Compliance by design or law by decree? A comparative analysis of the tokenization of financial instruments

1 Introduction

Transcending mere incremental innovation, the tokenization of financial instruments constitutes a structural transformation of capital markets by converting real assets into interoperable digital forms on distributed ledgers. This evolution from traditional paper-based and dematerialized securities to blockchain-based inscriptions challenges the existing “legal-owner-asset” triad and the sovereign normative frameworks that underpin it (Mahboub and Sadok, 2023). By aiming to minimize reliance on traditional intermediaries through smart contracts and cryptography, this shift forces a profound reappraisal of the institutional foundations of global finance (Laarabi et al., 2025).

The objective of this evolution, as observed by Lavayssière (2024), is the systematic reduction of trust-based intermediation through algorithmic decentralization. The empirical scale of this phenomenon is now indisputably systemic: by 2025, the total capitalization of crypto-assets exceeded $4 trillion, while stablecoin transfer volumes reached an unprecedented $27.6 trillion (Sadok, 2025). This volume, surpassing the combined processing power of the world’s largest traditional credit networks (Krause, 2026), signals that tokenization is no longer a niche innovation but a transformative infrastructure challenging the very foundations of the global financial legal order.

Despite this rapid market expansion, the operational reality of real-world asset (RWA) tokenization reveals a central paradox: rather than eliminating trust requirements entirely, de facto asset management remains heavily anchored to specialized digital intermediaries - such as licensed custodians, oracle operators, and SPV managers - that retain critical control over private keys and physical asset custody. Consequently, tokenization does not suppress intermediation, but rather shifts its locus, exposing a persistent friction between technological “compliance by design” and legal ambiguity regarding the token’s ontological nature and its erga omnes enforceability. This friction has tangible economic consequences: legacy T+2 settlement cycles generate substantial market inefficiencies through immobilized capital, operational friction, and ongoing counterparty risk (Mahboub and Sadok, 2024). However, the mitigation of these costs is fundamentally predicated upon a prerequisite legal recognition: the validation of on-chain inscription as a legitimate and enforceable mode of property transfer.

To address the aforementioned paradox of “compliance by design” versus legal uncertainty, this research adopts a Law and Economics framework, evaluating regulatory structures through the lens of economic efficiency and agent behavior. In accordance with its standard usage as an interdisciplinary academic field, this framework applies economic methods to legal analysis—drawing upon the seminal contributions of Coase (1960) regarding transaction costs, Posner (1972) on the efficiency of legal rules, and legal institutionalism (North, 1990) regarding formal property rights—to treat normative architectures as dynamic incentive systems designed to minimize institutional transaction costs and information asymmetries.

The extant scholarly literature addressing the digitalization of financial assets has historically coalesced around two primary analytical axes. The inaugural strand, exemplified by the seminal work of Zetzsche et al. (2020), focused predominantly on the taxonomical challenges of Initial Coin Offerings (ICOs) and the preliminary regulatory lacunae characterizing the early crypto-asset ecosystem. A secondary strand, represented by Treleaven et al. (2022), succeeded in mapping the intricate technical architectures of decentralized finance (DeFi), yet largely refrained from a granular comparative interrogation of divergent legal regimes. More contemporary contributions, notably Lavayssière (2024), have introduced sophisticated structural grids for tokenization, while Krause (2026) and Odinet and Tosato (2026) have elucidated the persistent regulatory vulnerabilities inherent in stablecoin frameworks.

Notwithstanding these advancements, a major conceptual and theoretical gap persists: to date, no comprehensive study offers an integrated structural synthesis capable of systematically evaluating cross-border tokenization regimes across legal, technological, and systemic dimensions through a unified Law and Economics lens (Sadok, 2023a). Methodologically, this article provides a qualitative comparative legal analysis grounded in institutional economics, explicitly distinguishing its approach from empirical quantitative modeling. The four jurisdictions were selected to represent structural regulatory archetypes within global finance: Switzerland illustrates radical legal integration (codifying DLT within civil law); the European Union represents a time-bound, experimental model involving regulatory derogations (the DLT Pilot Regime); the United Arab Emirates offers a model of competitive specialization via financial free zones (DIFC/ADGM); and the United States reflects a fragmented, enforcement-led transition. This cross-jurisdictional selection ensures a balanced assessment of how different legal traditions—civil law, common law, and hybrid regimes—manage the friction between algorithmic code and sovereign enforceability. Through this synthesis, the study evaluates whether these frameworks foster genuine “compliance by design”—where legal rules are programmatically embedded into protocol architectures—or remain reliant on top-down “law by decree,” defined as sovereign legal mandates imposed on cryptographic infrastructures without adapting private law doctrines or technical protocols to match on-chain realities.

The analysis is structured around three core axes—technological protocol design, doctrinal property qualifications, and systemic risk mitigation—and is organized into five distinct sections. This study adopts a qualitative, comparative Law and Economics research design. Rather than conducting statistical hypothesis testing, it employs functional legal micro-comparativism to evaluate how divergent regulatory architectures function as dynamic incentive structures. To systematically evaluate cross-border tokenization regimes, four analytical indicators are used: (i) the legal recognition and enforceability of on-chain property transfers erga omnes, (ii) the structural integration of DLT market infrastructures, (iii) the robustness of insolvency protection and asset segregation mechanisms, and (iv) the mitigation of settlement risk via the cash leg. These indicators provide the objective basis for qualitative comparative scoring across the target jurisdictions.

