iv. Regulatory Considerations for Tokenized Real Assets

Where structure matters more than technology.

Overview

Tokenization is often framed as a technical innovation enabling digital representation, fractional ownership, and programmable compliance. While these capabilities are real, they address operational mechanics rather than fundamental regulatory requirements. Real assets—particularly real estate—are among the most regulated asset classes globally, subject to securities laws, property registries, zoning regimes, tax codes, and investor protection frameworks developed over decades. Tokenization does not remove these constraints or create regulatory safe harbors. It adds new layers of interpretation, coordination, and oversight that must be reconciled with existing frameworks.

The real estate tokenization market is projected to reach $19.4 billion by 2033 from $3.5 billion in 2024, reflecting substantial growth but from a small base. Analysis by IOSCO examining tokenization adoption across global capital markets finds that while tokenization is gaining traction in certain asset classes, broader market impact remains limited by technological challenges and critically by legal and infrastructural constraints. Most importantly, IOSCO emphasizes that existing securities regulatory and enforcement frameworks remain fully applicable to tokenized assets and should be leveraged to address emerging risks rather than creating parallel regimes.

Understanding regulatory considerations is not compliance afterthought or optional enhancement. It is prerequisite for building tokenized instruments that can operate beyond pilots and private placements to achieve meaningful scale. Projects designed around regulatory compliance rather than regulatory arbitrage demonstrate durability and attract institutional participation. Those attempting to bypass or minimize regulatory requirements through technical architecture discover that regulators evaluate substance over form, and creative structures do not override fundamental legal obligations.

Tokenization Does Not Change Legal Classification

The first and most important regulatory principle is that tokenization does not alter the legal nature of an asset or security. Creating a digital token representing ownership, revenue rights, or other claims does not transform regulatory treatment or obligations. Tokenized real assets remain subject to comprehensive existing frameworks: securities law governing investment contracts and financial instruments; property law establishing ownership, transfer, and encumbrance rules; contract law defining rights and obligations between parties; tax law determining treatment of transactions, income, and capital gains; and jurisdiction-specific licensing regimes for intermediaries, advisors, and platforms.

A token representing equity in a property-owning entity is still a security subject to registration requirements or exemption criteria under securities laws. A token providing fractional ownership in real property remains subject to property law requiring title recording and transfer formalities. A token enabling participation in rental income or appreciation may trigger securities regulation, derivatives oversight, or both depending on structure. The digital wrapper changes representation format; it does not change underlying legal obligations, investor protections, or regulatory jurisdictions.

Research on SEC approaches confirms this principle explicitly. The SEC's Howey Test—established in 1946 and applied consistently since—determines whether an arrangement constitutes an investment contract (security) by examining whether there is: investment of money, in a common enterprise, with expectation of profits, derived from efforts of others. This test focuses on economic reality rather than form or label. Calling something a "utility token" or emphasizing technical features does not prevent classification as security if the substance involves investment expectations. Most tokenized real estate offerings clearly satisfy all Howey Test elements and are therefore securities requiring compliance with registration or exemption requirements.

Regulators across jurisdictions evaluate substance over form when analyzing tokenization structures. They examine what rights tokens actually confer, how value is generated and distributed, what role issuers and managers play in performance, and whether token holders expect profits from others' efforts. Technical architecture, blockchain selection, and smart contract features are largely irrelevant to these substance-based determinations. An instrument structured to avoid regulation through technical means still faces regulatory requirements if its economic substance triggers applicable frameworks.

Jurisdiction Matters More Than Technology

Real assets are physically immovable, making their regulation inherently local and territorial. While tokenization introduces cross-border complexity by enabling digital tokens to move globally and trade 24/7 regardless of asset location, it does not override fundamental jurisdictional constraints. Every tokenized real asset transaction involves multiple potentially independent regulatory layers: where the underlying asset is physically located determines property law, zoning, permits, and local regulations; where the issuer is legally domiciled establishes corporate governance, securities filing, and primary regulatory oversight; where investors reside triggers investor protection rules, suitability requirements, and potentially registration obligations; and where trading or transfer occurs may invoke additional securities regulation, market conduct rules, or intermediary licensing.

