Asset Tokenization Compliance: A Legal Guide

Introduction

The market for tokenized Real-World Assets (RWA) is demonstrating exponential growth, attracting close attention from global regulators. According to the analytical platform RWA.xyz, by mid-2024, the market volume exceeded $8 billion [1], while Boston Consulting Group analysts predict its growth to $16 trillion by 2030, emphasizing that tokenization will become a key driver of liquidity for previously illiquid assets [2]. For issuers and investors, this means that legal compliance is no longer a formality but the foundation for attracting institutional capital, passing audits, and minimizing regulatory risks. Implementing KYC/AML procedures, obtaining licenses, and managing user access are necessary steps to prevent a project from being classified as an illegal securities issuance or a tool for financial crimes.

Regulatory Landscape and Key Jurisdictions

The choice of jurisdiction determines the legal regime of the project, licensing requirements, and potential risks.

Table 1. Regulatory Risk Matrix by Key Jurisdictions

Jurisdiction	Regulatory Risk	Key Factors
USA	High	Uncertainty of the Howey Test, aggressive SEC enforcement practices, high costs for registration or structuring exemptions.
EU (MiCA)	Medium	New but comprehensive regulatory framework. Authorization and compliance with strict rules required. Risk of classification as a financial instrument outside MiCA.
Switzerland	Low	Clear token classification from FINMA, the "same rules for the same activity" principle, developed legal ecosystem.
UAE (ADGM/DIFC)	Low	Specialized regimes for virtual assets, pro-innovation regulatory approach, favorable tax regime.
Russia	High	Restrictive regime (Federal Law-259), low limits for non-qualified investors, lack of developed market practice.
China	Critical	De facto ban on virtual asset operations, high risk of activity being declared illegal.

Source: compiled by the author based on regulatory practice analysis.

1. USA: The Howey Test and Its Practical Consequences

The U.S. Securities and Exchange Commission (SEC) applies the Howey Test to determine whether an asset is an "investment contract" and, therefore, a security. Most RWA tokens involving the investment of money in a common enterprise with an expectation of profits from the efforts of third parties fall under this definition.

Practical Consequences:

• Registration or Exemptions: The issuer must either register the offering with the SEC (Form S-1) or structure it within exemptions, such as Regulation D (for accredited investors) or Regulation S (for non-U.S. investors).
• Infrastructure Requirements: The sale of security tokens must be conducted through licensed broker-dealers, and ownership records must be maintained by a registered transfer agent.
• Enforcement Risks: The SEC actively pursues projects for issuing unregistered securities, creating high risks for issuers.

2. European Union: MiCA Regulation

The Markets in Crypto-Assets Regulation (MiCA) [3] creates a unified regulatory framework in the EU. RWA tokens are classified based on the structure of the underlying asset:

• Asset-Referenced Tokens (ART): According to Article 3(1)(6) of MiCA, these are tokens that purport to maintain a stable value by referencing the value of several fiat currencies, one or more commodities, or crypto-assets. ART issuers are required to obtain authorization (Article 16), publish a white paper (Article 17), and comply with strict reserve and management requirements. RWAs tokenizing diversified asset portfolios (e.g., a basket of debt obligations) may fall into this category.
• E-money Tokens (EMT): Tokens pegged to the value of a single official fiat currency. Their issuance is permitted only to credit institutions and electronic money institutions (EMI).
• Tokens as Financial Instruments: If an RWA token is inherently a share, bond, or unit in a fund, it falls outside the scope of MiCA and is regulated by the Markets in Financial Instruments Directive (MiFID II) and national securities legislation. This is the most likely scenario for the majority of RWA projects.

3. Switzerland, UAE, Singapore: Progressive Jurisdictions

These countries offer a clearer and more favorable environment for RWA projects.

Table 2. Comparison of Progressive Jurisdictions

Parameter	Switzerland (FINMA)	UAE (ADGM/DIFC)	Singapore (MAS)
Regulation	"Same activity — same risks — same rules" principle. Clear token classification.	Specialized regimes for virtual assets.	Regulation based on token classification (security, payment token).
Licensing	Fintech license or banking license required depending on the structure.	FSRA (ADGM) or DFSA (DIFC) licenses required.	CMS or PSA licenses required depending on the activity.
Advantages	Legal certainty, access to qualified specialists.	Favorable tax regime, focus on innovation.	Global financial center status, developed ecosystem.

Source: compiled by the author.