Thus, the remainder of this article will be structured as follows:Section 2 establishes the ontology of the token, situating the digital asset between technical inscription and property law; Section 3 interrogates the mechanics of “Lex cryptographia” and algorithmic compliance standards such as ERC-3643; Section 4 provides the comparative analysis across the four target legal systems; and Section 5 presents a cross-sectional synthesis highlighting functional convergences, structural fractures, and macro-prudential stability considerations.

2 Token ontology: the dialectic between legal object and technological inscription

The foundational challenge posed by tokenization is essentially ontological, necessitating a determination of the essence of the token beyond its existence as a mere technological artifact. This characterization is far from a theoretical abstraction; it constitutes the prerequisite for establishing the applicable legal regime, as it dictates the nature of the rights conferred upon the holder, the requirements for erga omnes enforceability, and the priority of claims within the hierarchy of creditors in the event of insolvency. Furthermore, from a macro-prudential perspective, the ontological status of the token serves as a primary determinant of the systemic risk profile the asset introduces to the broader financial ecosystem. By defining whether the token is a property right, a claim, or a sui generis legal object, the law establishes the boundaries of financial stability in a decentralized environment.

At its most basic technical level, a digital token is defined as a discrete entry in a distributed ledger—a cryptographically secured entry in a decentralized database managed by a distributed network of nodes. However, this minimalist definition fails to capture the functional versatility of the object, which, through the mechanism of representation, can encompass a stake in a company’s capital, a share of real estate ownership, a debt security, or a digital currency. It is this capacity for representation—the link between a digital bit and a legally recognized value—that gives the token unprecedented legal complexity (Entriken et al., 2018). In the transition from traditional dematerialized securities to assets based on distributed ledger technology (DLT), the token functions as a “container” whose legal validity rests on the strength of the link between the blockchain entry and the underlying rights, necessitating a shift from the traditional concept of physical ownership to a new paradigm of “control” over a digital representation of value (Sadok, 2023b).

To grasp this complexity, the structural analysis framework proposed by Lavayssière (2024), summarized in Table 1 below, distinguishes three configurations of legal links, each with specific implications in terms of transaction costs and legal certainty. The first, direct tokenization or primary registration, occurs when the token constitutes the legal instrument of the right; in this case, the transfer on the blockchain results in an immediate and absolute transfer of ownership, thus achieving the pinnacle of “design compliance.” Conversely, indirect tokenization refers to situations where the token represents rights over an intermediary structure—such as a special purpose vehicle (SPV) or a regulated fund—thus reintroducing traditional counterparty risk and a “legal gap” between activity on the blockchain and off-chain ownership. Finally, the “digital twin” or incomplete tokenization model refers to tokens that possess only a mirror value, without independent legal force. This model offers only minimal efficiency gains, as it does not solve the efficiency problems of regulations and remains entirely dependent on existing legal registers for its validity and enforceability against third parties (Lebrun et al., 2021).

TABLE 1. Structural taxonomy of tokenization (Lavayssière, 2024, pp. 8–12).

Source: Lavayssière (2024).

Building on the previously established typology of legal relationships, the shift from technological registration to property status represents the most conceptually controversial boundary and the one with the most significant economic consequences in tokenization. At the heart of this doctrinal tension lies the question of whether a digital token can be classified as property in the strict legal sense, thus granting its holder rights enforceable against all (El Alami et al., 2015). Such a classification is not merely a matter of severance; it is the essential linchpin for creating perfect security interests, establishing a right of recovery in the event of the custodian’s insolvency, and fostering the overall development of a liquid secondary market based on robust property security. Without this property foundation, the token remains a mere contractual claim, which considerably increases the costs of trust identified in legal and economic analyses (Benazzouz and Sadok, 2025).

The skepticism regarding this proprietary status is prominently articulated in the work of Stevens (2025), who advances a critical thesis asserting that digital assets, by their very nature, resist classical property classifications. Stevens’ central argument focuses on the ontological distinction between physical possession and the control of a private key. Unlike a material object, a private key constitutes information that can be replicated or clandestinely appropriated without the original holder being immediately or physically dispossessed. This non-rivalrous and informational character of the key complicates the application of traditional in rem doctrines. Within civil law traditions, this perspective resonates with the ongoing doctrinal reluctance to qualify crypto-assets as intangible movables, as the lack of physical corporeality continues to challenge the established “legal-owner-asset” triad.

However, this traditionalist view is increasingly being superseded by proactive legislative and judicial interventions designed to bridge the gap between “on-chain” facts and “off-chain” law. A landmark development in this regard is the Dubai International Financial Centre’s Digital Assets Law (No. 2 of 2024), which, in Article 15, expressly institutes a legal fiction by recognizing digital control via a private key as the functional equivalent of physical possession. Similarly, the Swiss DLT Act (2021) has fundamentally integrated these assets into the Swiss Code of Obligations (CO, Arts. 973d–973i) by creating “DLT uncertificated securities” (Art. 973d–973i CO). This reform elevates the distributed ledger to a legally recognized support for rights, placing it on equal footing with traditional centralized registries and effectively anchoring the “compliance by design” paradigm in positive law. These normative architectures directly counter Stevens (2025) reservations by providing the legal certainty necessary for property-like enforceability.

