Role of Regulations in Real-World Assets (RWAs)

1) The Howey Test and Its Broad Application

Almost every project want to target US investors because of the size of the US market. The Howey Test, stemming from the U.S. Supreme Court case SEC v. W.J. Howey Co., determines whether a transaction qualifies as an investment contract (and thus a security). The test considers whether there is:

1. An investment of money,

2. In a common enterprise,

3. With an expectation of profits,

4. Derived from the efforts of others.

This test applies not only to traditional securities but also to non-traditional assets like certain real estate deals, cryptocurrencies, and non-fungible tokens (NFTs). For RWA tokenization, this means almost all tokens are classified as securities, triggering regulatory compliance requirements.

2) Global Regulatory Complexity

Traditional financial systems were build mostly to operate at a contry level. We can now send USD as USDC/USDT across borders instantly and at almost zero cost, a level of efficiency unmatched by traditional financial players or banks who have been in the financial domain for decades. We now have global friends, many of whom we have never met or will never meet in person, a scenario unprecedented before. Similarly, sending money or collaborating on incentives or investments now needs to be on a global level, yet financial systems have been designed with limitations to national borders.

As mentioned in the introduction

Note: Builders/Token Issuers need to consider the legal implications of both the jurisdiction where the token is issued (securitized) and where the token is distributed.

Blockchain projects and other internet projects have mostly operated on a global landscape, and imposing these requirements has proven to be detrimental for Real World Asset (RWA) projects. Often, RWA projects must spend upwards of $200K to $500K to meet some of these regulations before they can even determine if the public will appreciate their asset.