From by Ledger Insights

India wants to compete with international financial centers (IFCs) such as Singapore, Dubai (DIFC) and the Abu Dhabi Global Market. Hence, in 2019 it created its own International Financial Services Centre (IFSC) in GIFT City, Gujarat. Now the local regulation authority IFSCA is conducting a consultation on DLT and its use in Real World Asset (RWA) tokenization. It wants to consider the design of secondary markets for tokens from first principles.

The regulator was keen to emphasize that the dialogue only covers tokenization and not cryptocurrency. IFSCA doesn’t plan to permit the trading of cryptocurrencies, so it went so far as to threaten legal action if the consultation was misconstrued!

The IFSC’s consultation is very open, posing a series of questions rather than being prescriptive. Hence, if the next step is to outline the IFSC’s preferred path, the process may require more than one round of consultation.

The paper covers the entire tokenization life cycle including issuance (and redemption), custody, trading, clearing and settlement. Key goals include the creation of a framework for market infrastructures and clarifying the roles of other market participants, as well as exploring investor protections and compliance.

One controversial question relates to custody. It asks whether self custody and/or regulated custody should be supported. Given it’s likely that regulations would include third party custody, the question boils down to whether individuals should have the freedom to self custody.

First principles for tokenized secondary markets

While the paper poses a lot of good questions, the secondary market aspect is the most distinctive. The IFSCA says it “wishes to re-imagine the digital token market from first principles and identify possible market participants and appropriate regulatory treatment for each of them.” Most other regulatory approaches, such as Europe’s DLT Pilot Regime and the UK’s Digital Securities Sandbox, start from the status quo and look at relaxing elements.

For each question the IFSCA additionally asks how this differs from the status quo in traditional finance. Questions include: