Insights

Introduction
Real World Asset (RWA) Tokenization is the process of converting ownership or economic rights vested in tangible assets such as gold, real estate or bonds into digital tokens on a blockchain. This technology is creating a lot of interest globally with multinational institutions like BlackRock having launched tokenized funds. But legal uncertainty, especially in developing markets like India continues to be a primary barrier to widespread adoption.

Working Principle
The tokenization is created through the digital representation of a physical asset. It will be issued the tokens which is used for trading purposes on blockchain. These tokens allow for fractional ownership and help liquidation, making high value assets accessible to a larger investor base. Actually, the physical asset remains off- chain in the real world and the token exists on- chain, with a custodian or Special Purpose Vehicle (SPV) maintaining the connection between them. Smart contracts help for automatic ownership transfers, and enhancing the governance, payments process, eliminating the dependency on intermediaries. Tokenization has been successfully implemented across the world. A few examples of the same are Tokenized Gold, Tokenized Bonds, Real Estate (Fractional ownership of high value properties)

Legal Status: India vs Global Perspective 
India currently has no absolute legal framework for RWA tokenization. Regulatory bodies like RBI and SEBI have not any specific guidelines for tokenized assets. Tokenizing real estate, for example, may violate the Real Estate (Regulation and Development) Act (RERA) since Land title transfers cannot rely solely on tokens, with tokenized offerings governed by a patchwork of regulations like FEMA, SEBI, RERA, and taxation laws.This uncertainty makes it difficult for developers to structure offerings and for investors to understand their rights.

Global View
Singapore has regulated and monitored by the Monetary Authority of Singapore (MAS) under the Payment Service Act and Securities and Futures Act, and MAS is already engaged with projects like Project Guardian to pilot tokenized bonds and funds in a sandbox environment. United States securities and Exchange commission has categorized most of the tokens as securities. By doing so, they are enforcing existing securities laws and typically requiring exemptions like Reg D or Reg A+, for STO’s. UAE: Abu Dhabi Global Market (ADGM) and Dubai Financial Services Authority (DFSA) provides a structured regulatory framework for digital assets and tokenization, establishing the region as an innovation hub.

Legal Frameworks and Compliance in Tokenized assets :
Tokenized assets face considerable legal and regulatory obstacles that relate to issuers and investors alike. One of the key concerns is whether digital tokens will be legally recognized and enforceable as a representation of ownership. In many regions of the world, the electronic record of ownership via a blockchain is still not accepted as a way to transfer or prove ownership of physical or financial assets. This lack of legal clarity can lead to many disputes, particularly if rights of the token holders are not defined by some set of law or contract. Laws and regulations need to create a clear distinction as to whether a token provides bearer rights or registered rights, and whether any benefit can extend to token holders including revenue sharing, voting rights, or access to dividends. At the same time, tokenized asset issuers are also under major legal obligations. For example, compliance with securities laws, registration requirements, anti-money laundering (AML) and know-your-customer (KYC) requirements, and to provide clear and accurate disclosures on the asset, and the risks associated with it. Non-compliance may lead to legal exposure, regulatory action, or even a loss of confidence from their investors. 

Custody, Security, and Cross-Border Compliance in the Markets of Tokenized Asset 
The custody and security of both the physical asset and the digital token that represents it is the foundation of tokenization systems. In a number of jurisdictions custodians of digital assets will need specific licenses or regulatory approvals to operate. The custodian’s responsibilities; i.e. segregation of customer assets, risk management of operational protocols, reporting obligations, should be clearly articulated to consider investor protection and a resilient operating environment. Tokenized assets can include multiple countries and can be used by and involve people around the globe, meaning that the asset, issuer, platform, and investors all may be in completely different jurisdictions. This results in more complex legal and regulatory issues due to the differences between jurisdictional definitions and regulatory approaches related to securities and property rights, digital tokens, and custodial obligations. In addition to this, there is also a lack of a common set of global standards, further increasing the risk of legal uncertainty, regulatory breaches, and enforcement issues. In order for market adoption to be wider, regulators will eventually need to put in place an interoperable model. Then the platforms are left with the obligation to create ticket compliance, and know-your-customer processes to work within the rules of compliance that apply to each jurisdiction.

Taxation and Jurisdictional Challenges in Tokenized Asset Markets
From a legal perspective, uncertainty still represents a significant challenge for the market for tokenized assets as it starts to mature. This is particularly in respect of the taxation and jurisdictional compliance aspects (in particularly India). It is important that global and national regulatory landscapes catch-up to enhance legal certainty, foster investor confidence/incentivize adoption. The tax treatment of tokenized assets is still very uncertain; particularly in many developing and emerging markets. Regulators/tax authorities very often fail to give explicit direction regarding the classification and accounting of capital gains, transfers, income from staking or revenue distributions from tokenized assets. The lack of guidance presents significant uncertainty to both issuers and investors and may lead to fears of non-compliance or double taxation. Consistent and clear tax treatment is imperative to promote accurate reporting, mitigate legal exposure and to promote responsible market engagement.

Risks in Reality: 
The promise of tokenization is tempered by concerns over legal enforceability, with token ownership rarely equivalent to legal title in numerous jurisdictions. Custodian risk, insufficient secondary market infrastructure, and valuation manipulation continue to impede progress. Several platforms overstate their capabilities, frequently without proper asset support or regulatory compliance. Other challenges include market instability, technological flaws, and operational issues that might trigger asset devaluation or default.

Conclusion: 
Real World Asset (RWA) tokenization enables greater investment inclusivity and improved liquidity in conventionally illiquid markets. However, without legal validation of tokens as binding claims, the tokenization ecosystem stays vulnerable and subject to substantial risks. India needs to look at jurisdictions like Singapore and the EU, developing regulations that foster innovation while ensuring investor protection to unlock the full potential of asset tokenization. In India, it is essential that legislation is created to define the legal treatment, regulatory status – including in terms of transfer, of tokenized asset developments to fit within the current financial instrument ecosystem and property ownership scheme.