Each jurisdictional layer may introduce independent regulatory requirements that must be satisfied simultaneously. A property located in Texas owned through a Delaware entity issuing tokens to investors in California and trading on a platform based in Singapore faces Texas property law, Delaware corporate law, federal and California securities regulation, and potentially Singaporean financial services regulation. Reconciling these overlapping regimes requires sophisticated legal structuring that acknowledges rather than attempts to bypass jurisdictional complexity.

Analysis of leading jurisdictions for tokenized real-world assets in 2025 reveals substantial variation in regulatory clarity and hospitable frameworks. Singapore's MAS operates Project Guardian commercializing asset tokenization with clear licensing requirements through Capital Markets Services and Recognized Market Operator frameworks. The UAE's VARA provides compliance guidelines for tokenized offerings within DIFC and ADGM digital asset oases. Hong Kong's SFC regulates tokenized securities under existing Securities and Futures Ordinance while piloting tokenized government bonds. These jurisdictions demonstrate that regulatory progress requires explicit adaptation of existing frameworks rather than hoping technological innovation creates regulatory exemptions.

The United States presents particularly complex challenges. The SEC treats most tokenized real estate as securities—specifically investment contracts—requiring registration or specific exemptions. Regulation D permits offerings to accredited investors (individuals with $1 million net worth excluding primary residence or $200,000+ annual income). Regulation A+ allows raising up to $75 million from non-accredited investors with reduced disclosure requirements. Regulation Crowdfunding enables raising up to $5 million from retail investors. Each exemption comes with specific conditions, ongoing reporting obligations, and transfer restrictions that smart contracts must enforce to maintain compliance.

The 2025 regulatory landscape shows movement toward clarity rather than liberalization. The SEC's Crypto Task Force focuses on creating consistent guidelines for digital asset classification rather than case-by-case enforcement. However, this consistency emphasizes applying existing securities frameworks to tokenized instruments rather than creating new exemptions. The GENIUS Act establishing federal stablecoin framework reflects regulatory evolution but does not extend to asset-backed securities. Organizations expecting regulatory relief enabling unrestricted tokenization without traditional securities compliance are likely to be disappointed.

Securities Regulation is the Primary Constraint

Most tokenized real asset instruments fall squarely within existing securities frameworks requiring compliance with comprehensive regulatory regimes developed to protect investors and maintain market integrity. Key considerations include registration or exemption eligibility where full registration requires extensive disclosures, audited financials, and ongoing reporting that many private real estate owners cannot or will not provide, making exemptions critical for practical tokenization. Investor qualification requirements restrict who can purchase securities, with most tokenized real estate limited to accredited investors under Regulation D, substantially limiting addressable market compared to open offerings. Transfer restrictions maintain exemption status by preventing free trading that would trigger registration requirements, making secondary markets far more limited than tokenization advocates suggest.

Disclosure obligations require comprehensive information about asset conditions, financial performance, risk factors, and conflicts of interest, with potential liability for misrepresentations or omissions regardless of whether information is delivered via smart contract or traditional prospectus. Ongoing reporting duties continue after initial issuance, requiring periodic updates about material changes, financial results, and regulatory developments that token holders must receive regardless of blockchain transparency.

Smart contracts can automate enforcement of some regulatory requirements—verifying investor accreditation before permitting token purchase, enforcing transfer restrictions preventing sales to non-qualified buyers, implementing hold periods preventing premature trading, or limiting ownership concentrations preventing excessive position accumulation. However, automated enforcement logic does not replace underlying legal compliance obligations. A smart contract that fails to enforce a required restriction properly exposes issuers to enforcement action regardless of technical sophistication. The automation reduces operational friction but does not reduce liability or substitute for legal compliance.

