Real-World Asset Tokenisation

Legal wrapper and custody

Tokenisation wraps the field, flat or bond in a legal entity, usually a special purpose vehicle (SPV). This SPV is the layer between the "real" asset - like a farm plot - and the token that an investor holds. The legal wrapper determines the token-holder's claim on the asset, insolvency process, redemption terms and the jurisdiction of any dispute.

Legal documentation like an LLC operating agreement, trust deed or fund prospectus sets out the terms. Referenced terms typically involved in this structure: the qualified custodian which holds the RWA on behalf of token holders. This could be a bank, broker-dealer or trustee. For example, in 2023, the HK government's tokenised green bond named Bank of China (Hong Kong) and HSBC as custodians for the legal-wrapped securities.

When you buy an RWA token, like a tokenised share in a farmland project, you are not buying land directly. You are buying a security - a share - in the farmland project SPV, which in turn owns the fields. This means your investment rights, liquidity and security of the investment depend on the terms of that legal wrapper - .

How income reaches holders

The different income streams from the physical assets - rent from the flat, crop yields from the farm, or bond coupons - need a path to reach the token holder. People invest in these tokens looking for income, so the more concrete the path, the better. However, this can only be confirmed in the fine print of the issuer's documentation.

A key document is the fund prospectus, trust deed or operating agreement of the SPV. This outlines how the reference asset's income powers the investor's income, and how the calculations work. Typically, the underlying asset will distribute income to the legal wrapper, which then passes the income to the token holders, either by directly delivering the income asset (like crop harvesting delivery) or by transferring money based on the income asset.

Where tokenised bonds and funds fit

Tokenised government bonds and money-market funds help illustrate how these claims on a legal wrapper work. A tokenised bond is not a new asset; it's a government bond held in a legal wrapper by a custodian, with the token having written contractual representation of the bond.

Why some early land and agriculture tokens disappointed

Early enthusiasm for tokenising real assets like farmland ran into the absence of legally enforced rights for token-holders, among other issues. Some projects failed to execute cash flows to investors within the tokenised structure. Others punted ahead with token sales without having a mature legal wrapper or custody and liquidity in place.

One major issue, illustrated in otherwise credible white papers and discussions throughout the early 2017-19 period, was falling short on providing secure income streams to token holders, or being vague about the entire legal setup; .

What to check before buying any asset token

Because the real-world asset itself does not move onto-chain, it is crucial to confirm the structure holding that asset. Due diligence - confirm this structure and what cash flows it represents to buyer. The legal wrapper and custody terms must be spelled out. By checking these, buyers can evaluate whether the structure meets regulatory standards, assess the practical arrangements between the token and asset, the delivery of cash flows and investor protections.

At the bare minimum, buyers must confirm basic legal queries: the legal home of the wrapper, its regulatory status, and the roles both of the custodian and of the token itself. Buyers should be clear on the redemptions process, and their own legal protections. To avoid falling foul of these matters, at a minimum verify: the legal wrapper, custody arrangement, redemption powers, liabilities exclusions, voting rights, and the dispute jurisdiction.