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The 2Tokens Foundation, in collaboration with the Dutch Blockchain Coalition and at the request of the Dutch Ministry of Economic Affairs, has conducted an initial comprehensive analysis of the opportunities and challenges of tokenization in the Netherlands. The research had several objectives:
· To clarify the concept of tokenization and its potential impact.
· To evaluate various factors determining the suitability or friendliness of the Netherlands for adopting tokenization.
· To conduct an international comparison based on operational conditions, investments, financial conditions, developer and settlement conditions, legal and regulatory oversight costs, the ecosystem and trends in tokenization.
The analysis consisted of a range of activities, including desk research, literature review, expert sessions, a legal convention and numerous interviews with Dutch companies utilizing tokenization for various products and services. This led to several conclusions and calls to action for the Dutch triple helix - government, industry and academia.
Tokenization uses and market growth
In recent years, the potential of tokenization has proven to be far greater than its current predominant association with financial products. Tokenization presents significant opportunities to develop new products, services and processes, or to greatly enhance the efficiency of existing ones, across companies, industries and even citizen participation models. While often linked with financial products and the DeFi industry, tokenization offers solutions across a broad spectrum of use cases, which can be categorized as follows:
· (Partial) (proof of) ownership of:
- Financial products like securities, payment instruments or crypto assets
- Tangible goods such as real estate and sustainable energy generators (e.g., windmills, solar panels)
- Intangible goods, including energy and digital assets (e.g., in-game accessories, digital art, intellectual property).
· (Partial) (proof of) ownership of rights:
- (Proof of) voting rights or access rights (e.g., access to systems, voting in decentralized autonomous organizations, concert tickets)
- Other (personal) proofs such as electronic personal attestations or certificates of authenticity.
· Hybrid forms of the above categories:
The market for tokenization has grown significantly, with projections estimating that creating liquidity for currently illiquid assets alone could range from around $2 trillion to over $16 trillion by 2030. However, as shown, the potential of tokenization extends beyond financial products. Besides offering new and/or more efficient products and services, it can contribute to public values such as increased transparency and direct democracy, promoting a more equitable distribution of ownership and wealth and increasing citizen participation. Tokenization, along with digital identities, is seen as a crucial building block for the digital economy.
Despite the Netherlands' previous leadership in blockchain, Web3 and tokenization, it appears that the country has lost ground compared to other European nations.
Situation in the Netherlands
Within the Netherlands, numerous companies are developing tokenized solutions across various sectors, from tokenized bonds in finance to tokenized concert tickets and carbon credits. However, the presence of many initiatives does not necessarily make the Netherlands an easy or particularly suitable environment for launching tokenized projects. The analysis examined the Dutch situation regarding legal aspects, communication with regulators and the government, general operational factors, knowledge levels and the ecosystem. A common challenge for various initiatives is the generalization and close association of tokenization with cryptocurrencies or financial tokens. Given that tokens can represent a wide range of products or services, it is crucial to be specific about what the token represents to avoid misconceptions or misinterpretations. In terms of the legal situation, financial regulation for most tokenized initiatives is standardized across European countries due to MIFID II, EMD II and MiCAR. However, property law, which affects token ownership, varies per member state and can offer competitive advantages. Dutch law, in particular, is not well-suited for handling digital goods or digital representations of ownership, posing a potential hurdle for tokenization projects. Knowledge levels at companies and institutions are generally perceived as low by most interviewed companies and individuals. While there is adequate knowledge among individuals, institutional knowledge, especially at senior levels, is often insufficient. If key personnel leave, the understanding of tokenization can be significantly disrupted. Nevertheless, knowledge levels are gradually improving as various institutions act.
Operational challenges are significant for many Dutch companies dealing with tokenization. Obtaining a bank account is often extremely difficult solely because the company is involved with Web3, regardless of the token's purpose. This issue persists even if the company is not dealing with tokens or crypto assets. Additionally, registering companies with financial regulators presents challenges. The Dutch National Bank has lost multiple court cases due to the excessive registration requirements and high regulatory costs imposed on companies. There is a perception that tokenized or Web3 products are not treated equally to comparable physical products and services or those based on other technologies. According to multiple interviewees, the Netherlands lacks crucial services such as white-label third-party custodial wallet services and a Dutch exchange for tokenized securities. Additionally, there is no clear starting point, processes or templates for Dutch companies looking to adopt tokenization. A central “Know Your Customer” (KYC) system for sharing KYC data would be a welcome service. Despite being relatively small, the Dutch ecosystem is seen by peers as vibrant and high-quality. There is a general improvement in sentiment towards tokenization in the Netherlands, but other European countries are perceived to be slightly more favorable.
International comparison
As part of the comprehensive analysis, the Netherlands was compared to other European countries, specifically the UK, Germany and France. The comparison focused on various factors, including operational conditions, investment and financial conditions, developer and settlement conditions, legal and regulatory oversight costs, ecosystem and trends. Each factor was evaluated on a relative scale between the countries. The results of this comparison are illustrated in the figure below:
Source : Page 38 Hubspot
Based on the relative comparison, the UK and France appear to be the most favourable countries for tokenization projects. In France, there is strong public support, evidenced by government statements highlighting the importance of Web3. Additionally, tax benefits, investment opportunities and subsidies are particularly advantageous in these countries. France and Germany also score well in terms of specific legal adjustments and preparations for new legislation. The cost of regulatory oversight is lowest in the UK; however, due to Brexit, the UK is not subject to MiCAR regulations. Under MiCAR, the passport regime allows companies regulated in one EU country to easily offer their services in other EU countries.
Overall, Germany, France and the UK have shown improvement across all factors over the years, while the Netherlands, despite having had a head start, has experienced no improvement or even a decline.
Conclusions and call to actions
To maintain its competitiveness as an attractive destination for tokenization initiatives, the Netherlands needs to address several key areas. Implementing clear legislation and a robust legal framework, particularly concerning property law, could provide a competitive edge. However, a broader comparative study on property law suitability for tokenization across various EU countries is still needed. Improvements are also necessary in operational and financial aspects, such as reducing oversight costs, offering tax benefits or subsidies and ensuring access to essential services. Education and understanding of tokenization projects must be enhanced, as knowledge and accurate interpretation are crucial. Historically, the Netherlands has adopted a pragmatic approach to new products and services, which should be extended to tokenization. Lastly, increased public support from the government, similar to the approach in France, is essential.
The full report (in Dutch) and any questions about the article can be directed to info@2tokens.org. Visit http://www.2tokens.org/ for more information.