Are All Tokenization of RWA the Same? How Should They Be Regulated?

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Introduction

The concept of tokenizing real-world assets (RWA), the process of converting rights in physical or traditional financial assets into blockchain-based tokens, has garnered significant interest in bridging traditional finance (TradFi) with decentralised infrastructure. However, as more projects are developed, a critical question emerges: Are all tokenizations of RWA identical? If not, how should market participants and regulators approach this tokenisation to promote innovation while ensuring investor protection and systemic stability? 

In this article, we will:

• Distinguish various models and dimensions of variation in RWA tokenisation

• Explain why it matters for the industry and markets

• Examine potential issues for regulation

1. Types of RWA Tokenization

Tokenization takes many forms. Mapping the key structural dimensions across projects helps explain how each model influences liquidity, transparency, and market performance.

1. The distinction between on-chain and off-chain title is crucial in determining whether legal ownership is directly recorded on the blockchain, thereby rendering the ledger the definitive source of truth, or whether ownership is maintained within traditional registries such as land title offices or corporate share registers. In instances where the title remains off-chain, the token generally serves as a mere contractual claim or a tool for record-keeping convenience, necessitating that any ownership disputes be resolved through conventional legal mechanisms.

2. The distinction between native and linked tokens is of significant importance. A native token is generated and exists entirely within the blockchain, designed specifically for purposes inherent to the blockchain itself. Conversely, a linked token represents an existing off-chain asset and thus depends on bridging mechanisms, such as custodians, trust arrangements, or special purpose vehicles (SPVs), to uphold the legal correspondence between the token and the underlying asset.

3. The extent of collateralization or asset-backing is a critical determinant of a token's financial integrity. Tokens that are fully collateralized are supported on a one-to-one basis by identifiable assets, whereas those that are partially backed or synthetic represent derivative or leveraged exposures. This distinction has direct implications for investor risk, transparency, liquidation dynamics, and the robustness of investor protections.

4. The fungibility structure, whether tokens are fungible, non-fungible, or hybrid, significantly influences the allocation and transfer of rights. Fungible tokens, such as ERC-20, facilitate straightforward pooling and fractional ownership. In contrast, non-fungible or hybrid formats, such as ERC-721 or ERC-1155, introduce complexities in the management of unique or semi-unique entitlements.

5. The governance and access model, whether permissioned or permissionless, determines the entities authorized to issue, trade, or hold the tokens. Permissioned systems restrict participation to approved or whitelisted entities, thereby facilitating compliance with KYC/AML obligations, albeit at the expense of liquidity and openness. In contrast, public or permissionless models allow broader participation but present challenges in terms of regulatory compliance and oversight.

6. The extent of smart contract programmability determines whether the token incorporates automated rules for functions such as interest distribution, governance voting, buybacks, or redemptions. While programmability enhances efficiency, it also raises concerns regarding legal enforceability, contract upgradeability, and systemic counterparty risk in the event of code errors.

7. The jurisdictional and cross-border scope delineates the regulatory boundaries of the token. Tokens designed for local utilization may fall under a single legal framework, whereas those distributed across international borders engage multiple jurisdictions. This situation raises issues related to conflicts of law, regulatory arbitrage, and the complexities of cross-border compliance. 

Due to the above differentiation, two projects that both “tokenise real estate” may differ substantially in structure, risk profile, and regulatory treatment.

For example:

• Project A might keep the land title in a government registry (off-chain), and the token simply confers contractual rights to income and redemption via an SPV.

• Project B might attempt to encode title transfers on-chain (if recognized by law) and let holders effect land transfers via on-chain transactions.

• Project C might tokenize a debt instrument (e.g. corporate bond), with the token representing coupon flows and principal—functionally akin to a security.

Thus, not all tokenizations of RWA are the same.

2. Why These Differences Matter: Financial & Market Consequences

Tokenization reshapes not only how ownership is recorded but also how assets are priced, traded, and risk-managed. The structural variations across tokenization models have direct implications for market efficiency, liquidity, valuation stability, and the cost of capital. 

