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DESAT stands for Decentralized Storage and Asset Tokenization and is a network focusing on storage and tokenization of physical assets, providing the base layer for tokenization of physical real-world assets.
At the heart of the DESAT Network lies a simple commitment: each underlying physical asset shall be redeemable via the corresponding non-fungible token (“NFT”) issued by the DESAT Network. This seemingly simple promise carries a handful of challenges in practice, calling for the implication of an appropriate legal framework.
In the context of NFTs, distributed ledger technology enables the identification of the owner of a particular NFT and ensures the authenticity of such NFT. Adding an association to a specific asset and the NFT can be utilized as representation of ownership of such asset. Since digital assets exist in digital form, it seems natural that NFTs have been commonly used to represent ownership of digital assets. The compatibility of a digital asset and blockchain is easily comprehensible. Associating NFTs with a real-world physical asset, however, necessitates specific arrangements in the real world to guarantee redemption. The DESAT Network places particular emphasis on two critical aspects: 1) Legal ownership separation of the underlying physical asset from both, the token issuer and person tokenizing the physical asset and 2) conferring legally enforceable redemption right on the NFT owner.
Apart from the safe physical storage and availability of the asset, a prerequisite to define a legal redemption right is the presence of an identifiable entity that holds the asset on transparent legal grounds. Addressing precisely this element, the owner of an NFT issued by the DESAT Network has access to information on (i) how and by whom the physical asset is legally owned and (ii) what legal rights the NFT owner is provided with to legally enforce redemption of the underlying asset. Without these elements, an NFT owner may risk having a practically worthless NFT at hand as the redemption of underlying physical asset may not be legally enforceable.
1 Legal ownership of underlying physical asset
Since a DESAT NFT does not represent legal ownership of the underlying asset, it is crucial for the party owning the underlying physical asset to be a trustworthy party that exists (ideally) for the sole purpose of legally owning tokenized physical assets. This party should be legally structured so that it can best fulfill its purpose while keeping its assets minimally exposed to any legal actions from third parties. In contrast, the issuer of the NFT is generally not set up to meet such requirements and even less so the person tokenizing the physical asset. The DESAT Network addresses this challenge by transferring ownership of the physical asset to designated entities in the DESAT Network. This transfer of legal ownership not only ring-fences the assets from legal actions but also allows for tailoring these entities in accordance with the needs of the DESAT Network and NFT owners. With the said transparent legal framework, the risk exposure with regards to redemption of the underlying asset becomes considerably more tangible for the NFT owner.
2 Enforceable redemption right
An NFT ideally represents full ownership of a certain asset (like in the case of a digital asset). In a network of a global scale like DESAT which involves physical assets that are stored in various jurisdictions, however, the difference between jurisdictions and legal systems poses significant restrictions to a universal implementation of a redemption right. DESATs focus on the redemption of the underlying assets rather than an ownership representation itself, allows to incorporate jurisdiction specific agreements in its NFTs that are customized to each jurisdiction. This approach adapts to diverse legal environments, enabling the desired outcome: the entitlement of the NFT holder to legally enforce redemption of the underlying physical asset.
In the current market environment, owners of physical asset backed NFTs are often left with trusting the token issuer (who is usually also the initial owner of the underlying physical asset) that the physical asset is available and redeemable under the applicable terms as there is often little transparency and uncertainty around the legal rights of the NFT owner pertaining to the underlying asset. This makes it difficult to define the nature of a specific NFT and ultimately makes it challenging for NFT owners to legally enforce redemption.
It’s essential to recognize that despite the borderless nature of blockchain technology, jurisdictions and their specific laws still and will continue to impose limitation on how blockchain applications fit into an established legal and regulatory framework. Therefore, addressing the legal aspects even for unregulated activities is pivotal to the success of new blockchain ventures. Not only does it safeguard the products and services offered by the venture itself, but it also contributes to fostering discussions and inspiring legislators to adapt legislation for emerging technologies.