Research confirms that MiCA in Europe, fully implemented by late 2024, provides similar comprehensive framework defining tokens, mandating KYC/AML compliance, requiring clear disclosures, and demanding transparent cash flow distributions across EU's 27 member states. This regulatory harmonization improves cross-border consistency but imposes substantial compliance costs and operational requirements. The trend globally is toward clarity about what rules apply rather than creating exemptions for digital formats.

Transferability is Heavily Constrained

One of tokenization's advertised benefits is frictionless transfer enabling 24/7 trading and instant settlement. In regulated markets dealing with securities, this benefit is heavily conditional rather than inherent. Transfer restrictions are not technical limitations to be overcome through better platforms—they are regulatory requirements essential to maintaining exemption status, compliance with investor suitability rules, and respecting jurisdictional boundaries.

Most tokenized real estate operates under Regulation D exemptions permitting sales only to accredited investors. Maintaining this exemption requires preventing transfers to non-accredited buyers, enforcing one-year minimum holding periods under Rule 144, verifying buyer qualifications before each transfer, and maintaining records demonstrating continuous compliance. Smart contracts can automate these checks, but the underlying restrictions remain legally binding. A platform enabling trading to unqualified investors—even technically—exposes issuers and platforms to severe penalties including rescission rights allowing investors to reverse purchases and recover funds.

Unrestricted secondary trading is rarely permitted for tokenized real assets without full regulatory compliance equivalent to publicly traded securities. This requires comprehensive prospectus-level disclosures, audited financial statements, ongoing quarterly and annual reporting, compliance with market conduct rules, and typically listing on registered exchanges or alternative trading systems. Few private real estate assets meet these requirements or would want to incur the associated costs and disclosure obligations.

As a result, many tokenized instruments resemble regulated private markets rather than open exchanges. Trading occurs through whitelisted participants who have completed verification, on platforms operating as alternative trading systems with regulatory oversight, subject to transfer restrictions enforced programmatically, and with liquidity far more limited than public securities markets. IOSCO's analysis confirms this reality, noting that while tokenized money market funds may be issued on public blockchains, secondary trading remains limited and restricted to whitelisted investors. The promised liquidity benefits have not materialized in practice because regulatory constraints prevent the open trading that tokenization technology theoretically enables.

Custody and Control Raise New Questions

Traditional securities markets rely on well-defined custody chains with clear allocation of responsibilities, regulatory oversight of custodians, and established legal frameworks determining ownership in various scenarios including insolvency and disputes. Tokenization introduces genuine ambiguity around custody and control that regulators are working to address but have not fully resolved.

Critical unresolved questions include: who controls private keys determining token access, with implications for whether holders have true ownership or merely beneficial interests subject to custodian control; how beneficial ownership is established when tokens may be held through wallets, platforms, or intermediaries with different technical arrangements affecting legal rights; what happens in insolvency scenarios where bankruptcy law determines priority based on ownership structures that may not be clearly established for tokenized holdings; and how disputes get resolved when conflicting claims arise or technical errors occur, with unclear frameworks for who bears losses and what remedies exist.

Regulators are increasingly focused on custody arrangements for tokenized assets, emphasizing segregation ensuring client assets remain separate from custodian operational funds, recovery mechanisms enabling asset return to rightful owners even if custody provider fails, operational resilience maintaining service continuity during technical problems or cyber incidents, and insurance and capital requirements protecting clients if custodian errors cause losses. Multiple jurisdictions now require licensed custodians for tokenized securities, rejecting arguments that self-custody through private key control eliminates custody regulation.

The regulatory response is clear: custody is not eliminated by tokenization but redefined with new technical dimensions that must be addressed through appropriate oversight. Organizations assuming that blockchain-based ownership eliminates custody requirements face regulatory pushback and operational challenges when events require intervention that pure technical control cannot address. Pragmatic approaches combine technical self-custody capabilities with regulated custodian oversight providing legal certainty and regulatory compliance.

