The Dream of Tokenization! Tokenizing Intangible Assets: Far Away, Yet So Close!
The fragmentation of ownership of an asset or tokenization creates severe legal issues regarding rights and obligations, making decision-making among stakeholders time-consuming, complex, or even impossible. This often leads to intervention by legal or judicial entities. It is worth mentioning that according to clause (15) of the Iranian Auditing Organization’s Accounting Standard No. (17), “intangible assets do not have publicly available alternative uses, and they cannot be divided into smaller components for sale.”
Trust and credibility have long been metrics for evaluating individuals in societies. Among us Iranians, having credibility not only holds material value but also carries positive psychological significance, accompanied by a hidden pride and a delightful enthusiasm for the credible individual. However, traditionally, credibility and reputation, aside from their spiritual and psychological aspects, were not materially valuable or measurable; in fact, their worth was often considered much greater than their material counterparts. In our popular literature, “putting one’s mustache on the line” signifies the value of an individual’s credibility.
With the changing economic foundations and the fundamental transformations accelerated by technological advancements, the value of non-material and individual credibility began to be recognized as an asset. While assets were previously limited to tangible and physical properties, a new category of intangible assets has emerged. These assets are referred to by terms such as intangible, invisible, intellectual, and spiritual. However, from a precise technical and legal perspective, experts have identified differences and similarities among them, which are beyond the scope of this discussion.
Fundamentally, coinciding with the information technology revolution and the rapid development of technology since the 1990s, the pattern of economic growth has undergone significant changes. Consequently, knowledge has emerged as the most critical asset, replacing financial and physical capital in the global economy. In other words, the industrial economy has given way to a knowledge-based economy. In the industrial economy, the primary factors of economic wealth production are tangible assets such as land, labor, money, and machinery; in this economy, knowledge does not play a central role as the critical factor of value and wealth. However, knowledge and intangible assets are viewed as the primary means of wealth production in a knowledge-based economy compared to other tangible assets. In today’s competitive markets, where organizations aim to gain a larger market share by creating a competitive advantage, the success of an organization depends on the effective utilization and management of knowledge and intangible assets across all dimensions of the organization. Intangible assets currently play various roles in economic, managerial, technological, and social development processes.
Challenges of Tokenizing Intangible Assets
In a knowledge-based economy, where most startups lack tangible and concrete assets and rely on human capital, skills, information, intellectual property, inventions, and similar resources, establishing a mechanism for identifying, valuing, and generating these assets and consequently securing funding through these means, is of great importance. With the widespread adoption of blockchain technology and the facilitation of financing through the issuance of coins or shares via the creation and distribution of various tokens, the age-old topic of shared ownership has resurfaced in a new form. We have often heard about the tokenization of tangible assets, and simplifying it can be understood as the creation of digital shares using blockchain technology. While this topic has technical, legal, and economic dimensions, this article aims to address the challenges of tokenizing intangible assets in Iran. Initially, the discussion will examine intangible assets and their status in laws and regulations, then assess the feasibility of tokenizing intangible assets. Lastly, the current challenges of this process will be highlighted.
With the increasing use of blockchain technology and the ease of financing through the issuance of coins or shares by creating and distributing various tokens, the old concept of shared ownership has again emerged in a new form.