Legal and Structural Foundations of the Project

Underlying Asset Ownership Models

1. Direct Ownership: Investor rights are registered in an official state registry. The token serves as a digital certificate. This model provides maximum protection but is difficult to implement and scale.
2. Special Purpose Vehicle (SPV) Structure: The asset is transferred to the balance sheet of a legally separate SPV. Tokens represent shares or debt obligations of this SPV. To protect investors, the SPV must be structured as "bankruptcy-remote." This is achieved through statutory restrictions (e.g., prohibition on taking on additional debt, limitation of activity types), appointment of independent directors, and is confirmed by a legal opinion.
3. Trust Model: The asset is transferred to a licensed trustee who holds it in the interest of the investors. Investor rights are established in a trust deed, which must clearly state that the trust's assets are segregated from the trustee's own property and cannot be included in its bankruptcy estate.

AML/CFT Compliance and Sanctions Control

The Financial Action Task Force (FATF) requires Virtual Asset Service Providers (VASPs) to apply a risk-based approach.

• Identification and Monitoring (KYC/AML): Projects are required to conduct "Know Your Customer" (KYC) procedures, identify ultimate beneficial owners (UBO), and screen clients against Politically Exposed Persons (PEP) lists.
• Sanctions Screening: Procedures must be implemented for ongoing monitoring of clients and transactions for matches against sanctions lists (OFAC, EU, UN, etc.). Geoblocking should be applied to users from sanctioned jurisdictions.
• Travel Rule: FATF Recommendation 16 obliges VASPs to exchange information about the sender and recipient during virtual asset transfers, which requires integration with appropriate technical solutions (e.g., the TRISA protocol).

Technological Solutions for Compliance

Token Standards and Smart Contract Audits

To ensure compliance at the protocol level, specialized token standards are used that allow for the management of access and asset transfer.

• Token Standards: ERC-3643 (TCF) is the industry standard for permissioned tokens. It allows the issuer to define at the smart contract level who can own tokens and perform transactions with them, integrating KYC/AML checks into the on-chain logic.
• Smart Contract Audit: Before deployment, a smart contract must undergo an independent security audit by a reputable company to identify vulnerabilities that could lead to financial losses or failures in compliance mechanisms.

Enforcement Mechanisms: On-chain vs. Off-chain

To execute court decisions or regulatory requirements (off-chain) within the blockchain environment (on-chain), technical control mechanisms are necessary.

• Administrative Functions: The smart contract must contain functions managed by the issuer via an "admin key." This allows for the mandatory freezing (pause), force transfer, or burning of tokens based on a legal document. These powers must be transparently disclosed in the project documentation.
• Compliance Trade-offs:
  • On-chain Compliance: Rules are built into the smart contract. Pros: transparency, automation. Cons: low flexibility, difficulty in updating rules.
  • Off-chain Compliance: Checks are performed outside the blockchain (e.g., by a KYC provider), and the result (permission/prohibition) is transmitted to the smart contract. Pros: flexibility, ability to work with complex rules. Cons: centralization, dependence on an external service.

Personal Data Protection (GDPR)

Data collection for KYC must comply with data protection laws, such as the GDPR in the EU.

• Data Processing Algorithm:

  1. Determination of Legal Basis: Data processing for AML/CFT is usually based on the necessity of fulfilling legal obligations (Article 6(1)(c) of the GDPR).
  2. Off-chain Storage: Personal data (passport, address) is stored with a licensed KYC provider outside the blockchain.
  3. On-chain Confirmation: Only a cryptographic confirmation of verification (e.g., in the form of a non-transferable token or hash) is recorded on the blockchain, not the data itself. This allows for the fulfillment of the "right to be forgotten" by deleting off-chain data upon request.
  4. Privacy-Enhancing Technologies: Zero-Knowledge Proofs (ZKP) allow a user to prove their compliance with requirements (e.g., "not from a sanctioned jurisdiction") without revealing the data itself.

Legal Documentation Requirements

The prospectus (or "white paper") and the user agreement are key documents. They should include:

1. Description of the Underlying Asset and Legal Structure: Detailed information about the asset, SPV, or trust.
2. Token Holder Rights: A clear definition of rights. Sample phrasing: "Each token represents a share in the right of claim against the SPV, providing the right to receive a proportional share of the net rental income from the underlying asset, net of operating expenses and fees, as defined in this document."
3. Risk Factors: Full disclosure of market, technological, regulatory, and operational risks.
4. Issuer's Powers: A transparent description of the issuer's rights to take enforcement actions. Sample phrasing: "The Issuer, acting through its authorized administrator, reserves the right, on the basis of a legally binding court decision or a direct order from a competent regulator, to forcibly block (freeze) or transfer tokens from any address to the address specified in the decision without the prior consent of the address owner."
5. Limitation of Liability and Bankruptcy: Sample phrasing: "Assets belonging to the SPV are legally segregated from the assets of the Issuer and its affiliates and, in accordance with applicable law, shall not be included in the bankruptcy estate in the event of the Issuer's insolvency."
6. Governing Law and Dispute Resolution: Specification of the jurisdiction and arbitration forum.

