The legal reality of RWA Token: Why is the off-chain legal structure more important than on-chain code?

01 It all starts with a story: The abandoned buildings of Detroit and the disillusionment of ownership.

Imagine this scenario: a tenant living in an apartment in Detroit, with walls covered in mold and an eviction notice on the door. He had been told that the building was part of a revolutionary blockchain project called RealT, aimed at democratizing real estate. But when the rent checks stopped cashing and the project collapsed, he learned a painful lesson: when physical assets are mismanaged and legal ownership is tangled up by a bunch of shell companies, the tokens in his digital wallet are worth nothing.

This story is not an isolated case; it reflects the early issues in the RWA (Real World Assets) industry. We were promised a genuine on-chain ownership, but the reality is that many RWA projects are built on unstable legal foundations [1]. The tokens you hold are often just a digital certificate with limited rights to the underlying assets [1].

The road to a RWA market valued at trillions of dollars in forecasts is not solely paved by clever smart contracts. Boston Consulting Group (BCG) predicts that by 2030, the market size of tokenized assets could reach $16 trillion, while other reports in collaboration with Ripple predict it will reach $18.9 trillion by 2033 [2]. This road requires a robust dual-layer architecture: a solid legal framework built off-chain, and a sophisticated dual-chain system built on-chain. This is the only model that can withstand the test of reality.

02 Core contradiction: the conflict between the ideal of code and the reality of law

The failure of early RWA projects stemmed from a fundamental conflict: the contradiction between the automatic execution logic of smart contracts and the complexity of the real-world legal framework.

2.1 Common Questions about Early RWA Projects

From RealT's abandoned building in Detroit to the failed student apartment deal of the Harbor project, these failure cases reveal a common pattern [5]:

•Unverified ownership: The tokens sold by the project party correspond to assets that they either do not legally own at all or have already been mortgaged. The Harbor project failed because its lenders prevented the tokenization of the assets [3].

• Ambiguity of Responsible Parties: RealT allegedly utilized a network composed of shell companies, making it impossible for tenants and token holders to determine who should be responsible for [3].

• Technology cannot replace operations: RealT, while using blockchain to handle rent and token transfers, fails at the most basic tasks: paying taxes and maintaining properties. Blockchain cannot fix poor business operations [3].

2.2 Rule of Law: Code cannot override the law

We must understand a fundamental conflict: smart contracts execute automatically, while legal contracts require human judgment and are enforced by courts [1]. What happens when on-chain records show that you own a small part of a building, but the off-chain government land registry does not recognize your token at all? The answer is simple and cruel: the law is always the ultimate authority [4]. Your token will ultimately become a claim that cannot be enforced legally—interesting in theory, but worthless in practice [1].

Unlike pure on-chain assets like Bitcoin, the core challenge of RWA is not technical, but rather legal and operational. By definition, RWA must include an off-chain physical component (a building, a bond, a loan) [5]. This off-chain component requires a real person or legal entity to manage, custody, and legally hold it. This entity is known as the “counterparty.” The failure of an off-chain counterparty can directly lead to the value of the on-chain tokens dropping to zero. Therefore, the most critical design consideration for any RWA system is not the token standard or the TPS of the blockchain, but the legal and operational robustness of the off-chain counterparty.

03 Solution One: Build a Robust Off-Chain Legal Structure

The first step of the solution, and also the most critical step, is to conduct legal engineering design off-chain to provide a enforceable rights basis for on-chain tokens.

3.1 Core Mechanism: Special Purpose Vehicle (SPV) Explained

A Special Purpose Vehicle (SPV) is not an ordinary company. It is a legal entity created for a single, narrow purpose: to acquire and hold specific assets. It has no employees, no physical office, and only a set of predetermined rules that strictly limit its scope of activities. Its sole function is to serve as a safe, legally independent container for tokenized assets. This structure is the cornerstone of the asset-backed securities (ABS) market in traditional finance, valued at trillions of dollars.

3.2 How SPV Achieves Bankruptcy Isolation

This is the key advantage of SPV, which protects investors by isolating the assets from the financial risks of the initiator. This mechanism is achieved through three key steps:

1. Separation of Ownership (“Orphan” SPV): In order to truly isolate assets, the ownership of the SPV is typically placed in a trust structure managed by professional trustees, making it an “orphan” [6]. This way, neither the asset originator nor the investors can directly own or control the SPV itself, preventing the assets of the SPV from being pursued by the creditors of the originator in the event of bankruptcy.

2. Genuine Sale (Irrevocable Transfer): The asset originator must “genuinely sell” the asset to SPV[7]. This is a legally binding, non-recourse transfer of ownership, meaning the originator relinquishes all rights to the asset.

3. Contract Restrictions (Limited Recourse and Prohibition on Bankruptcy Filing): The legal documents of the SPV contain specific clauses. “Limited Recourse” means that the creditors of the SPV can only make claims against certain internal assets. The “Prohibition on Bankruptcy Filing” clause prevents counterparties from forcing the SPV into bankruptcy proceedings [6].