This movement toward proprietary recognition is further bolstered by emerging judicial precedents in common law jurisdictions. In D'Aloia v. Persons Unknown (2024), the English High Court recognized the viability of seeking civil injunctions over blockchain-based assets, signaling a shift toward providing effective judicial protection even in the absence of a final, definitive classification of the token’s nature. By treating the token as a “thing in action” or a sui generis form of property, courts and legislatures are moving toward an absorption of the lex cryptographia into sovereign frameworks. This evolution is critical for the systemic efficacy of tokenization, as it ensures that the reduction of transaction costs through technology is matched by the reduction of legal risks through institutional recognition.

Beyond the debate over proprietary nature and in rem enforceability, the efficacy of tokenization is equally contingent upon its functional classification within specific regulatory regimes. Within the European Union, the Markets in Crypto-Assets Regulation (MiCA, EU 2023/1,114) attempts to harmonize this landscape by categorizing tokens based on their underlying economic utility. This taxonomy distinguishes between E-Money Tokens (EMT), designed as digital surrogates for a single fiat currency; Asset-Referenced Tokens (ART), which maintain value by referencing a basket of assets or commodities; and Utility Tokens, intended solely to provide access to specific digital services or goods without conferring financial rights. However, a significant structural limitation persists: pursuant to Article 2 (4) (a), MiCA explicitly excludes “security tokens” from its scope—those assets already qualifying as financial instruments under MiFID II. This exclusion creates a critical regulatory bifurcation, as the most sophisticated forms of institutional tokenization remain governed by legacy securities laws rather than the bespoke MiCA framework.

To mitigate the risks of regulatory arbitrage inherent in this dual-track system, the European Securities and Markets Authority (ESMA) has institutionalized the guiding principle of “substance over form” (ESMA, 2024). This doctrine dictates that the legal qualification of a token is not determined by the nomenclature or label assigned by the issuer, but by the objective economic reality of the instrument. Consequently, a token marketed as a “utility” asset that nonetheless confers financial rights—such as participation in future profits, dividends, or voting influence—will be subjected to ex post requalification as a MiFID II financial instrument. This analytical approach mirrors the criteria of the Howey Test (328 U.S. 293, 1946) in US jurisprudence, which identifies a security based on the expectation of profits derived from the entrepreneurial efforts of third parties. Such a requalification carries severe consequences, including the potential nullity of the issuance, substantial civil liability, and criminal sanctions for the unauthorized offering of securities.

Crucially, this functional qualification is not a static determination made at the point of issuance but remains dynamic throughout the asset’s lifecycle. As noted in the foundational guidelines of FINMA (2018), a token may undergo a mutation of its legal nature; for instance, a utility token may evolve into a security if the issuer subsequently introduces secondary revenue-sharing mechanisms or deflationary “burn” protocols that correlate the token’s value with the performance of the enterprise (Mouline and Sadok, 2021). This potential for ontological shifting necessitates continuous regulatory vigilance and sophisticated “compliance by design” monitoring. Such dynamism reinforces the central thesis that while “on-chain” code may automate certain processes, the ultimate legal status of the token remains firmly anchored in sovereign normative frameworks, which prioritize the protection of market integrity and the mitigation of systemic risks over technological labeling (Trzcinski et al., 2018).

3 The emergence of a “lex cryptographia”: compliance by design

The conceptual pinnacle of institutional tokenization resides in the emergence of a lex cryptographia—a normative paradigm wherein computer code itself possesses the capacity to enact and enforce rules, effectively bypassing traditional legal mediation. This ambition is predicated on the hypothesis that smart contracts, by automating the execution of contractual obligations upon an immutable and transparent distributed ledger, can serve as a functional substitute not only for financial intermediaries but also for specific regulatory and adjudicative functions traditionally reserved for positive law (Benkhayat et al., 2015). This section interrogates the technological mechanisms underpinning this “compliance by design” ethos, while situating its operational reality within the broader Law and Economics framework of trust-cost reduction.

The technological foundation of this architecture is the blockchain, which, as originally conceptualized by Nakamoto (2008), functions as a decentralized peer-to-peer settlement system that obviates the necessity for a centralized trusted third party. By distributing the consensus function across a network of participating nodes through cryptographic protocols, the blockchain establishes a distributed substrate of immutability. As Tapscott and Tapscott (2016) posit, this transition represents a fundamental shift toward a “new layer of trust” for the global economy, where the reliability of the system is derived from mathematical certainty rather than institutional reputation. Within this framework, smart contracts—theorized by Szabo (1994) and operationalized via the Ethereum Virtual Machine (Buterin, 2014)—act as the engine of automation. These self-executing programs, characterized by their autonomy, immutability, transparency, and determinism, enable the “hard-coding” of contractual terms. This allows for the seamless execution of asset servicing, settlement-delivery, and governance, thereby reducing the transaction costs associated with manual intervention and human error (Sadok et al., 2023a).

For institutional applications, the distinction between public (permissionless) and private (permissioned) blockchains is paramount. While public networks like Ethereum offer maximum censorship resistance and decentralization, they present significant challenges regarding Know Your Customer (KYC) and Anti-Money Laundering (AML) mandates due to the native pseudonymity of wallet addresses. Conversely, permissioned infrastructures—such as Hyperledger Fabric, Corda, or Quorum—are tailored for the financial sector, offering native confidentiality and significantly enhanced transactional throughput (Sadok and El Maknouzi, 2021). Empirical data indicates that these enterprise-grade ledgers can achieve upward of 3,000 transactions per second (TPS), far surpassing the base-layer performance of public chains (Androulaki et al., 2018; Brown, 2018), thus meeting the high-frequency demands of capital market infrastructures.