Taxation of RWA Tokens

• Capital Gains and Income Tax: Income from the sale of a token or the receipt of payments (dividends, interest) is subject to taxation in the investor's jurisdiction.
• Withholding Tax: When paying income to foreign investors, the issuer (or SPV) may be required to withhold tax at the source. For example, if an SPV is registered in Luxembourg and pays dividends to an investor in Brazil, it must withhold tax at the rate established by Luxembourg law. The investor may reduce or offset this tax if a double taxation treaty exists between the countries.
• Tax Memorandum: The issuer should prepare a document explaining tax risks and obligations for investors in key jurisdictions, with a recommendation to seek individual advice.

Practical Checklist for the Issuer

Table 3. Key Stages of Launching an RWA Project

Stage	Key Actions	Responsible Parties	Estimated Timeline	Approximate Costs
1. Structuring	Choosing the asset and jurisdiction. Developing a legal model (SPV/trust). Tax planning.	Legal and tax consultants	1–3 months	$20,000–$100,000+
2. Preparation	SPV registration. Opening bank accounts. Selecting KYC/AML provider and custodian.	Lawyers, project management	2–4 months	$15,000–$50,000
3. Documentation	Preparing the prospectus ("white paper"), user agreement, tax memorandum.	Lawyers, technical writers	1–2 months	$25,000–$80,000
4. Tech Implementation	Developing and auditing the smart contract. Creating an investor platform.	Blockchain developers, auditors	2–4 months	$30,000–$150,000+
5. Licensing	Submitting application to the regulator (if required).	Lawyers, compliance officer	6–18 months	$50,000–$500,000+ (incl. fees)
6. Launch and Operations	Conducting token sale. Organizing secondary market. Ongoing AML monitoring and reporting.	Management, compliance, tech support	Ongoing	Operational expenses

Source: compiled by the author.

Conclusion

Legal compliance is not a post-launch phase but the foundation of an RWA project. Errors at an early stage can lead to regulatory sanctions, loss of investor confidence, and project failure. Successful implementation requires an interdisciplinary team including securities lawyers, tax consultants, AML/CFT specialists, blockchain architects, and smart contract auditors. Thorough planning and strict adherence to regulatory requirements are key factors for building a sustainable and scalable business in the field of real-world asset tokenization.

Glossary

• RWA (Real-World Assets): Real-world assets represented as tokens on a blockchain.
• KYC (Know Your Customer): Procedure for identifying and verifying the identity of a client.
• AML/CFT (Anti-Money Laundering / Countering the Financing of Terrorism): A set of measures to combat money laundering and the financing of terrorism.
• FATF (Financial Action Task Force): The intergovernmental organization that develops standards for combating money laundering.
• SPV (Special Purpose Vehicle): A legal entity created for an isolated purpose, such as owning an asset.
• Custodian: A licensed organization that holds clients' assets.
• MiCA (Markets in Crypto-Assets): EU regulation establishing rules for the crypto-assets market.
• ART (Asset-Referenced Token): A type of token under MiCA pegged to the value of a basket of assets.
• Transfer Agent: An organization that maintains a registry of security owners.

Sources and Regulatory Acts

1. RWA.xyz. Total Value of Tokenized Assets. Available at: https://rwa.xyz (Accessed: 20.10.2024).
2. Boston Consulting Group, ADDX. Relevance of On-Chain Asset Tokenization in ‘Crypto Winter’. September 2022. p. 4.
3. Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA).
4. Federal Law No. 259-FZ of 31.07.2020 "On Digital Financial Assets, Digital Currency and on Amendments to Certain Legislative Acts of the Russian Federation."
5. People's Bank of China et al. Joint Notice "On Further Preventing and Disposing of Speculative Risks in Virtual Currency Transactions". 24.09.2021.
6. Ethereum Improvement Proposals. EIP-3643: T-REX Protocol for Tokenized Regulated EXchanges. Available at: https://eips.ethereum.org/EIPS/eip-3643.