Below are key financial dimensions to consider.

Capital Efficiency and Balance-Sheet Impact

Different tokenization designs alter the liquidity profile of underlying assets.

• On-chain settlement and 24/7 market access can compress settlement cycles, freeing working capital and lowering counterparty exposure.

• However, if a token merely represents an off-chain claim through an SPV, liquidity benefits may be minimal, and capital remains effectively locked in traditional custodial layers.

• The degree of collateralization and redemption flexibility directly affects the velocity of capital and balance-sheet optimization for issuers and investors alike.

Pricing, Yield, and Valuation Transparency

• When tokens trade in real time on distributed ledgers, price discovery can become more continuous, but also more fragmented if liquidity pools are shallow.

• Projects that fractionalize high-value assets (e.g., real estate, private credit, closed-end funds) may improve accessibility but complicate valuation: bid-ask spreads widen when markets are thin.

• The credibility of on-chain oracles and third-party pricing data strongly influences valuation accuracy and perceived creditworthiness (liquidity pools, market makers, etc).

• Inadequate or inconsistent pricing feeds can distort net-asset-value (NAV) calculations and impair investor confidence (depeg from the underlying represented asset).

Counterparty, Custody, and Operational Risk

• Financially, the weakest link in tokenization is often the bridge between the on-chain token and the off-chain collateral. Any lapse in custody, whether by a trustee, custodian bank, or tokenization platform, creates potential loss of backing.

• Custody fragmentation raises operational risk and increases the cost of due diligence.

• For institutional investors, the credit rating and audit standards of custodians become as crucial as smart-contract reliability.

Liquidity, Market Microstructure, and Secondary Trading

• While tokenization promises fractional ownership and liquidity, many RWA tokens trade on restricted or permissioned venues, leading to low turnover and price opacity.

• Thin liquidity can amplify volatility and make exit timing unpredictable, undermining one of tokenization’s core selling points, liquidity democratization.

• Platforms with embedded automated-market-maker (AMM) models may offer tighter spreads but introduce liquidity-pool risk when underlying collateral is illiquid.

• Cross-border transfers, currency conversion, and tax treatment can further erode realized returns.

Governance, Incentives, and Upgrade Economics

• Token structures that embed governance or revenue-sharing rights introduce new incentive dynamics akin to equity-like instruments.

• Economic misalignment between token holders, issuers, and developers can generate agency risk, particularly when protocol upgrades affect yield distribution or redemption logic.

• Transparent governance frameworks reduce perceived risk premiums and can lower funding costs.

Correlation, Leverage, and Systemic Risk

• As tokenized instruments proliferate, their behaviour under stress matters. Correlated exposures, particularly to stablecoins, DeFi lending, or tokenized money-market instruments (eg, Buidl), can amplify contagion.

• Synthetic RWA representations or leveraged pools may increase procyclicality: in downturns, margin calls or redemptions accelerate selling pressure.

• Regulators and asset managers should monitor interconnections between tokenized and traditional markets to assess liquidity mismatch and fire-sale risk.

3. Principles for Regulating Tokenized RWAs

Functional Regulation, Not Technological

Regulation should focus on a token’s economic substance, not its code.

• Tokens conferring ownership or income rights should be regulated as securities.

• Tokenized deposits or stable assets as payment instruments.

• Pure utility tokens must be clearly delimited to prevent disguised financial exposure.

• This principle prevents “blockchain wrapping” from evading financial oversight.

Clear Taxonomy and Legal Recognition

Governments should adopt a consistent taxonomy of token types (security, asset-backed, utility) and define when on-chain records constitute legal title. Australia’s DFCRC, for example, proposes legal clarity through classification and transitional frameworks.

Licensing and Prudential Oversight

Issuers, custodians, and trading venues for RWAs should be licensed under existing financial regimes, with capital adequacy, segregation, and audit standards tailored to digital infrastructure. Regulatory sandboxes can allow innovation under supervision.