The evolution of on-chain compliance has culminated in specialized protocols such as ERC-3643 (formerly T-REX), which currently represents the state of the art for institutional security tokenization. The fundamental innovation of ERC-3643 lies in its decoupling of investor identity from the token through the ONCHAINID system. Unlike the generic and non-compliant ERC-20 standard, ERC-3643 facilitates dynamic and automated whitelisting by assigning investors a digital identity that stores encrypted KYC attestations issued by accredited providers. This architecture addresses the inherent tension between the transparency requirements of financial regulators (e.g., AMLD6 and FATF Recommendation No. 16) and the data privacy mandates of the GDPR. Through the deployment of Zero-Knowledge Proofs (ZKP), the protocol can mathematically verify a user’s compliance—such as tax residency or qualified investor status—without disclosing sensitive personal data on the public ledger. This synthesis of cryptography and identity management transforms blockchain’s native pseudonymity into a selectively verifiable system, effectively operationalizing the “compliance by design” paradigm while ensuring that the lex cryptographia remains compatible with the sovereign normative frameworks of the global financial order.

The operationalization of lex cryptographia within institutional finance is ultimately contingent upon the technical robustness and regulatory compatibility of the underlying smart contract standards. While the “compliance by design” paradigm offers a theoretical framework for automating legal norms, its practical efficacy is realized through a hierarchy of token standards that have evolved to meet increasingly rigorous institutional requirements. Whereas early protocols focused primarily on basic fungibility and retail utility, contemporary standards have integrated sophisticated identity management and native transfer restrictions to bridge the gap between algorithmic autonomy and sovereign legal mandates. This technical evolution reflects a strategic shift from the permissionless pseudonymity of the early blockchain era toward a selectively transparent infrastructure capable of supporting regulated financial instruments. The following Table 2 provides a comparative analysis of the predominant Ethereum-based standards, illustrating the progressive integration of legal and regulatory constraints directly into the token’s technical architecture.

TABLE 2. Comparative analysis of token standards on Ethereum.

Sources: EIP, Repository (Lebrun et al., 2021; Vogelsteller and Buterin, 2015).

The transition from a technologically governed lex cryptographia to a tangible financial revolution is most clearly articulated through the mechanism of on-chain Delivery versus Payment (DvP T+0). This process, which confers genuine operational and economic value upon the tokenization paradigm, utilizes smart contracts to simultaneously sequester the tokenized security (the Asset Leg) and the digital currency (the Cash Leg) within a digital escrow. By design, the transaction is “atomic”—adhering to the ACID (Atomicity, Consistency, Isolation, Durability) principles of distributed database theory—meaning the exchange is either executed in its entirety or fully rejected. This structural synchronization effectively eliminates the risk of principal loss, specifically the danger of a delivery occurring without a corresponding payment, a safeguard explicitly sought in modern regulatory frameworks such as the EU DLT Pilot Regime (Regulation 2022/858) (European Union, 2022).

The economic ramifications of this shift from asynchronous to atomic settlement are substantial. In traditional capital markets, multilateral clearing processes managed by central counterparties (CCPs) necessitate a 2-day settlement latency (T+2), a window that imposes significant capital requirements and operational friction. Industry estimates by Goldman Sachs and Banco Santander suggest that this latency generates annual infrastructure costs ranging from $11 billion to $20 billion, primarily through immobilized capital, mandatory margin calls, and the lingering counterparty risk inherent in the settlement window (Carstens, 2022). By contrast, instantaneous T+0 settlement releases this trapped liquidity, facilitating more efficient balance sheet management for market participants and structurally reducing systemic exposure to settlement failures. Within the Law and Economics framework previously discussed, this represents a massive reduction in the transaction costs associated with intermediated trust.

However, as developed in the preceding analysis of technological and legal architectures, the systemic efficacy of this mechanism remains contingent upon a critical prerequisite. As Carstens (2022) highlights, the tokenization of the asset leg remains functionally incomplete if the cash leg continues to rely on legacy banking systems, such as SWIFT or TARGET2. This discrepancy reintroduces manual intervention and latency, effectively breaking the automation of the smart contract and curtailing the anticipated efficiency gains of the lex cryptographia. Therefore, the realization of the economic benefits of DvP T+0 is fundamentally conditional upon the successful integration of a digital cash settlement medium—such as a wholesale Central Bank Digital Currency (wCBDC) or a highly regulated stablecoin— (Sadok and Elouaourti, 2025), a challenge that constitutes the “Cash Leg Gap” to be analyzed in Section 5 of this study.

The institutional safeguarding of tokenized assets represents a critical operational pillar, directly addressing the “costs of trust” and the ontological vulnerabilities identified in the preceding analysis. The evolution of this sector has been profoundly shaped by the systemic failures of the 2012–2022 decade, most notably the collapse of FTX in November 2022. This event served as a catastrophic empirical demonstration of the risks inherent in the absence of robust client asset segregation, where billions of dollars in depositor funds were misappropriated to cover the liabilities of the parent entity (e.g.,Chainalysis on 2024; Sadok et al., 2024)). The lack of a clear legal mechanism for the revendication (recovery) of assets in the event of insolvency highlighted a fundamental fracture between the technological holding of assets and their protection under traditional bankruptcy law. Consequently, this crisis catalyzed a global regulatory consensus on the mandatory segregation of tokenized assets, reinforcing the necessity for a legal and technical framework that prevents the commingling of proprietary and client funds.