3.3 Case Analysis: The Controversy and Legal Reality of Figure's “Hybrid Model”

Figure, as a leader in the tokenized private credit space, has recently had a public dispute with the data platform DefiLlama, which perfectly reveals the true operational model of current RWA business under regulatory lag.

The controversy arises from DefiLlama's refusal to fully count the over $10 billion TVL (Total Value Locked) claimed by Figure on the Provenance chain in its statistics, citing that on-chain data cannot adequately verify this scale, and its activity model resembles more of mirroring an internal database onto the chain, lacking real on-chain asset transfers and transactions [8].

The core of this controversy is not the business fraud of Figure—being a U.S. company that has submitted an IPO application, its financial data is subject to strict audits, making the cost of fraud extremely high. The real point of contention lies in the current operational model of RWA, which is a hybrid of “on-chain visibility + off-chain verification.”

According to the S-1 document submitted to the U.S. Securities and Exchange Commission (SEC) in Figure, its Provenance Blockchain is a permissioned consortium blockchain, rather than a permissionless public blockchain. This means that only certified entities, such as financial institutions, can join and validate transactions, making it difficult for third parties like DefiLlama to conduct comprehensive on-chain due diligence.

More importantly, under the current framework of U.S. securities laws (such as the Securities Exchange Act of 1934), the ultimate ownership of securities (Record Ownership) must be based on the official records of a registered transfer agent (Transfer Agent) [9]. On-chain records can currently only serve as “auxiliary records” and do not constitute ownership certificates with final legal effect. Figure also explicitly states in its legal documents: “Peer-to-peer transactions are not final… until the transfer agent records them in the official records.”

This hybrid model is an inevitable choice under the current regulatory environment for the following reasons:

•Identity Compliance: Legal requirements mandate that securities holders undergo AML/KYC (Anti-Money Laundering/Know Your Customer) checks. A wallet address alone is insufficient to meet this requirement.

•Investor Protection: In the event of lost private keys or fraudulent transfers, there must be an authoritative legal entity (i.e., Transfer Agent) to handle disputes and restore ownership.

• Regulatory framework not updated: Regulatory agencies such as the SEC have not amended rules to acknowledge that “on-chain registration is legal ownership.”

Therefore, the model of Figure represents a necessary stage in the development of RWA: utilizing blockchain to achieve transparency of transaction records and partial automation of processes, while anchoring the final legal rights confirmation in traditional financial infrastructure off-chain. This controversy clearly indicates that assessing RWA projects cannot solely rely on on-chain data, but must also understand the legal structure and regulatory constraints behind them.

04 Solution 2: Design a Dual-Layer On-Chain Architecture

On a solid legal foundation, an efficient and secure on-chain technology architecture is needed to support the liquidity of assets.

4.1 Separation of Asset Chain (Registration Layer) and Transaction Chain (Speed Layer)

A single blockchain cannot simultaneously satisfy two contradictory demands: the ultimate security and finality required for asset ownership registration, and the high speed and low cost demanded by financial transactions [10]. Therefore, a dual-layer architecture has emerged.

The case of Figure just explains this issue for us. The Provenance Blockchain where its assets are located is a permissioned consortium blockchain.

Unlike public chains (such as Ethereum) that anyone can participate in anonymously, the nodes of a consortium chain are permitted and identifiable entities (such as banks, fund companies, and auditing institutions). This brings several unparalleled advantages for being an “asset chain”:

• Regulatory Compliance and KYC/AML: Transactions of real-world financial assets must meet strict “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML) requirements. Consortium blockchains can ensure that all participants are compliant, verified financial institutions through node admission mechanisms, addressing the compliance challenges posed by anonymity from the source.

• Identity and Recourse: In extreme cases such as the loss of private keys or fraudulent transactions, recourse and arbitration can be pursued through legal means off-chain due to the identifiable identities of the participants. This is crucial for assets worth tens of millions or even billions, and it is a security guarantee that public chains cannot provide.

•Performance and Privacy Control: The transaction throughput (TPS) of consortium chains is usually much higher than that of public chains, and it allows for more refined privacy control over transaction data, making it visible only to relevant parties, which better aligns with the business needs of financial institutions.

Therefore, the core task of the asset chain is not decentralization, but rather to become a digital ownership registration system that is jointly maintained by multiple trusted institutions, immutable, and recognized by law. Under the current legal framework, a consortium chain is the best choice to carry out this mission.

4.2 Case Study: The Practice of Ant Group's Jovay Platform

The “two chains and one bridge” architecture of Ant Group is a typical example of a dual-layer model [11].

•Asset Chain: A consortium chain used to carry and verify data from real-world assets such as new energy equipment from mainland China, ensuring the authenticity and reliability of asset information.

•Jovay: A high-performance Layer 2 platform optimized for RWA trading, supporting throughput of up to 100,000 TPS and approximately 100 milliseconds confirmation time for capital tokenization and high-frequency trading.

