In this article, we will guide you through the real-world asset (RWA) tokenization process. Keep in mind that tokenization can differ based on asset type, service provider, jurisdiction, and other factors. Here, we’ll outline the standard asset tokenization process that InvestaX follows to ensure compliance and maximize value.
Let's explore the details.
Real World Asset Tokenization Basics
Real world asset tokenization is the process of issuing digital tokens that represent specific rights in real world assets, such as real estate, renewable energy, intellectual property assets, private equity, and investment funds.
Initially, tokenization was used primarily for fundraising purposes, allowing startups to raise funds through Security Token Offerings (STOs). However, as the technology continues to evolve, tokenization is increasingly being used for other purposes beyond fundraising, such as tokenizing real world assets to improve their accessibility, market efficiency, and liquidity.
RWA tokens fall under the digital asset category and are often classified as securities. Therefore, a robust legal compliance framework is necessary to ensure that RWA token offerings, trading, and custody solutions, meet regulatory requirements. Throughout the RWA token life cycle, tokens and associated intermediaries, such as tokenization advisers, platforms, trading platforms, and custodians, are subject to securities regulations to protect investors and ensure market integrity.
The Asset Tokenization Process
1. Asset selection and evaluation
The asset tokenization journey begins with identifying an asset with strong tokenization potential, such as real estate, fine arts, commodities, and precious metals. Ensure that the asset is eligible for tokenization and complies with relevant regulations.
The value of the asset is then carefully assessed and documented, following standard financial practices.
2. Legal structuring
At this step, a legal framework is established to ensure that digital tokens represent valid claims to the underlying real world assets. This involves defining the specific rights associated with the tokens and choosing an appropriate tokenization structure.
What types of rights can be tokenized?
Two common tokenization structures for real world assets
The two common tokenization structures include Tokenized Special Purpose Vehicle (“SPV”) and Direct Asset Tokenization:
- Tokenized SPV: Tokenized SPV approach also known as indirect tokenization is a common approach where the asset is held by an entity, either a private limited company or a trust. This entity is then tokenized, and tokens are issued through a pooling of funds from multiple investors, giving investors indirect interests in the underlying RWA. This is often a better approach as it fits within the securities regulations.
- Direct Asset Tokenization: The asset itself is directly tokenized and the tokens represent a direct claim on the underlying asset This approach is typically less common due to regulatory challenges and issues such as non-fungibility, lack of regulatory clarity, and limited use cases.
Each tokenization structure often comes with different licensing requirements. Check out the Licensing Requirement Analysis for Asset Tokenization by InvestaX’s legal team for more details.
3. Custody of the RWA and Custody of RWA Tokens
Before digitalization, the underlying asset (RWA) will be custodized to ensure the asset is immobilized and safe kept before its digital representation is created on the blockchain. Most times if it's a tangible movable RWA like whiskey barrels the RWA is securely stored and managed by qualified custodians, trustees, or licensed managers.
On the other hand, the digital representation i.e. RWA tokens can be either held in i) Self Custodized or ii) 3rd Party licensed custodian.
- Self-custody
Self-custody wallets are wallets used to store digital assets providing users full control over their private keys and, consequently, their assets. It is the practice of individuals taking full control and responsibility for storing and managing their own digital assets without relying on third-party intermediaries.
With self-custody, users hold their own private keys, which are essential for accessing and transacting with their digital assets. Self-custody wallets, which can be software-based (like mobile or desktop applications) or hardware-based (physical devices), allow users to interact directly with blockchain networks, giving them complete ownership and control over their assets.
While self-custody offers enhanced security and privacy, it also requires users to be vigilant about safeguarding their private keys and recovery phrases, as there is no central authority to recover lost or stolen assets.
- Custodizing RWA Tokens with a Licensed 3rd Party Custodian
Licensed Custodians are regulated and authorized to provide custody services. These custodians are typically subject to stringent regulatory requirements and oversight, ensuring they adhere to high standards of security, operational integrity, and compliance. By leveraging the services of a licensed digital asset custodian, organizations can mitigate the risks associated with holding and managing digital assets, ensuring they are stored securely and in compliance with relevant regulations.
Some of the security measures adopted are decentralized security protocols and multi-party computation (MPC) to eliminate single points of failure, thereby enhancing the protection against both external and internal threats. Additionally, custodians often implement multi-signature wallets, hardware security modules (HSMs), and key sharding to further safeguard private keys. These technologies are complemented by rigorous compliance with regulatory standards, such as Know Your Customer (KYC) and anti-money laundering (AML) rules, ensuring that custodians meet stringent reporting, auditing, and fraud detection requirements
At InvestaX, we work with licensed custodians to provide you with a trustworthy and credible custody infrastructure.
There are many different types of assets in the world and how the custodian is handled and regulated is widely different. The issuers should evaluate the custodian's services, such as asset management, trade processing, and asset servicing, to ensure they meet the needs of the RWA.
4. Token Issuance
At this phase, the representation of the ownership of the asset is converted into digital tokens (which we often call “RWA tokens”) on a chosen blockchain and launched on either the RWA issuer’s website or via a licensed real world asset tokenization platform like InvestaX.
5. Primary Token Offering
A primary offering is the initial sale of new RWA tokens, such as equity or debt, by a company to an investor class. This process allows a company to raise capital directly from investors, which can be used for various purposes such as expanding operations, paying off debt, or funding new projects.
Wondering how to create a primary RWA token offering? Watch our 90-second platform demo video on how you can seamlessly and efficiently create an RWA token offering.
Furthermore, through InvestaX’s Singapore-regulated marketplace, issuers can launch their RWA token offering to a global investor base and unlock global capital opportunities.
6. Secondary Trading
Following the initial offering, RWA tokens may be traded on secondary markets through various channels, such as:
- Peer-to-peer trades on Licensed RWA broker-dealers platforms such as InvestaX
- Licensed RWA exchanges such as InvestaX’s IX Exchange
- Decentralized exchanges (DEX) like IX Swap's Automated Market Maker (AMM) DEX
Secondary trading of RWA tokens is among the outstanding use cases that tokenization brings to real world assets. It offers more flexibility to token holders, giving them more opportunities to exit an investment and/or potentially benefit from capital appreciation, instead of being locked for 8-10 years in some traditional investment vehicles like real estate funds or private equity.
7. Ongoing Management
Post-tokenization management involves essential services like regulatory compliance, tax management, regular asset valuation, and facilitating corporate actions such as dividend distribution and voting rights. This management continues throughout the token's lifespan until its maturity or redemption.
After RWA tokenization, ongoing compliance is also necessary to ensure continued adherence to regulatory requirements. This includes monitoring changes in securities laws, implementing necessary updates to smart contracts, conducting periodic audits, and managing investor relations.
Tokenize Your Assets With InvestaX
InvestaX offers a comprehensive solution for real-world asset (RWA) tokenization. We provide tokenization advisory, technology, marketplaces, and licenses to enable issuers to smoothly and legally tokenize assets and launch their RWA token offerings to a global investor base.
Looking to tokenize your assets? Contact our team to discuss your tokenization strategy.