To operationalize these stringent regulatory mandates, the financial industry has converged upon Multi-Party Computation (MPC) as the authoritative cryptographic standard for institutional-grade custody. MPC transcends the limitations of traditional private key management by utilizing a mathematical framework that fragments the key into multiple shares distributed among independent parties. Under this architecture, no single entity possesses the complete cryptographic secret at any time; rather, a transaction can only be authorized through the collaborative combination of a predefined threshold of fragments—typically a “two-out-of-three” quorum. This distributed approach effectively eliminates single points of failure and internal collusion risks, while simultaneously facilitating access management protocols that align with established banking requirements, including operational continuity, rigorous segregation of duties, and a comprehensive, immutable audit trail.

From an institutional standpoint, MPC offers decisive advantages over earlier “multi-sig” configurations by enabling key share rotation and the revocation of specific participants without necessitates a service interruption or a total reissuance of the underlying keys. For licensed institutional custodians such as Fireblocks, Komainu, and Metaco, these features are essential for managing the dynamic lifecycle of digital assets within the “compliance by design” paradigm. By integrating MPC architectures, market participants can achieve a level of operational security that mitigates the inherent risks of digital possession discussed in Section 2, thereby providing the structural stability required to support a secure and liquid secondary market for tokenized financial instruments. This technical maturity, however, remains inextricably linked to the sovereign normative frameworks—such as the Swiss DLT Act or the EU’s MiCA—which provide the legal certainty that these cryptographic controls will be recognized and protected in a court of law.

4 Regulatory fragmentation: comparative analysis of four models

While “compliance by design” offers a robust technological response to the problem of trust, the persistent fragmentation of global regulatory frameworks remains the primary barrier to systemic adoption. From a Law and Economics perspective, the efficiency of any given regulatory model is measured by its capacity to minimize transaction costs, provide robust legal certainty, and safeguard overall financial stability. Switzerland currently represents the global vanguard of this evolution through its DLT Act of 2021, which established a model of radical legal integration by fundamentally reforming multiple bodies of rules to recognize blockchain as a legitimate legal support for rights. This approach effectively bridges the gap between technical facts and legal status by elevating distributed ledger technology to the same legal standing as traditional centralized registries.

The centerpiece of this reform is the creation of “DLT uncertificated securities” under the Swiss Code of Obligations (CO, Arts. 973d–973i), which introduces the critical legal innovation that an on-chain inscription constitutes a transfer of ownership enforceable erga omnes. This framework achieves a high degree of legal predictability by conditioning the validity of a right on four unique technical pillars: the integrity of the inscription, third-party enforceability, exclusive control by the holder via a private key, and the accessibility of information. Furthermore, Switzerland has streamlined its market infrastructure via the FMIA Act, allowing a single entity—exemplified by the SIX Digital Exchange (SDX, 2022, 2024).)—to operate trading, clearing, and settlement functions under a unified license. The success of this integrated approach was empirically validated by Project Helvetia, which demonstrated that tokenized assets could be settled directly via atomic Delivery versus Payment (DvP) using a wholesale Central Bank Digital Currency (wCBDC). Ultimately, the Swiss model provides the definitive legal permanence and long-term certainty necessary to attract institutional investment, contrasting sharply with experimental or fragmented regimes that may discourage long-term infrastructure commitments.

In contrast to the permanent legal integration characterizing the Swiss model, the European Union has adopted a philosophy of supervised experimentation through the DLT Pilot Regime under EU Regulation (EU) 2022/858. This regulatory “sandbox” operates as a derogatory framework from established MiFID II and CSDR mandates, providing a temporary six-year window for market participants to test the viability of distributed ledger technology for financial instruments. The regime introduces three distinct infrastructural categories: Multilateral Trading Facilities (MTF-TRD) that facilitate direct retail access, Settlement Systems (SS-TRD) designed for instantaneous T+0 settlement, and the innovative DLT Trading and Settlement Systems (SSS-TRD). The latter represents a significant structural shift by authorizing the merger of trading and settlement functions under a unified license, mirroring the operational efficiency sought by “compliance by design” protocols.

However, the efficacy of this experimental model is significantly constrained by strict protective thresholds and a fundamental “Cash Leg Gap”. The regulation imposes an aggregate capitalization cap of EUR 6 billion on DLT infrastructures, with an alert threshold at EUR 9 billion that mandates the activation of an exit strategy. These limits, born from institutional compromises between the Commission, Parliament, and Council, have been criticized as insufficiently ambitious to incentivize participation from major institutional actors. Most critically, the absence of a wholesale Central Bank Digital Currency (wCBDC) forces a reliance on Asset-Referenced or E-Money Tokens (EMTs) as cash substitutes. This reliance reintroduces the very bank counterparty risks that traditional systems like TARGET2-Securities were designed to eliminate, thereby undermining the atomic settlement benefits theorized in Section 3. Coupled with a persistent regulatory asymmetry that favors traditional Central Securities Depositories (CSDs) over SSS-TRD entities, these factors create a formidable barrier to the migration of legacy actors, ultimately hindering the achievement of necessary market depth and liquidity.

In contrast to the radical integration seen in Switzerland or the supervised experimentation of the European Union, the United Arab Emirates has pioneered a model of competitive specialization. This ecosystem is characterized by a sophisticated, multi-layered regulatory architecture partitioned between federal authorities—such as the Securities and Commodities Authority (SCA) and the Central Bank of the UAE (CBUAE)—and specialized financial free zones. Within this framework, the Dubai International Financial Centre (DIFC) serves as an institutional sanctuary governed by Common Law. Its Digital Assets Law of 2024 represents a significant advancement in legal theory by codifying the private key as the functional equivalent of physical possession. Furthermore, the DIFC provides robust investor protections through mandatory asset segregation; in the event of a custodian’s insolvency, digital assets are excluded from the bankruptcy estate, granting clients a priority right of reclamation that supersedes the claims of general creditors. This institutional stability is augmented by the DFSA’s Tokenisation Regulatory Sandbox, which provides a structured evolutionary pathway from innovation testing to full regulatory authorization.