Currently, there is no comprehensive definition of intangible assets in financial literature; however, various references have provided definitions of intangible assets as follows:
| Definition | |
| International Accounting Standard No. 38 (IAS 38) | An identifiable non-monetary asset that lacks physical substance. |
| U.S. Accounting Standard No. 142 (SFAS 142) | Assets that lack physical substance and do not include financial assets. |
| International Valuation Standards Committee | Assets that have three economic characteristics: they lack physical substance, confer rights and privileges (immunity) to their owners, and typically generate income. |
| Iranian Accounting Standard No. 17 | An identifiable non-monetary asset that lacks physical substance. |
| Arthur Andersen in the Dictionary of Business and Economics (1997) | Anything that lacks physical substance and is not intended for sale. For example, industrial designs, goodwill, etc., are intangible assets. |
| Thomas A. Stewart (1997) | Considers intangible assets to be knowledge, information, intellectual property, and experience that can contribute to wealth creation. |
| Baruch Lev (2001) | Defines intangible assets as claims on future economic resources that lack physical substance. |
In Iranian laws and regulations, there are multiple provisions regarding intangible assets, including Article 45 of the Fourth Economic, Social, and Cultural Development Plan of the Islamic Republic of Iran, Article 20 of the Law on the Implementation of the General Policies of Article 44 of the Constitution, Section 1, Clause (d) of Note 19 of the National Budget Law for the year 1396 (2017), and Clause 3 of Article 1 of the Foreign Investment Promotion Law; the Executive Regulation on the Pricing of Shares Owned by the Government and State-Owned Enterprises, the Development Plan for the Production of Knowledge-Based Products, the Regulation on the Support of Knowledge-Based Production and Job Creation in the Economy, and the Regulation on the Valuation of Intangible Assets in Investment Projects. The definition of intangible assets is scattered across these regulations with some differences. In summary:
| Regulation | Definition |
|---|---|
| Regulation on the Support of Knowledge-Based Production and Job Creation in the Economy (approved 1401) | Intangible assets include all intellectual properties and rights arising from contracts and legal licenses, as well as human, organizational, and relational (network) capital, emphasizing the registration of technical knowledge and patents. |
| Regulation on the Valuation of Intangible Assets in Investment Projects (approved 1396) | Non-monetary assets with no physical substance arise from contractual or other legal rights, regardless of whether such rights are transferable or separable. |
| Accounting Standard No. 17 of the Iranian Audit Organization | An identifiable non-monetary asset that has no physical substance. |
| Regulation No. 69 regarding the Calculation and Supervision of the Financial Solvency of Insurance Institutions (approved 1390) | Intangible assets such as goodwill, licenses, patents, and trademarks. |
| Executive Regulation of Clause (m) of Note 5 of the National Budget Law for the year 1398 | Intangible assets (or the right to benefit from them). |
| Instructions and Guidelines for the Activity and Supervision of Institutions/Companies Valuing Intangible Assets | Non-monetary assets with no physical substance may be separable or arise from contractual rights or other legal rights, regardless of whether such rights are transferable or separable. |
As can be seen, in the absence of a clear legal definition of intangible assets, the regulator and, in general, the government have sought to define the scope of intangible assets by mentioning examples and providing criteria derived from accounting definitions, either broadening or limiting it according to their intended objectives.
In the absence of a clear legal definition of intangible assets, the regulator and, in general, the government have sought to define their scope by citing examples and establishing criteria primarily derived from accounting definitions, again broadening or limiting it based on their intended objectives.
With this approach, and to expand government support, Article 2 of the Instructions and Guidelines for the Activity and Supervision of Institutions/Companies Valuing Intangible Assets lists the types of intangible assets as follows:
Industrial Ownership: Inventions, industrial designs, names, trademarks, and other legal instances.
Literary and Artistic Ownership: Copyrights, literary and artistic works such as plays, books, music, and films, acquired rights, software, and other legal instances.
Contractual Rights: Relating to intangible assets such as non-compete agreements, natural rights, and plant varieties.
Technical and Specialized Knowledge: Patent-registered technologies, non-patented technologies, databases, formulas, and domain names.
Other Instances: Startups and knowledge-based companies, a significant portion of whose assets are intangible, human capital, intellectual capital, relational capital, organizational capital, customers, information, technical, commercial, and economic experiences, licenses and legal permits, royalties, licenses, and franchises that are identifiable and can be valued according to valuation and accounting standards.
As mentioned, a wide range of instances and subjects have been identified by the government as intangible assets. At the same time, each of them is subject to specific laws and regulations, which underscores the importance of this issue.
