Since January, blockchain technology company Digital Asset has issued at least eight press releases detailing its progress toward completing the Canton Network, a blockchain ledger designed to house tokenized assets. To run its Canton Network pilot programs, Digital Asset partnered with the Depository Trust and Clearing Corporation and Euroclear, two of the world’s most influential financial institutions.
These successful pilot programs indicate the imminent arrival of a global, dematerialized macroeconomic system, which could lead to the loss of remaining property rights over virtually all of our assets.
Are you ready to own nothing and be happy?
DTCC and Euroclear play critical roles in tokenization. DTCC serves as the clearing and settlement provider, standing “at the center of global trading activity” and processing trillions of dollars in securities transactions daily. Euroclear, meanwhile, is “the leading International Central Securities Depository (ICSD).” Together, these entities handle the majority of global securities transactions.
In the pilot program with DTCC, U.S. Treasuries were tokenized and used as collateral for margin calls. In the future, other tokenized assets could also serve as collateral for similar purposes and beyond.
Deloitte, which observed the Canton Network pilot programs, stated that tokenization aims to transform illiquid assets, create new assets usable like cash, open capital markets to more customers by making assets “cash-like,” and automate transactions. The Canton Network pilot programs demonstrated the feasibility of achieving all three objectives.
The organizations behind the Canton Network present it as a promising solution to address ownership and privacy concerns associated with other blockchain networks. While tokenization carries significant risks, it is not inherently problematic if properly designed and can even be beneficial.
However, the Canton Network’s processes for tokenization, custody, and control lack sufficient precision to guarantee that investors will retain their property rights. More concerning, Digital Asset states in a report that the Canton Network complies with Articles 8 and 12 of the Uniform Commercial Code, a comprehensive set of state laws governing commercial transactions in the United States.
In a paper I co-authored with Heartland Institute Research fellow Jack McPherrin, we discuss how the UCC has already undermined property rights to investment securities through the creation of a legal concept called a “security entitlement.” Revisions to Article 8 transformed individual securities investors from outright property owners into “entitlement holders,” allowing the world’s largest banks to seize what most consider personal property during insolvency scenarios.
As we emphasize in our paper, the proposed UCC Article 12 — along with amendments to Article 9 — threatens to extend this framework to all tokenized assets, further benefiting too-big-to-fail financial institutions at the expense of individual property rights.
In its report, Digital Asset asserts,
The creation of a digital twin of the UST fits neatly into [the Article 8] framework: the security interest in the underlying ‘original’ UST is perfected through Article 8 while the security interest in the controllable electronic record representing the UST is perfected by established control over the digital twin. However, the phrase ‘digital twin’ may end up creating confusion – market participants should consider simply explaining that these are securities entitlements represented by ledger entries on the blockchain.
In plain English, this means that tokenized assets will function in the exact same way as “security entitlements,” meaning that this technology will allow Digital Asset and its allies to legally own anything that is tokenized and housed on its blockchain.
As McPherrin and I explain, “UCC Article 8 defines individual securities investors as entitlement holders — with no property rights to the securities that investors think they own — the amendments to UCC Articles 9 and 12 would define individuals as purchasers of ‘interest,’ who are considered neither secured parties nor qualifying purchasers.”
We further clarify:
Under this new arrangement, ‘entitlement holders’ are treated as unsecured creditors rather than property owners. The ‘secured creditors’ are the too-big-to-fail financial institutions to which securities brokers have pledged investors’ assets as collateral for loans and derivatives. In other words, if a securities broker or the DTC/DTCC goes bankrupt, their creditors — primarily the world’s largest banks — have priority over the securities that investors believe they own.
As of October, 25 states and the District of Columbia have passed the 2022 amendments to the UCC that create Article 12 and update Article 9 for this centrally controlled, tokenized economy.
Why is this happening?
According to David Rogers Webb’s “The Great Taking,” the derivatives market needs more collateral to survive. Transforming currently illiquid assets into liquid forms of collateral solves this problem, while giving even greater control to the banks.
Once everything is tokenized, all assets will become collateral for the derivatives markets in which too-big-to-fail institutions are the secured creditors — and therefore the legal owners of all of our property.
It is no longer a matter of if all assets will be tokenized but when they will be tokenized. Are you ready to own nothing and be happy?
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