Complementing the DIFC’s institutional focus, the Virtual Assets Regulatory Authority (VARA) and the Abu Dhabi Global Market (ADGM) ¹ offer specialized frameworks for retail and governance-focused applications. The VARA 2.0 (2025) ² regime introduces rigorous standards for Asset-Referenced Virtual Assets (ARVAs), mandating semiannual reserve audits and substantial minimum capital requirements that exceed international norms. Simultaneously, the ADGM has established a global precedent by legally validating the principle of “governance by code.” Under the ADGM Digital Asset Regulatory Framework, the operational rules of a DLT Foundation may be embedded directly into smart contracts, imbuing algorithmic protocols with full legal force. While this ecosystem is characterized by a “golden rule” of hermetic separation—requiring separate authorizations for the local retail market and international institutional spheres—it maintains systemic coherence through the CBUAE’s Payment Token Services Regulation. Crucially, by actively piloting a digital dirham (CBDC), the UAE effectively bridges the “Cash Leg Gap” that currently hinders the European Pilot Regime, ensuring that tokenized transactions can be settled in central bank money to eliminate counterparty risk (Sadok and Assadi, 2023).

In stark contrast to the integrated legal certainty of the Swiss model or the specialized ecosystems of the United Arab Emirates, the United States represents a model of fragmented transition characterized by significant jurisdictional complexity. This regulatory landscape is defined by a triad of structural impediments: the persistent dualistic tension between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the continued application of the century-old Howey test as the primary qualification criterion, and the historical lack of a unified federal legislative framework (Howey Co., 328 U.S. 293, 1946). The limitations of applying legacy jurisprudence to contemporary digital assets were acutely demonstrated in SEC v. Ripple Labs (2023) decision, which resulted in a bifurcated qualification of the same token based on the nature of the acquirer—institutional versus retail—thereby complicating the “compliance by design” ideal and introducing substantial unpredictability for market participants (No. 20-cv-10832, SDNY, July 2023).

The promulgation of the GENIUS Act in July 2025 marks a foundational effort to establish federal coherence, specifically targeting the stablecoin sector through rigorous 1:1 reserve requirements and heightened transparency mandates for large-scale issuers (Krause, 2026). However, the Act operates under a statutory delay—taking effect on the earlier of 18 January 2027 (18 months post-enactment) or 120 days after federal regulators finalize implementing rules—placing the U.S. market in a transitional rulemaking phase. Consequently, while it anticipates fortifying the “cash leg” of digital transactions, it does not currently offer an operational regulatory regime. Furthermore, the framework leaves key issues unaddressed, such as the geographic fragmentation of liquidity or the unresolved regulatory status of yield-bearing stablecoins backed by Treasury bills under the Howey doctrine, preserving a significant vacuum of legal certainty (Odinet and Tosato, 2026). Table 3 below presents a comparative analysis of this fragmentation of legal status.

TABLE 3. Comparative analysis of tokenization regulatory models.

Sources: Made by authors based on Swiss DLT, Act (RO, 2021); EU, Regulation (EU) 2022/858 (EU) 2022/858 2022/858; DIFC, Digital Assets Law No. 2 of 2024; GENIUS, Act (July 2025); ESMA (2026); Krause (2026); Odinet and Tosato (2026).

5 Cross-sectional synthesis: convergences, divergences and systemic risks

The comparative analysis of the four regulatory frameworks—Switzerland’s radical integration, the European Union’s experimental “sandbox,” the United Arab Emirates’ competitive specialization, and the United States’ fragmented transition—reveals a clear thematic synthesis that transcends individual jurisdictions (El Maknouzi and Sadok, 2021). While these models possess fundamentally different legal philosophies, they exhibit three critical functional convergences that signal the emergence of a global “compliance by design” paradigm. The first is the cross-jurisdictional primacy of substance over form, a methodological alignment where tokens are qualified according to their underlying economic reality rather than their commercial designation. This convergence, evident from the Swiss erga omnes integration to the American application of the Howey test, serves as a fundamental safeguard against regulatory arbitrage and places the burden of legal precision on the initial structuring of the asset’s lifecycle.

Furthermore, a significant technical convergence is occurring through the automation of compliance and the standardization of institutional custody. The widespread adoption of programmable standards, such as ERC-3643 and ERC-1400, is establishing a common on-chain language that facilitates interoperability across secondary markets, regardless of whether the governing law is civil or common. Parallel to this, Multi-Party Computation (MPC) has emerged as the global standard for institutional custody, bridging the gap between the rigid technical pillars of the Swiss DLT Act and the strict asset-segregation requirements of the DIFC. By universalizing MPC, jurisdictions are collectively responding to the systemic vulnerabilities exposed by past market failures, effectively mandating a technological layer of protection that ensures client asset segregation. These convergences suggest that while regulatory fragmentation persists, a decentralized, code-based normative framework is beginning to harmonize the operational reality of global tokenization.