Several Definitions of the Concept of Tokenization
The need for digitizing assets emerged alongside the advent of computational machines and data transmission networks. Existing tools for managing assets and conducting transactions needed to be sufficiently automated and were not considered reliable. However, more than the perceived need to implement this idea was needed, as there was a need for a specific technology to maintain asset records. The emergence of blockchain technology, along with its unique features and distributed ledgers, provided this foundation. Given that the modern concept of tokenization is relatively new, various definitions have been offered, and there has yet to be a consensus on a single definition. Some definitions are as follows:
| Source | Year | Definition |
|---|---|---|
| Cambridge | 2019 | Tokenization is a form of digital marking based on blockchain and distributed ledger technology. It is represented as a string of characters and numbers using secure cryptographic representation and is applied in various fields. |
| Deloitte | 2019 | Tokenization, in simple terms, is the process of issuing tokens using blockchain technology. Tokens represent digital versions of tradable assets. |
| IFRS | 2018 | Distributed ledgers can serve as a platform for maintaining records of various data types. Physical and financial assets, such as gold and stocks, are tokenized and stored as tokens in ledgers. The main goal of tokenization is to simplify transactions related to asset value representation. |
| Distributed Lab | 2018 | Tokenization is considered a digital transformation process in accounting and asset management systems. This topic is not connected to the creation of virtual currencies. Tokenized assets are always issued by a consortium responsible for user registration, transaction processing, and custodial services, all conducted according to local regulations. |
Tokenization, regardless of its various definitions and types, can be utilized across different industries. By circulating frozen assets, it can help stimulate production and increase investment. Tokenization offers users the opportunity to own a fraction of an asset.
Fiat currencies of countries, such as the dollar, can only be subdivided to 0.01 of the base unit, but this limitation does not exist in tokenization. Tokens can be subdivided up to 18 decimal places of a unit. The ability to securely transfer assets by eliminating intermediaries, maintaining a record of ownership and transactions using the immutability of blockchain transactions, reducing paperwork related to trade through smart contracts, price discovery, and information gathering via transparency, as well as increasing financial inclusion, are among the advantages cited for tokenizing assets using blockchain. However, regulatory and legislative challenges, scalability and compatibility issues, last-minute execution problems, security concerns, and restrictions on investor rights and their control over assets are some disadvantages of asset tokenization.
Countries’ Approaches to Asset Tokenization
Countries’ approaches to asset tokenization can be divided into four categories: aligning with current laws and regulations, amending existing laws and defining tokenization legally, establishing new specific statutes and regulations, or creating a new regulatory body for this purpose. To analyze the status of tokenizing intangible assets, it is essential to distinguish between the types of tokens and the function of each. In countries where financing laws and the possibility of aligning tokenization with regulations are provided, successful examples are also in operation; for instance, “Tether” (USDT), which is considered a tokenized dollar backed by an equivalent of 1.1 dollars, has made use of all the advantages of acceptance, transparency, and low transaction costs proposed by blockchain for digital dollars. Similarly, this applies to tokenizing other tangible assets that may fall under the jurisdiction of securities laws in various countries. Therefore, the tokenization of assets varies depending on which asset is being tokenized and within which legal jurisdictions it occurs, resulting in different legal implications.
In countries where financing laws and the potential for aligning tokenization with regulations are established, successful examples are also in operation; for instance, Tether, which is considered a tokenized dollar backed by 1.1 dollars, provides all the advantages of acceptance, transparency, and low transaction costs that blockchain offers for digital dollars.
Tokenization of Assets in Iran
In Iran, if we consider a token representing an intangible asset as a certificate of ownership for a specific amount of the asset, based on Article (6) of the Electronic Commerce Law and its exceptions, as well as other articles including (12), (13), and (14), tokens that maintain their integrity and use a reliable system and procedure for their production, transfer, and storage—such as blockchain technology—have no prohibitions for use between two parties, except in cases requiring specific legal formalities, and can also be referenced in official authorities and courts. However, suppose a token function following the legal definition of shares or is issued for financing through the partitioning of an asset, based on clause (24) of Article (1) of the Securities Market Law of the Islamic Republic of Iran, which defines securities as “any type of document or record that includes transferable financial rights for the owner of the asset or its benefits,” and according to Article (6) of the Electronic Commerce Law. In that case, it must be considered a security, and the laws and regulations of this area would apply. Therefore, if knowledge-based companies intend to tokenize their intangible assets, they must act as a new financial instrument based on the Crowdfunding Guidelines and by clause (4) of Article (4) of the Securities Market Law. Engaging in such activities outside the legal framework can lead to legal consequences, including criminal liabilities.
If a token functions in accordance with the legal definition of shares or is issued for financing through the partitioning of an asset, it must be considered a security under the Securities Market Law of the Islamic Republic of Iran. This law defines securities as “any type of document or record that includes transferable financial rights for the owner of the asset or its benefits,” and it falls under the Electronic Commerce Law.
