The Hidden Pitfalls of RWA Tokenization

For several years now, experts have been promoting the tokenization of real-world assets as a promising direction for the cryptocurrency industry. Many expect that this area will serve as a springboard for another leap in interest in blockchain technology’s capabilities. However, breakthroughs in this field are not evident. So what’s the issue? Let’s examine who has attempted to tokenize real-world assets and which problems they encountered.

History of Real-World Asset Tokenization

Real-world asset tokenization is the digitization of ownership rights to physical or financial assets in the form of blockchain tokens. This can provide two major advantages over direct ownership of the assets themselves:

• Expensive assets (real estate, artwork, stocks, bonds, etc.) can be divided into small fractions, accessible for purchase and trading by anyone who wishes;
• Placing traditional assets on the blockchain gives cryptocurrency traders access to trade them: on platforms where traditional assets are traded, cryptocurrencies are not accepted, while token trading can be conducted on any cryptocurrency exchange.

The Birth of the Concept. The first ideas about “digital tokens” appeared long before modern blockchains. Back in 1994, Nick Szabo described smart contracts for managing property rights. However, only in 2009, with the emergence of Bitcoin, the idea of tokenization took a practical form. In January 2012, J.R. Willett published “The Second Bitcoin Whitepaper,” proposing the Mastercoin protocol — a layer on top of Bitcoin for issuing tokens pegged to real currencies or commodities. This concept essentially laid the foundation for real-world asset tokenization on the blockchain.

Tokenization of Fiat Currency. Based on this protocol, in October 2014, the cryptocurrency Realcoin (later renamed Tether USD) was issued. Stablecoins became the first tokens pegged to a real asset — the US dollar. Each unit was supposed to be backed by a reserve of dollars in an account, representing a tokenized analog of fiat currency. And USDT can be considered the first successful example of real asset tokenization, as by 2025 it is widely used and has a circulation in the hundreds of billions.

First Gold Tokens. Following stablecoins, projects for tokenizing commodities emerged, primarily gold. One of the pioneers was the Singapore company Digix, which launched the DGX token on Ethereum in 2016, backed by physical gold. Each DGX token is pegged to 1 gram of gold from a specific bar with its own number in storage. A side effect of such tokenization was additional protection of the authenticity of bars owned by the company: each genuine bar had its “copy” on the blockchain.

However, early projects like Digix didn’t achieve mass adoption, due to technical barriers and the lack of user-friendly platforms. Digix itself had to exit the business in 2023 (although DGX tokens can still be redeemed through the company’s partner).

Tokenization of Real Estate and Other Physical Assets. One of the first notable events in real estate tokenization was the sale of an apartment in Kyiv (Ukraine) through the blockchain platform Propy in 2017. This property was purchased by Michael Arrington (founder of TechCrunch) using cryptocurrency, and the transaction was fully recorded by an Ethereum smart contract which issued a token for that apartment.

This was a direct purchase by a single owner, and around 2018, projects for fractional real estate tokenization began to emerge. For example, startups like Harbor, Polymath, and Swarm attracted attention by promising to transform shares of buildings into digital securities. At the same time, Elevated Returns, in conjunction with the brokerage platform tZERO, conducted the tokenization of the St. Regis Aspen resort hotel — issuing Aspen Coin, representing a share in this commercial real estate property. This step was considered groundbreaking, but it didn’t receive widespread participation from retail investors due to strict limitations (tokens were distributed as securities to accredited US investors only).

