RWA functional tokens, stop fooling yourself

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Original author: Shao Jiadian Lawyer

Introduction

Many RWA projects, when consulting a lawyer for the first time, almost always say the same thing:

“We are not securities, just a functional RWA token.”

“We simply put real assets on the chain, with no financing attributes.”

“We are utility tokens, not security tokens.”

Honestly, I’ve become numb to these statements.

But the point is—regulation is never based on what you call yourself, but on what you are actually doing.

And an extremely important point is:

The gray buffer zone of “functional RWA tokens” has been gradually squeezed out by real case law in major regulatory jurisdictions worldwide.

Today, I will do only one thing:

Without abstract legal provisions or vague theories, I will use real regulatory cases to tell you—how “functional RWA tokens” are gradually being classified as “security tokens.”

What do you think you are doing when you call it “RWA functional”?

Let’s clarify this first. The vast majority of so-called “functional RWA tokens” in reality have the following structure:

Project party:

“Put real assets like mining machines, computing power, power plants, charging stations, real estate, accounts receivable on the chain.”

User:

“I buy your tokens.”

Actual economic relationship:

Money flows into an asset pool controlled by the project party;

The project party purchases and operates RWA assets;

Returns are proportionally distributed to token holders;

At the same time, you give them some “governance rights,” “usage rights,” or “ecological rights.”

What you package externally is:

Functionality, governance, ecology, on-chain credentials.

But regulators see four standard securities elements:

Invested funds (pay money to buy tokens)

Entry into a common asset pool (you operate RWA collectively)

Expected returns (dividends, interest, distribution of output)

Returns derived from others’ efforts (you operate the assets)

Once these four points are established, in mature jurisdictions like the US, EU, Switzerland, Hong Kong, they are directly labeled as: Investment Contract = Security

Whether you call it RWA, Token, or NFT, it does not affect the legal conclusion that it is a security.

Real Case 1:

“RWA + governance tokens” are directly penalized by the SEC for “securities issuance”

This is a name you must remember:

DeFi Money Market (DMM)

What does the project say externally?

It’s a “DeFi + real asset yield protocol”

Underlying assets: real-world debt claims like auto loans (standard RWA)

Provides two types of tokens to users:

One is a “fixed income token” (promising an annualized 6.25%)

The other is a “governance token DMG,” claiming to be “governance + ecological functions”

The project states:

One is a yield tool, the other is a functional governance token.

What does the SEC (U.S. Securities and Exchange Commission) say?

A one-sentence classification:

Both types of tokens are securities.

The reasoning is very straightforward:

Funds enter a unified RWA asset pool;

Returns come from the project’s operation of real assets;

Investors are passively allocated;

The so-called “governance rights” do not change its “investment nature.”

Final result:

Unregistered securities issuance;

Project fined;

Investors enter compensation procedures.

The cruelest part of such cases is:

Even if you truly hold real assets, generate real returns, and put them on-chain,

As long as your structure is “you manage assets, users receive returns,” you cannot escape the legal classification of securities.

Real Case 2:

“Asset-backed RWA tokens” are directly recognized as securities + fraud

Let’s look at a project closer to what you see on the market now: “asset-backed RWA” projects:

Unicoin case (SEC lawsuit in 2025)

This project’s initial positioning was very standard:

Issuance of “rights certificates” + future exchangeable RWA tokens;

Claimed externally:

Tokens backed by real estate + pre-IPO equity;

A “safe, stable, real-asset-backed crypto asset.”

Sounds “compliant,” right?

Very similar to the rhetoric in many RWA whitepapers now.

The SEC’s (U.S. Securities and Exchange Commission) determination is only one sentence:

This is a typical unregistered securities issuance + fraudulent asset support promotion.

The core logic is also very harsh:

Investors are not buying “usage rights”;

They are expecting “future returns of an asset pool”;

Packaging this expectation into a token, fundamentally, it remains a security.

Why is “functional” particularly untenable in the RWA field?

Because there is a natural conflict between RWA and “functional tokens”:

Functional tokens emphasize:

Usage rights, consumption, access, governance participation

RWA emphasizes:

Assets, returns, cash flow, yields

Once your RWA token has any of the following:

Periodic dividends

Proportional profit sharing

Corresponding to real asset cash flows

Redeemable underlying assets according to rules

In the eyes of regulators, you are no longer a “functional token,” but a:

Profit rights credential

Asset-backed credential

Investment contract

Security token

This is not abstract reasoning; it is the logic that global regulators have already practically applied.

A reality you must face:

Future RWA tokens will increasingly “look like securities” under regulation.

This is not a trend prediction but an already existing fact:

In the US:

All RWA + yield structures will prioritize unregistered securities review paths.

In the EU (MiCA + securities law):

Any “transferable + yield-bearing + public-facing” tokens are inherently subject to securities regulation.

Switzerland:

Utility tokens with “investment purposes” are directly treated as securities.

Hong Kong:

As long as it constitutes a “Collective Investment Scheme (CIS),” regardless of whether it’s a token, it falls under the securities regulatory system.

In other words:

Regulation is not ignorant of RWA; it is fully applying “securities upgrade” logic to RWA.

A brutally honest summary:

You may dislike this statement, but it applies to the vast majority of “functional RWA token” projects:

It’s not that you don’t know you’re raising funds, but that you’re unwilling to admit you’re doing a form of “financing that cannot be classified as securities.”

The problem is:

You can deceive the market;

You can talk about functions, ecology, narratives in groups;

But you cannot deceive the legal classification of real regulation.

So, does RWA “have to be securities”?

Finally, I will say a very honest and important point:

Not all RWA must be securities, but as long as you are “raising funds from the public + expecting returns,” you must accept the path of securities regulation.

From a global practical perspective, currently, if RWA wants to avoid the “traditional securities law path,” there are only three truly feasible models:

First, completely de-yielded, retaining only on-chain usage and consumption attributes as “pure functional RWA credentials”;

Second, strictly private placements within qualified investor scope;

Third, represented by Dubai’s VARA, the “virtual assetization with securities logic”—it does not avoid securities but allows RWA tokens with securities attributes to be compliant and accessible to retail under a dedicated virtual asset regulatory framework.

Beyond these, any RWA structure that “raises funds from the public + distributes yields + allows free circulation” will almost inevitably be pulled back into the securities regulatory framework in major jurisdictions.

In addition:

Facing retail investors

Tradeable

Yield-bearing

Dividends

Asset pools

No matter how you package “functional,” the outcome is highly predictable in the eyes of regulation.

A final message to all projects struggling with “functional RWA”:

You are not choosing between “functional” or “securities”; you are choosing between “long-term compliance” or “short-term luck.” This is not a moral issue; it’s a survival issue.