Despite the functional convergences toward “compliance by design” and technological standardization discussed previously, three profound structural fractures persist among the analyzed jurisdictions, primarily concerning the enforceability gap. The first divergence centers on the distinction between native legal recognition and transitory derogatory regimes. Switzerland remains the outlier by having permanently integrated DLT uncertificated securities into its Code of Obligations, thereby providing the durable legal predictability essential for institutional long-term planning. In contrast, the European Union’s DLT Pilot Regime (Regulation 2022/858), with its six-year temporal limitation and pending review clause, introduces a significant risk of regulatory obsolescence that may actively discourage the heavy capital expenditure required for permanent market infrastructure.

The second fracture concerns the legal nature of property transfer and its enforceability against third parties. While Switzerland (art. 973e CO) and the DIFC (Digital Assets Law 2024; art. 15) ³ have successfully resolved the paradox of legal-technical dualism by decreeing that on-chain transfers are legally sufficient to be enforceable erga omnes, the United States maintains a more fragmented approach. Although the 2022 amendments to the Uniform Commercial Code (UCC Article 12) represent a notable advancement in the recognition of “Controllable Electronic Records,” the progressive and uneven adoption of these standards across individual states creates a legal heterogeneity that remains detrimental to the liquidity and certainty of secondary markets (Swiss Confederation, 2021).

Finally, a critical divergence exists regarding protection within insolvency frameworks, specifically concerning the tension between asset segregation and creditor priority. Both the Swiss model (art. 973 g CO) and the DIFC framework guarantee absolute asset segregation and an autonomous priority right of reclamation (revendication) for the client, which operates independently of collective insolvency proceedings. This stands in sharp contrast to the paradox inherent in the American GENIUS Act. As market participants prepare for the full implementation of the GENIUS Act in 2027, attention has focused on its prospective insolvency mechanisms. As demonstrated by Odinet and Tosato (2026), the super-priority granted to stablecoin holders over an issuer’s entire estate under Article eight of the Act may prove counterproductive.

It should be noted that these assessments regarding the EU DLT market infrastructure pilot regime and the US GENIUS Act represent forward-looking qualitative indications—based on an analysis of current legislative texts and regulatory mandates—rather than definitive empirical results. Given that full implementation mechanisms—such as the rule-making process scheduled for 2026–2027 under the GENIUS Act and the final triennial reviews of the DLT pilot regime—are still underway, the actual structural impacts on market behavior and liquidity remain subject to ongoing empirical verification as these frameworks mature.

The final dimension of this cross-sectional synthesis involves an evaluation of financial stability and systemic risks, a crucial analytical component that often remains marginalized in comparative legal discourse. As tokenization moves beyond experimental frameworks like the EU’s Pilot Regime toward the permanent integration seen in Switzerland, it functions simultaneously as a mechanism for risk mitigation and a generator of novel systemic vulnerabilities. On the economic plane, tokenization offers a substantial reduction in traditional financial risks; for instance, the implementation of atomic Settlement (DvP T+0) structurally eliminates settlement risks that currently cost markets an estimated $11–20 billion annually under traditional T+2 cycles (Carstens, 2022). Furthermore, the generalization of MPC custody standards and the programmability of rights—such as automated dividend distribution and embedded KYC restrictions—significantly lower operational risks and information asymmetries. This promise of enhanced economic efficiency is exemplified by the BlackRock USD Institutional Digital Liquidity Fund, which demonstrates how direct tokenization can provide daily liquidity to money market instruments while adhering to rigorous institutional compliance standards.

However, the transition toward this “compliance by design” paradigm introduces new vectors of systemic risk that are only beginning to be mapped by global authorities like the Financial Stability Board (FSB). The collapse of the algorithmic stablecoin Terra USD (UST) in May 2022, which saw $45 billion in market value evaporate within 72 h (e.g., Chainalysis in 2024), serves as a definitive case study in the dangers of automated arbitrage mechanisms devoid of tangible reserves. This event underscores why jurisdictions like the United States have moved to prohibit algorithmic models through the GENIUS Act. Beyond the risk of collapse, Krause (2026) identifies a persistent systemic risk in the form of liquidity fragmentation across cross-border payment corridors. Despite 72% of organizations actively engaging with stablecoin payments, significant costs and delays persist in corridors such as US/Nigeria and Gulf/Egypt (Sadok et al., 2023b). This fragmentation reflects an endogenous liquidity risk resulting from insufficient market depth—a challenge that neither the European nor American frameworks have yet successfully resolved through their current regulatory interventions.

The most critical systemic vulnerability, however, lies in the “contractual gap” identified by Odinet and Tosato (2026) within the stablecoin markets that underpin the “cash leg” of the tokenization ecosystem. An analysis of the terms and conditions of dominant issuers like Tether and Circle reveals profound asymmetries: limited direct redemption access for the vast majority of holders and broad disclaimers of liability for various loss categories. Most concerningly, the legal characterization of these holdings often suggests a simple debtor-creditor relationship rather than a segregated deposit, implying that holders would likely be relegated to the status of unsecured creditors in a bankruptcy scenario. This lack of robust contractual protection, particularly when concentrated in assets representing over 80% of market capitalization, mirrors the enforceability gap discussed in Section 4 and constitutes a first-order systemic risk that remains largely unaddressed by contemporary regulatory frameworks.