Was the Early Experience Successful? Overall, the first experiments laid the foundation but weren’t commercially widespread. Tether can be called the only successful early tokenization project. But nowadays stablecoins are usually not considered part of RWA tokenization, so it can be discounted, although it did prove the viability of tokens backed by real-world reserves. In the real estate, gold, and other asset segments, the success of early projects was limited. The main reasons:

• Technical Unpreparedness and UX. Early platforms were complex to use: storing cryptocurrency wallet keys seemed unfamiliar to the average investor. Additionally, there were strong doubts regarding technological risks (such as smart contract errors), infrastructure risks (such as oracles determining the current exchange rate), and human factors (such as compromise of the real asset custodian’s employees).
• Legal Uncertainty. It wasn’t clear whether authorities would recognize tokens as legal confirmation of rights to an asset. In 2017–2018, many regulators were just beginning to explore this topic. Without a legal ownership scheme, a token essentially remained “unauthorized” from an ownership perspective — i.e., the investor owned only records on the blockchain but didn’t always have guaranteed rights in the offline jurisdiction.
• Lack of Secondary Market and Liquidity. Even if a token was issued, its market was very limited. Even USDT at that time was traded on a relatively small number of exchanges. And for the first real estate or art tokens, there were no trading platforms at all.

But even those startups that seemingly successfully solved these problems didn’t achieve success. A well-known example was the DX Exchange, which provided custodial storage of tokens familiar to traditional investors and attracted market makers to create a market for such assets, quickly ceased operations. Currency Com, which in addition to all this also operated in the Belarusian jurisdiction, where since late 2017 there were clear, understandable, and very liberal token regulation rules, also didn’t gain popularity as a platform for trading tokenized assets and eventually stopped offering them to users, focusing on regular cryptocurrencies.

Notable Failures of Tokenization Projects

Over the past years, there have been several high-profile real-world asset tokenization projects that didn’t meet expectations or were shut down.

• Harbor and Real Estate Tokenization. The Harbor startup in 2018 attracted attention with a plan to tokenize commercial real estate. They announced the issuance of digital shares (tokens) for a real estate property — a $20 million student dormitory (Convexity Properties project in South Carolina). However, after a few months, the deal had to be canceled due to a dispute with the property’s mortgage lender. The lending bank didn’t approve the deal, concerned about the legal certainty of the collateral. This case showed that the traditional financial structure of an asset (pledges, mortgages) can conflict with a new ownership scheme.
• Royal Mint Gold (RMG) Project. In 2016, the British Royal Mint, together with the CME exchange, announced an innovative project to tokenize gold stored in the mint’s vaults, worth up to $1 billion. This could have been the first initiative of such scale with the participation of a major economy’s government. However, the project faced obstacles: in 2017, CME withdrew from the partnership at the last moment, and the mint’s attempt to issue tokens through a crypto exchange was blocked by the UK Treasury, considering it too risky for reputation. As a result, RMG never launched. The government simply didn’t allow a state institution to pioneer in the, at that time, unregulated crypto space. This case showed that even with the technology in place, political factors can halt a project.
• Corporate Initiative Libra/Diem (Facebook). In 2019, Facebook announced the creation of the Libra token — a global digital currency backed by a basket of fiat currencies and government bonds. Formally, Libra wasn’t tied to a single asset, but conceptually it was a tokenization of a basket of real financial assets. The project triggered an immediate negative reaction from regulators worldwide. Under pressure from central banks and governments, key partners (Mastercard, PayPal, etc.) left the Libra Association, the project was renamed Diem, and eventually shut down. The former project leader directly called its outcome “100% political kill” by regulators. The main reason for the failure was that authorities saw a private global currency as a threat to the financial system, and while Bitcoin, which also poses such a threat, cannot be shut down with legal methods, such a centralized project easily can be.
• Tokenized Stocks on Exchanges. Following DX Exchange and Currency Com, some major crypto exchanges also tried to open trading in tokens linked to the prices of well-known companies’ stocks. In 2021, the largest exchange, Binance, launched trading in tokens reflecting Tesla, Apple, and other stocks. These products essentially gave the right to an equivalent of shares owned by Binance’s partner in Germany. However, after just three months, the service had to be shut down: supervisory authorities (from Germany, Hong Kong, UK, etc.) stated that such tokens were securities, for which Binance had no license to trade. In July 2021, Binance announced the closure of its stock token program under regulatory pressure. Similarly, FTX offered stock tokens through a German intermediary, but after FTX’s collapse in 2022, token holders were left with nothing. In both cases, tokens that remained without the support of the trading platform that issued them completely lost their liquidity and value.
• LAToken and Other ICO Tokenizations. During the ICO boom of 2017–2018, projects emerged claiming to tokenize everything — real estate, paintings, company shares. The LAToken platform claimed to create a market for tokens linked to Apple shares, London real estate, or art masterpieces. However, essentially, many of these tokens were merely synthetic derivatives (their price followed the asset’s price, but the token didn’t provide legal rights to the asset itself). In the absence of a mechanism to exchange the token for the real asset, everything ultimately came down to trust in the issuer, who promised to buy back the token at the price of the real asset. If this trust disappeared, the token lost its peg to the asset’s price, and its buyers incurred losses. Such unauthorized tokenization can easily be associated with fraud, so the loss of trust in many projects was justified. Even the state token Petro, issued during the ICO boom by the Venezuelan government and claimed to be backed by barrels of oil, didn’t escape this fate, as it had no mechanism for exchange for real oil.
• Closed Consortiums and Pilots. A number of corporate tokenization initiatives passed the pilot stage but weren’t offered to the masses. For example, the We.Trade banker consortium and Marco Polo tried to tokenize bills of exchange on the blockchain, but by 2021–2022, both projects closed due to lack of transactions and complexity of integration with banking infrastructure. The Australian Stock Exchange (ASX) spent several years implementing blockchain for stock clearing (which would essentially tokenize shares in a new accounting format), but in 2022 canceled the project, writing off $170 million in expenses. Although these examples aren’t always in the spotlight, they illustrate typical difficulties of corporate tokenizations: incompatibility with standard accounting systems and caution of management afraid to change established processes.