• Trusted Cross-Chain Bridge: Connects asset chains and transaction chains, ensuring data synchronization and secure asset transfer between the two chains. It employs a “three-phase layered confirmation + TEE/ZKP” security model to guarantee the reliability of cross-chain operations.

In this architecture, assets are first verified and digitized on the asset chain, and then efficiently circulated and engaged in financial activities on the trading chain Jovay, achieving a balance between security and efficiency.

05 Market Snapshot: The data tells us what RWA looks like today.

By mid-2025, the RWA market has developed into an ecosystem worth over $24 billion, dominated by specific asset classes and blockchain networks [12].

As shown in Chart 2, private lending is the undisputed leader, accounting for over 60% of the market share. This is due to its ability to generate predictable returns, making it an ideal choice for DeFi investors seeking stable returns [13].

In terms of underlying technology, Ethereum and its Layer 2 solutions host approximately 59% of the tokenized value (excluding private credit), solidifying its position as the “institutional standard”[12].

06 Unignorable Risks: Potential Fault Lines in the Model

Although the dual-layer architecture addresses core issues, risks still remain.

6.1 Unavoidable Counterparty Risk

The SPV model mitigates, but does not eliminate, counterparty risk. SPVs still require real-world service providers: trustees managing the trust, custodians holding asset documents, etc. [14]. If these centralized entities commit fraud or go bankrupt, legal claims for token holders may become extremely complex and costly in court [15]. The growing number of protocol vulnerabilities also exacerbates this risk. According to data from CertiK, in the first half of 2025, losses from security vulnerabilities in RWA protocols reached $14.6 million, surpassing the total for the entirety of 2024 [16]. Among them, the largest incident occurred in March 2025, when the Zoth project lost $8.5 million due to the theft of the service wallet private key managing the smart contract.

6.2 The data dependency problem of oracles

The entire on-chain system relies on oracles (such as Chainlink) to provide it with critical off-chain data—asset valuations, rental income, default status, etc. [15]. If this data is manipulated, delayed, or incorrect, smart contracts will execute based on erroneous information. For example, a tokenized real estate protocol relies on oracles to provide the latest valuation of the property. If that oracle is manipulated to input a false low price, it could lead to users holding the property tokens and using them as collateral being unfairly liquidated. Similarly, if an oracle for a private credit protocol fails to update the borrower's default status in a timely manner, on-chain investors may continue to fund an already defaulted asset pool, resulting in losses.

6.3 Decoupling Risk: Warning for USDC

The connection between L2 trading tokens and L1 asset representatives is a form of “anchoring.” Like stablecoins, this anchoring can break under pressure. The collapse of Silicon Valley Bank in March 2023 led to the USDC stablecoin, which had financial ties to it, temporarily decoupling to $0.87, which serves as a stark warning for RWA protocols that rely on traditional financial partners.

6.4 Complex Global Regulatory Environment

The legal environment is a complex and ever-changing puzzle. A token may be considered a security in the United States (subject to SEC regulations), a different type of instrument under the EU's MiCA framework, and completely different in Asia. This cross-border complexity brings significant compliance costs and risks.

The 6.5 RWA Impossible Triangle: The Trade-off Between Law, Efficiency, and Decentralization

The RWA system faces its own “three difficult dilemmas”: legal enforceability, capital efficiency, and decentralization. You can choose any two of them, but achieving all three at the same time is extremely difficult.

•Legal enforceability + capital efficiency: This is the SPV model we are discussing. It uses a centralized legal entity to provide strong legal claims and attract institutional capital, but sacrifices decentralization.

• Legal enforceability + decentralization: This could lead to a system of assets controlled by a DAO, but there will be difficulties in legal enforcement as courts and regulators prefer to deal with a single, accountable legal entity (such as an SPV). This combination severely impairs capital efficiency: DAO governance decisions are slow and each on-chain vote incurs high Gas fees; a required over-collateralization rate of 150-200% (far exceeding the 100-120% of SPVs); institutional capital avoids DAO structures due to unclear liability and compliance risks, limiting the scale of available funds (the $16 trillion market predicted by BCG relies heavily on institutional participation); emergencies (such as the case of RealT failing to pay taxes on time) cannot be addressed promptly.

•Capital efficiency + Decentralization: This is the model of early pure on-chain DeFi, using crypto assets as collateral. It is efficient and decentralized, but has no legal enforceability in the real world.

Therefore, the dual-chain/SPV architecture represents a pragmatic choice that prioritizes legal enforceability and capital efficiency at the expense of pure decentralization.

07 From “Can it be tokenized?” to “Can it survive in court?”

The future of the RWA market will belong to teams that can draft watertight legal clauses for SPVs while also being proficient in writing secure smart contracts.

For many years, the core question in our industry has been: “Can we tokenize it?” It turns out that, technically, we can almost tokenize anything. But that is the wrong question. The only question that matters now is: “Can this structure we are building survive the first encounter with bankruptcy court?” The answer to this question will determine whether RWA tokenization becomes a $16 trillion revolution or just a footnote in the history of financial engineering worth billions.

Reference source

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