The comparative analysis across the aforementioned jurisdictions—ranging from Switzerland’s radical integration to the fragmented transition of the United States—reveals a singular, common structural obstacle that transcends national borders: the “Cash Leg” of settlement-delivery. This “Cash Leg Gap” has been identified as the primary impediment to the systemic adoption of tokenized markets, acting as a definitive brake on the evolution of global financial infrastructures (ESMA, 2026). In the current absence of a widely accessible wholesale Central Bank Digital Currency (wCBDC), market participants are forced to rely on private-sector substitutes, such as stablecoins or tokenized deposits. As previously noted in the critique of the European Pilot Regime, this reliance reintroduces the very bank counterparty risks that traditional systems, such as TARGET2-Securities, were specifically engineered to eliminate, thereby undermining the “compliance by design” objective of trustless, risk-free settlement.

While the technical feasibility of the optimal solution—wholesale CBDC—is no longer in question, its implementation remains the final systemic lock on market efficiency. Empirical evidence from the Banque de France (2021) and the success of Project Helvetia (BIS and SNB, 2021; BIS and SNB, 2022) have already demonstrated that tokenized assets can be settled directly in central bank tokens via atomic Delivery versus Payment (DvP), effectively bypassing traditional, siloed settlement infrastructures. However, as the UAE’s proactive piloting of a digital dirham suggests, the generalized deployment of such a solution is not a matter of technological maturity but is instead conditioned upon complex sovereign monetary policy decisions that lie beyond the immediate reach of financial regulators. Consequently, it is the availability of wholesale CBDC, rather than the sophistication of DLT protocols themselves, that represents the ultimate determinant of whether tokenization can achieve its theorized economic efficiency (Carstens, 2022; ESMA, 2026). Table 4 below summarizes the convergences, divergences, and systemic risks associated with these regulatory models.

TABLE 4. Cross-sectional synthesis: convergences, divergences, and systemic risks.

Source: Made by authors based on comparative analysis of Swiss, European, UAE, and American regulatory frameworks, and data from Carstens (2022), ESMA (2026), Krause (2026), and Odinet and Tosato (2026).

6 Conclusion

The tokenization of financial instruments does not suppress intermediaries; rather, it fundamentally redefines their roles and responsibilities within an economy of minimized trust. This multi-jurisdictional comparative analysis, articulated through the lens of Law and Economics, establishes with certainty that the transition from traditional assets to blockchain-based inscriptions challenges the sovereign normative frameworks that underpin global finance. In response to the central inquiry of this study, tokenization does not yet constitute the emergence of an autonomous on-chain financial law. While algorithmic code serves as a powerful executor, it does not possess the inherent capacity to create substantive rights; instead, it presupposes their existence within a broader legal order.

The practical efficacy of “compliance by design”—supported by protocols such as ERC-3643, ONCHAINID, atomic settlement (DvP T+0), and Multi-Party Computation (MPC)—can only be fully deployed in jurisdictions where positive law explicitly recognizes on-chain inscription as a valid mode for the constitution and transfer of rights. Law and Economics analysis confirms that the jurisdictions most successful in reducing institutional transaction costs are those that have permanently and non-derogatorily integrated on-chain rights into their positive law, exemplified by Switzerland’s radical integration and the Dubai International Financial Centre’s (DIFC) specialized framework.

However, three structural locks currently condition the systemic adoption of these technologies. The monetary lock remains the most fundamental: the absence of accessible wholesale Central Bank Digital Currencies (wCBDC) forces tokenized markets to rely on substitutes that reintroduce bank counterparty risk, thereby neutralizing a significant portion of the benefits of decentralization. The legal and contractual lock constitutes a second obstacle, as asymmetric gaps in the contractual frameworks of systemic stablecoins represent a first-order systemic risk in a $300 billion market that remains unaddressed by current regulations like MiCAR or the GENIUS Act. Finally, the regulatory fragmentation lock maintains unacceptable cost disparities in cross-border payment corridors and discourages the development of secondary market infrastructure at an international scale.

This study presents three primary limitations. First, given the rapid evolution of digital asset regulation—particularly regarding the pending full implementation of the US GENIUS Act and the final reviews of the EU DLT Pilot Regime—the findings represent a snapshot of active legislative trajectories. Second, as a qualitative comparative legal analysis, this study does not measure quantitative market metrics such as secondary market trading volumes or liquidity depth across tokenized assets. Finally, implementation gaps may emerge between formal statutory frameworks and judicial enforcement as novel insolvency cases involving on-chain assets progress through courts.

Ultimately, tokenization represents a profound transformation of capital markets, yet it remains a conditional one. Its technological promise can only be realized in legal spaces where sovereign normativity explicitly chooses to accommodate it. This choice is not economically neutral, as the transaction cost differentials between various legal systems directly condition the long-term competitiveness of financial centers. At a time when the European Union is questioning the balance of its Pilot Regime, the Swiss model offers a valuable empirical demonstration: it is only when code and law are explicitly aligned that tokenization reveals its true systemic value.

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Footnotes

Edited by: Eda Sahin-Sengul, Bath Spa University, United Kingdom

Reviewed by: Kiruthika Dhanapal, Chennai Dr. Ambedkar Government Law College, India

Nenad Tomić, University of Kragujevac, Serbia

Footnotes

ADGM Digital Asset Regulatory Framework (DARF), update 2024–2025, notably §3.2 (DLT Foundation). Financial Services Regulatory Authority (FSRA), Abu Dhabi.

VARA 2.0 (May 2025). Asset-Referenced Virtual Assets (ARVA) Regulations. Virtual Assets Regulatory Authority, Dubai.

DIFC Digital Assets Law No. 2 of 2024, notably art. 15 (digital possession). DIFC Authority, 8 March 2024.