Disclosure Standards Must Evolve, Not Disappear

Tokenization enables more granular and potentially continuous disclosure compared to traditional periodic reporting. Smart contracts can make real-time asset performance data, transaction histories, and ownership structures continuously visible on-chain. This technical capability creates both opportunity and regulatory challenge requiring careful navigation.

Regulatory challenges include determining what constitutes material information requiring disclosure versus routine operational data that can be omitted. Avoiding selective disclosure where technical access provides some participants information advantages before others receive it, violating fair disclosure principles. Ensuring consistency across digital and traditional reporting channels so information provided on-chain matches formal regulatory filings without conflicts or gaps. Balancing comprehensive disclosure protecting investors against excessive information creating liability exposure when minor errors or omissions occur in continuously updated feeds.

Inadequate disclosure undermines investor protection by concealing material risks, misrepresenting performance, or omitting conflicts of interest. Excessive disclosure can introduce liability through minor technical errors in continuous data feeds, inconsistencies between on-chain and off-chain information, or over-disclosure of operational details that create opportunities for misinterpretation or litigation. Regulators are still calibrating where appropriate balance exists, with frameworks evolving but not yet settled.

IOSCO's principles emphasize that enhanced data availability through tokenization should improve investor protection but must be accompanied by clear standards for what information is required, verification ensuring data accuracy and completeness, consistency across all disclosure channels and formats, and materiality focus on information actually relevant to investment decisions rather than technical noise. Organizations implementing continuous disclosure should work proactively with regulators to establish acceptable approaches rather than assuming that more information automatically satisfies regulatory obligations.

The Role of Ongoing Compliance

Traditional securities compliance often functions as series of discrete events—registration at issuance, periodic reporting at defined intervals, testing covenants at scheduled dates. Tokenized assets with embedded logic and continuous observability transform compliance into ongoing process requiring continuous rather than episodic attention.

This raises new regulatory questions around continuous monitoring obligations where issuers and platforms must maintain real-time oversight rather than periodic reviews. Automated enforcement actions triggered by smart contracts raise questions about who is responsible when automated systems enforce restrictions incorrectly. Escalation and override mechanisms are needed when automated rules produce inappropriate outcomes requiring human intervention. Documentation and audit trails must demonstrate that compliance processes functioned properly throughout asset lifecycle rather than just at testing dates.

Compliance as ongoing process rather than discrete event favors assets with clear governance structures establishing who makes decisions and how authority is exercised. Verifiable data inputs enable compliance systems to operate reliably rather than garbage-in-garbage-out automated enforcement based on unreliable information. Auditable decision logic allows regulators and auditors to verify that compliance systems functioned as intended rather than operating as black boxes producing unexplainable outcomes.

Without these foundations, automation increases regulatory risk rather than reducing it. A compliance system that automatically enforces restrictions based on unverified data may prevent legitimate transactions while allowing improper ones. Smart contracts that cannot be audited or understood by regulators raise questions about whether compliance is actually occurring. Organizations implementing automated compliance must demonstrate that automation enhances rather than obscures regulatory oversight.

Why Regulatory Clarity Favors Data Readiness

Early tokenization efforts often relied on jurisdictional arbitrage—locating in permissive jurisdictions, structuring to exploit ambiguities, or arguing that technological features created exemptions from traditional regulation. This window is closing rapidly. Regulatory coordination is increasing across securities regulators through IOSCO, central banks through BIS, and market infrastructure authorities through various international working groups. Tokenized real assets are now firmly on regulatory agendas globally, with frameworks converging toward applying existing principles to new formats.

