What Tokenized Real-World Assets Are and Why Custody Matters

Tokenized real-world assets (RWAs) are redefining capital markets.

By representing ownership of tangible assets like real estate, private credit, or commodities etc. on distributed ledgers, tokenization promises faster settlement, fractional ownership, and global liquidity.

But promise doesn’t equal adoption.

For institutions, the bottleneck is not technology but custody, the layer that connects legal title in the real world with token control on-chain.

Without a compliant, technically robust custodian, RWA tokens remain legal abstractions and not investable instruments.

As the Bank for International Settlements noted in 2023, tokenisation only gains traction when trusted intermediaries bridge traditional legal systems and distributed ledgers.

Custody is that bridge. It transforms tokenization from a proof of concept into a market infrastructure, and it anchors enforceable ownership, regulatory compliance, and institutional trust.

A compliant custodian ensures:

• Legal enforceability - the token’s owner is legally recognized as the asset’s owner.
• Technical integrity - private keys and contracts are securely managed.
• Regulatory assurance - the entire lifecycle meets securities and AML standards.

Without this foundation, tokenized assets are claims without courts, code without capital, and markets without trust.

Legal Risks in Custody of Tokenized Assets

1. Securities Classification and Regulatory Status

Many tokenized assets may qualify as securities under the Howey Test (U.S.) or MiCA (EU) frameworks. If a token represents profit participation or resembles a financial instrument, custodians must operate under securities-custody licensing.

For example, the U.S. SEC has clarified that “custodial entities holding digital asset securities must meet the same standards as traditional securities custodians”. Non-compliance risks enforcement actions and asset freezes.

2. Off-Chain vs On-Chain Rights Mismatch

A recurring legal fault line: tokens represent claims to off-chain assets, but smart contracts cannot enforce those claims in real-world courts. Custodians therefore must anchor legal ownership via Special Purpose Vehicles (SPVs) or trust structures that legally bind token holders to asset titles.

Failure to match the off-chain legal title with on-chain token control creates “orphan tokens, which are digital claims without enforceable recourse. In 2023, several tokenization projects in Europe faced investor disputes due to unclear title transfer clauses.

3. Cross-Jurisdictional Custody Complexity

RWAs frequently span jurisdictions: an asset in Switzerland, investors in Singapore, custodian in the U.S. This introduces regulatory fragmentation and potential double custody obligations.

Best practice is to:

• Maintain a single jurisdiction of asset law and recognize it in the token terms;
• Use licensed custodians or trustees in every market where investor funds are held;
• Apply MiFID II or MiCA alignment for EU clients and Rule 15c3-3 compliance for U.S. brokers.

Without harmonization, asset recovery after insolvency becomes legally uncertain.

Technical Risks in Custody for Tokenized Assets

1. Key Management Failures

Private keys represent ultimate control of tokenized assets. Loss, theft, or compromise equals asset loss.

Modern custody providers mitigate this through Multi-Party Computation (MPC) or multi-signature architectures that remove single points of failure.

However, improper implementation of MPC protocols or unsecured key backups (e.g., HSM misconfiguration) remain leading causes of institutional loss.

2. Smart Contract Vulnerabilities

RWAs rely on token contracts to enforce ownership logic. Vulnerabilities such as reentrancy bugs, upgrade keys, oracle manipulations etc. create systemic exposure.

A survey of smart contract hacks lists dozens of incidents where access-control and role-based permission flaws enabled attackers to drain funds

Institutional custody must therefore include formal verification, code audits, and restricted administrative privileges before onboarding assets.

3. Off-Chain Data and Oracle Risk

Since RWAs depend on external asset data (e.g., valuation feeds, cash-flow updates), oracles act as critical trust points. If compromised, they can desynchronize token balances from real assets.

Custodians should deploy redundant oracle networks and cross-validation systems to detect anomalies.

4. Operational and Liquidity Risk

Unlike native tokens, RWA tokens rely on issuers’ operational continuity. If the issuer or custodian halts operations, on-chain ownership may become legally inert.

To minimize this, custody must integrate continuity plans, insurance coverage, and emergency key rotation mechanisms.

Best-Practice Custody Framework for Tokenized RWAs

A robust custody framework addresses both legal enforceability and technical integrity simultaneously.

1. Legal Layer

• Use a licensed custodian or trust company subject to securities regulation.
• Establish an SPV or trust holding the underlying assets; token holders own units in this entity.
• Enforce clear investor agreements linking off-chain ownership to token metadata.
• Integrate jurisdictional clauses defining applicable law and dispute venues.

This dual-layer structure ensures that the token’s on-chain logic reflects legally enforceable rights.

2. Technical Layer

• Key Security: Multi-party computation, role-based access control, hardware isolation (HSMs).
• Contract Governance: Independent audits, upgrade transparency, immutable records of code versions.
• Monitoring: Continuous anomaly detection and real-time ledger monitoring.
• Recovery & Continuity: Designate recovery agents, maintain insurance pools, and enforce key-rotation policies.

3. Governance & Compliance

• Integrate compliance automation (KYC/AML) into custody workflow.
• Maintain audit trails under ISO 27001 and SOC 2 standards.
• Perform regular proof-of-reserves attestations using on-chain Merkle proofs.

Together, these measures build a defensible, regulator-ready custody architecture for RWAs.

Conclusion

Tokenized RWAs can transform capital markets ONLY if custody bridges the legal and technical divide. Institutions must treat custody not as back-office plumbing but as regulatory infrastructure.

By embedding legal enforceability, cryptographic resilience, and regulatory-grade governance, custodians turn digital promises into real, auditable assets.

Visit our Digital Asset Custody page to learn how we help financial institutions secure tokenized assets with confidence.