Unresolved Complexities

Collectively, the failed cases provided the industry with valuable experience. They identified sticking points, many of which still haven’t been overcome.

• Legal Barriers and Lack of Recognition. Many projects couldn’t find a way to fit tokens into the existing legal system. If the law doesn’t recognize a token as proof of ownership, then token holders have no protection. For example, the Harbor project couldn’t bypass mortgage agreement requirements; Binance didn’t obtain securities licenses. Without a legal connection between the token and the asset, tokenization remains in a semi-legal position.
• Risk of Unauthorized Tokenization. Some failures occurred because token issuers tokenized assets without the necessary rights or procedures. Unauthorized tokenization is when tokens are issued, claimed to be backed by an asset, but the connection is not secured either legally or physically. This contains fraud risks and undermines the reputation of the RWA tokenization industry.
• Double Accounting and Loss of Connection with the Underlying Asset. In 2022, the carbon credit registrar Verra prohibited platforms from turning their credits into tokens, discovering that some crypto projects had “tokenized” supposedly redeemed credits without writing them off in the registry. In other words, it was the same unauthorized tokenization, but in another aspect: tokens created a threat of double counting emission reductions. In other words, the same credits could be counted twice — on the blockchain and off-chain, which is incorrect. If tokenization occurs parallel to traditional accounting, there’s always a risk of desynchronization: as long as the credit isn’t “immobilized” in the registry, its tokenization leads to the token existing while the original certificate is also considered active — creating a double asset. Such situations are fraught with a collapse of the peg. This was also related to scandals around Tether, which was accused of incomplete reserves.
• Risks of Collective Ownership and Asset Management. Tokenization often implies fractional ownership, where hundreds of people own parts of a single physical object. This carries management complexities. A property owner usually makes decisions (sell, repair, etc.) unilaterally; with tokenization, it’s unclear who will manage and how. Many projects solved this by creating a legal entity (SPV/fund) that holds the asset, and the token is a share of this SPV. Management was entrusted to a manager, and token holders had limited rights (for example, only the right to income, without the right to use or make decisions). However, this approach reduces the token’s attractiveness — it becomes similar to a passive stock. The alternative — giving token holders voting rights — threatens disagreements between investors and decision paralysis. A known example: an attempt to launch a DAO for the joint purchase of a rare copy of the US Constitution (ConstitutionDAO project, 2021). About $47 million were raised, but the DAO lost at the auction, and then the problem of returning funds to thousands of participants arose, which proceeded chaotically. Another example — a community that bought the “Dune” manuscript at auction for €2.6 million believed they had acquired film rights, whereas legally this didn’t happen. These examples show that collective owners can have different expectations and goals, and the legal nature of their shares (tokens) isn’t always obvious, leading to disappointment and disputes.
• Economic and Marketing Problems. Some projects overestimated market interest. Tokenization was supposed to make assets liquid, but liquidity doesn’t appear with a snap of fingers — a market of buyers/sellers is needed. Many tokenized objects faced the absence of a secondary market: there are few people willing to buy a share in a specific house or painting if it doesn’t bring tangible benefits. Without liquidity, investors don’t see the point of tokens, and projects fade away. Marketing in 2018 often loudly promised a revolution (“sell 1% of your house in seconds!”), but reality proved more prosaic. As a result, a number of projects burned out, unable to attract enough users, because people weren’t ready to change familiar investment tools for new tokens with uncertain prospects.