Projects designed to exploit regulatory ambiguity rather than address it struggle to scale beyond pilot offerings to sophisticated investors who accept elevated risks. Institutional participants and mainstream investors require regulatory clarity and compliance before committing significant capital. Regulators prioritize transparency enabling oversight, auditability supporting verification that rules are followed, and accountability establishing who is responsible when problems occur.

Assets meeting these requirements have substantial advantages in regulatory approval and ongoing oversight. Structured records demonstrating compliance with disclosure obligations, property requirements, and contractual terms. Verifiable state enabling regulators to assess conditions without requiring extensive investigations. Clear rights and obligations specified in documentation that legal analysis can interpret and smart contracts can implement consistently. These characteristics make assets easier to supervise, approve for offerings, and monitor for ongoing compliance.

This creates reinforcing dynamic where regulatory requirements and functional tokenization requirements converge. Both demand high-quality structured information, verifiable data supporting claims and compliance, clear governance establishing decision authority and accountability, and auditable processes demonstrating appropriate behavior throughout asset lifecycle. Organizations building information infrastructure to support functional tokenization simultaneously build capabilities satisfying regulatory requirements. Conversely, attempting tokenization without adequate information infrastructure creates both operational problems and regulatory obstacles.

Why This Guide Matters

Tokenization will not achieve scale by bypassing regulation through technical innovation or jurisdictional arbitrage. It will achieve scale by fitting into existing regulatory frameworks through structures that satisfy both technical requirements and legal obligations. Regulatory considerations shape fundamentally what can be tokenized and issued to investors, who can participate as buyers subject to accreditation and suitability requirements, and how instruments behave over time with ongoing compliance and disclosure obligations.

Projects treating regulation as design constraint from inception rather than obstacle to avoid are far more likely to survive regulatory scrutiny and achieve operational durability. This means engaging with regulators proactively rather than reactively, structuring for compliance rather than exemption hunting, building information systems supporting both technical functionality and regulatory reporting, and accepting that regulated markets require investor protections that limit some theoretical benefits of tokenization.

Tokenization is not deregulation enabling new freedoms from oversight. It is regulated finance with new tooling that must satisfy existing principles about investor protection, market integrity, and systemic stability. Organizations understanding this reality and building accordingly position themselves for sustainable success as regulatory frameworks mature and institutional participation expands. Those expecting technological innovation to circumvent regulatory requirements will discover that substance determines treatment regardless of technical sophistication.

The practical guidance is direct: understand applicable regulatory requirements before designing tokenization structures, engage with regulators to establish compliant approaches rather than assuming permission, build information infrastructure supporting both regulatory compliance and operational functionality, accept that transferability will be constrained by investor protection requirements, and recognize that regulatory clarity increasingly favors transparency and accountability over technical complexity and jurisdictional arbitrage.

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Keywords: regulatory compliance, tokenized real assets, securities regulation, digital securities, custody, transfer restrictions, disclosure requirements, blockchain regulation, IOSCO, SEC, investor protection

References

• International Organization of Securities Commissions. (2025). Final Report on Tokenisation of Financial Assets. Comprehensive analysis finding that existing securities frameworks remain applicable to tokenized assets with emphasis on investor protection and market integrity.

• Primior Group. (2025). Real Estate Tokenization: SEC Rules Blockchain Companies Must Know. Analysis of Howey Test application, registration requirements, and exemption frameworks under Regulations D, A+, and Crowdfunding.

• Six Leading Jurisdictions for Tokenized Real World Assets. (2025). Comparative analysis of regulatory approaches in Singapore, UAE, Hong Kong, and other jurisdictions implementing frameworks for tokenized securities.

• U.S. Securities and Exchange Commission. Framework for "Investment Contract" Analysis of Digital Assets. Guidance applying Howey Test to determine when digital assets constitute securities requiring registration or exemption.

• World Economic Forum. Digital Assets and Institutional Adoption. Analysis of how regulatory clarity affects institutional participation in tokenized markets, emphasizing compliance requirements over technical innovation.