
Notary Signature: __________________________
Date: _______
Signatures:
[COMPANY NAME] - Signature: __________________________
[USER NAME] - Signature: __________________________
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