In addition to the mentioned cases, each intangible asset is subject to specific laws and regulations; multiple and scattered rulings create ambiguity and complexity in the valuation process, making the partitioning and offering of these assets face particular challenges. For instance, Article (16) of the Patent, Industrial Designs, and Trademarks Registration Law states that the validity of a patent certificate is considered to last 20 years under certain conditions, and Article (12) of the Copyrights and Related Rights Law specifies that the duration of the economic rights of the creator for their heirs is 50 years from the date of the creator’s death. In these cases, given the lack of a transparent mechanism and execution process for controlling intangible assets, as well as legal restrictions and similar issues regarding the frequent sale of intangible assets and the transfer of their ownership, serious potential challenges require further research.
Given the need for a precise mechanism and execution process for controlling intangible assets, legal restrictions and similar issues regarding the frequent sale of intangible assets and the transfer of their ownership, serious potential challenges require substantial research.
As another example, domain names or social media accounts are typically registered in an individual’s name. Now, if the name of a domain or social media account holds significant value, how can it be tokenized and offered? This challenge also applies to issues related to seizure, usage, auction, pledging, and similar matters. Additionally, the fragmentation of ownership of an asset can create severe problems in exercising legal rights and obligations, making decision-making among stakeholders time-consuming, complex, or even impossible, which could lead to the intervention of legal or judicial entities. This directly conflicts with the primary purpose of tokenization, which is to eliminate intermediaries and reduce disputes between two parties through smart contracts. It is also worth noting that according to clause (15) of Accounting Standard No. (17) of the Iranian Audit Organization, “intangible assets generally do not have alternative uses and cannot be divided into smaller components for sale.”
Fragmentation of asset ownership creates severe issues in exercising legal rights and obligations, making decision-making among stakeholders time-consuming, complex, or even impossible, which could lead to the intervention of legal or judicial entities. It is worth noting that according to clause (15) of Accounting Standard No. (17) of the Iranian Audit Organization, “intangible assets generally do not have alternative uses and cannot be divided into smaller components for sale.”
The process of valuing intangible assets should be consistent with mandatory accounting standards; it should be noted that the current information system, built on an industrial paradigm, cannot meet the informational needs of the information age and cannot appropriately measure and disclose intangible assets. According to current accounting standards, most intangible business unit investments are recorded as expenses or amortized voluntarily. Even many of these expenditures, such as research and development and training, which are recorded as expenses, are not disclosed separately and are reported cumulatively with other costs. The inefficiency of the accounting system in reflecting environmental and economic changes of the information paradigm leads to various consequences, including reduced relevance of accounting information, asymmetry of information, and consequently, additional capital costs and misallocation of resources.
Moreover, the valuation of intangible assets must adhere to principles of confidentiality, transparency, neutrality, and avoidance of conflicts of interest, and their use should not contravene public norms and regulations; compliance with the laws of the Islamic Republic must be considered, and ultimately, the protection of valued assets is conditional upon the investor fulfilling legal requirements and taking necessary actions to safeguard their investments in Iran. Therefore, regarding this last point, discussing trademark registration in various countries, legal jurisdictions, and similar issues must also be considered during implementation. Additionally, regulatory laws concerning anti-money laundering, counter-terrorism financing, and related obligations are legal obstacles to tokenizing intangible assets.
Alongside these points, some believe that currently, all the advantages cited for tokenizing intangible assets already exist in the securities market; on the one hand, there is transparency in transactions, enforcement of laws and regulations, and the presence of a regulatory body, while on the other hand, information systems like Codal provide news and information to all. The only difference is the execution platform, as blockchain technology is not used in the securities market. However, another perspective argues that blockchain technology and distributed ledgers, based on the philosophy of creation, network architecture, and game theory principles, are fundamentally designed in a way that eliminates the possibility of specific market interventions and that market manipulations will not occur, predicting that the inevitable fate of future financial markets is a shift to blockchain platforms. In any case, despite the allure and benefits that the tokenization of intangible assets offers in unlocking underutilized assets in the economy, it is still in its early stages. Preparations such as formulating and clarifying the laws and regulations in this area, establishing a regulatory authority, defining operational mechanisms, creating a structured market for offerings, and, more importantly, fostering a mental readiness for acceptance among stakeholders and active individuals in this field must be developed.