Prospects for RWA Tokenization

From 2023 up to the present moment, the RWA trend in decentralized finance has become increasingly prominent.

Protocols like MakerDAO, Aave, Goldfinch, and Centrifuge began issuing loans backed by tokens secured by real assets — from real estate to small business invoices. For example, MakerDAO in recent years has accepted as collateral tokenized US Treasury bonds (through funds such as Ondo Finance OUSG, which represent shares in a pool of short-term bonds) and real estate loan tokens (through projects on Centrifuge).

Over 10% of DAI (MakerDAO’s stablecoin) backing comes from RWAs, such as bonds and credit agreements. This is a success in integrating traditional assets into the crypto economy: even a decentralized protocol is beginning to rely on stable income from real bonds. The risks are bilateral: for the DeFi protocol — counterparty risks (what if the bond fund goes bankrupt and doesn’t return the money — the smart contract will suffer); for traditional participants — regulatory risks (not everyone is ready for their securities to be used in global decentralized schemes). Nevertheless, the RWA trend indicates that tokenization is proceeding steadily where there’s economic sense (for example, extracting yield from real assets in the crypto world or protecting against cryptocurrency volatility when backing algorithmic stablecoins).

In Europe, MiCA regulations have come into effect, which regulate tokens of this type. In the US, the issue of tokenization regulation will be resolved in the foreseeable future, as Trump has already signed an executive order directing federal agencies to reassess current regulations related to digital assets and propose updates within 60 days to maintain legal clarity and technological progress.

The demand for tokenization grows every year, and its potential is evident: it simplifies access to assets, makes investments more accessible, and creates new business models.

At the Rabbit Swap cryptocurrency exchanger, we also notice clients’ interest in tokens pegged to real assets. And I’m not just talking about stablecoins (which, I repeat, although tied to such assets, are traditionally not included in the RWA sphere). During periods of cryptocurrency volatility, we observe an increase in demand not only for stablecoins but also for gold-backed tokens: PAX Gold and XAUT.

And it’s especially interesting that the risks facing RWA don’t deter our clients from exchanging traditional cryptocurrency for such tokens.

• It doesn’t matter that tokens are interpreted differently in various jurisdictions: in some places they’re securities, in others utility tokens, and in some places even outside the law.
• Neither technological risks, nor infrastructure risks, nor human factors are frightening.
• Problems of liquidity and market stability take a back seat, although even successful projects can face a liquidity crisis: if interest suddenly decreases or panic arises, tokenized assets are difficult to support, as they don’t have such instruments as exchange stocks and exchange commodities (market makers under regulatory control, etc.).

Nevertheless, these risks haven’t gone away. Perhaps this is why we don’t see a significant breakthrough in the RWA sphere:

• The tokens themselves can be in demand,
• But technical solutions for them have existed for a long time, and it’s unlikely that any revolution can be expected technically,
• And the systemic risks are too high for RWA tokens to become anything more than assets satisfying the need for a “safe haven” during periods of increased cryptocurrency market volatility.