RWA tokenization

How it works

A token represents ownership of or exposure to an underlying asset that sits in off-chain custody. The claim on that asset trades onchain while the asset itself does not move. Enforcing the link between the token and the asset is the whole design problem, and everything else follows from how well that link holds.

Token classification matters from day one. A pure ownership claim with no yield is generally treated as an asset or commodity token, carrying custody, AML, and audit obligations. The moment it pays a yield or is marketed with a return expectation, it migrates toward the security classification, which adds prospectus, disclosure, and often registration.

Design consequence

The structural problem has four parts that must be solved in sequence. First, a custody arrangement that keeps the asset in segregated, auditable safekeeping with a counterparty that can survive issuer insolvency. Second, a mint gate tied to verified backing, so tokens cannot be issued unless proof-of-reserves confirms sufficient assets on deposit.

Third, a creation and redemption mechanism that keeps market price aligned with the underlying spot. Fourth, an entity architecture that gives token holders bankruptcy remoteness, so a collapse of the operating company does not extinguish their claim. Token standard selection also flows from classification: permissioned standards like ERC-3643 restrict which DeFi protocols can integrate the token, constraining distribution before a line of code is written.

Example

BlackRock's BUIDL fund is the most-cited institutional precedent. It holds US Treasury bills in custody at BNY Mellon, issues participation units as onchain tokens on Ethereum, and restricts transfers to KYC-verified wallets under a permissioned contract. That design isolates the token from the issuer's general estate and keeps the mint tied to verified holdings. It is not a blueprint every issuer can copy, but it shows where the real difficulty lives.

Common mistake

The most common failure is inverting the design sequence: building the token contract first and treating custody, proof-of-reserves, and bankruptcy remoteness as vendor decisions for later. Later does not come before the first holder buys in. By then the structural risk is already priced in by the market, or worse, invisible to holders who assumed the issuer had solved it.