Disclosure, Transparency, and Audit

Issuers must disclose underlying asset links, valuation methods, governance, and custody.

Proof-of-reserves or independent attestations should complement on-chain transparency to ensure investor confidence and market integrity.

Interoperability and Cross-Border Coordination

As tokenized assets are inherently global, cross-jurisdictional harmonization is essential. Regulators should pursue mutual recognition of licensing, shared reporting standards, and consistent treatment of custody and settlement.

Investor Protection and Asset Segregation

Retail exposure should be limited through caps, advice, and cooling-off periods.

Underlying collateral must remain bankruptcy-remote, with accessible dispute resolution mechanisms.

Transitional Models and Systemic Safeguards

Hybrid structures—where tokens reference assets held in legacy SPVs or registries—should be supported until on-chain title recognition matures. Regulators must monitor leverage, rehypothecation, and liquidity mismatches to mitigate contagion and procyclicality.

Global Benchmarks

• EU (MiCA): Framework for issuance, custody, and stablecoin governance.

• US (SEC): “Substance-over-form” approach; most RWA tokens qualify as securities.

• Australia: Proposes taxonomy and sandbox regimes via DFCRC reforms. Consultation from Treasury is currently in progress. 

• Singapore: MAS Project Guardian is a leading multi-institution initiative testing tokenization’s potential to enhance capital-market efficiency, liquidity, and interoperability, with participation from major banks, exchanges, and regulators.

• Hong Kong: Active consultations on crypto-asset and tokenization frameworks is being conducted, aiming to establish a regulated structure for tokenized financial instruments as its regime matures.

Conclusion

Tokenization is redefining the foundations of modern finance, integrating market infrastructure, settlement, and asset ownership into programmable and globally interoperable systems. Yet not all tokenized RWAs are created equal: their liquidity dynamics, collateral composition, and systemic implications vary significantly across structures and jurisdictions.

A function-first, risk-sensitive, and phased regulatory framework, anchored in transparency, interoperability, and prudential discipline, remains essential to ensure that innovation enhances, rather than destabilizes, financial markets.

At the forefront of this evolution, Vector Capital Management is actively advancing the development, trading, and infrastructure design of tokenized real-world assets, including money market funds, government bonds, and multi-currency instruments. Through strategic collaboration with technology partners and regulatory bodies, Vector is helping to build the institutional architecture required for secure, scalable, and compliant tokenized markets.

By aligning sound financial engineering with robust governance, Vector aims to demonstrate how tokenization can move beyond experimentation, unlocking global liquidity, improving capital efficiency, and extending investor access while preserving financial integrity and market stability.

ABOUT THE AUTHOR – WIL 

Wil is a global investment leader with over two decades of executive experience across top-tier financial institutions including HSBC, Citibank, Deutsche Bank, Sparx Group (Japan), Maybank (Malaysia), and Westpac Bank (Australia). Having led teams in Hong Kong, Seoul, Shanghai, Singapore, Sydney, and Melbourne, he brings unparalleled cross-border expertise in global macro strategy, emerging markets, and digital asset innovation. A licensed professional (HKSFC, MAS, AFMA), Wil has consistently delivered strong institutional performance across traditional and alternative asset classes while navigating complex regulatory landscapes.

As General Manager of Vector Capital Management, Wil leverages his institutional pedigree to transform private wealth management, implementing professionalised investment frameworks typically reserved for large financial institutions. His approach bridges the gap between sophisticated family office needs and institutional-grade portfolio strategies.

Wil combines hands-on financial leadership with academic rigor - currently completing his PhD research on fiscal/monetary policy impacts while holding advanced degrees in Investment Management and Economics. As a guest lecturer and university advisor, he shapes the next generation of finance professionals, blending cutting-edge theory with real-world market experience. This unique intersection of practice and scholarship establishes Wil as a thought leader in global finance.

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