Billions in assets have already been tokenised, attracting the interest of startups, global banks and regulators alike. Yet fundamentally, ambiguities remain about the underlying legal operations. What does a token represent exactly?
Token issuers are strategically exploring the full range of legal options available globally. One actor issues tokenised sovereign bonds using an ad hoc law in Switzerland. Another repurposes old German corporate law to associate a token with a specific right. This creativity drives innovation but causes fragmentation and uncertainty. Without legal clarity, investors and regulators may face unintended consequences.
Stablecoins, the most commonly tokenised assets, have triggered regulatory responses with their volumes, hubris and failures. The Market in Crypto Asset regulation in Europe, for instance, aims to ensure that tokens are properly backed and redeemable. In contrast, the rest of the tokenisation ecosystem remains a legally creative wild west. Risks, as well as fraud opportunities, linger in novelty and ambiguities.
A clear framework would allow us to rationalise tokenisation strategies and better assess their risks. Drawing on analysis of tokenisation projects across multiple jurisdictions, recent research into the legal structures of tokenised assets proposes a taxonomy. Tokenised assets can be grouped based on the nature of the legal link between tokens and assets into three high-level categories: direct, indirect and incomplete tokenisation (Figure 1).
Direct tokenisation
The token is the full embodiment of the asset. These native assets are similar to a paper share or an entry in a security register. This model offers the highest degree of legal certainty. Central bank money or sovereign bonds issued natively on-chain fit this category, such as the 2024 Slovenian sovereign debt issuance. Corporate bonds are also a frequently considered target for direct tokenisation. However, in many jurisdictions, certain assets can only be issued in specific forms, preventing such native issuance until laws and regulations change.
Indirect tokenisation
The token represents a right to an intermediary structure that holds the actual asset. These asset-backed tokens are simply the combination of securitisation via a fund or Special Purpose Vehicle and direct tokenisation. This model is favoured by startups, as several assets can be tokenised once a legal vehicle is found. The growing ‘real-world assets’ industry leverages these strategies. One can create a series of LLCs to tokenise real estate, or funds in a financial hub to tokenise shares and treasury bonds.
Incomplete tokenisation
The token serves as an interface or a symbolic representation. Its possession does not confer legal ownership of an asset. For example, a bank can offer an investment in gold, with associated tokens that remain legally and operationally dependent on the relationship with the bank. While these tokens can be useful tools, their customised nature requires precise legal arrangements and clear communication between the parties.
Each of these categories has distinct implications. Direct tokenisation mostly changes operational aspects. Indirect tokenisation introduces risks common with securitisation, particularly when exotic structures are used. Incomplete tokenisation offers flexibility but with varying legal protection.
Figure 1. Legal links between the token and the asset
Direct, indirect and incomplete tokenisation
The need for harmonisation
Important nuances exist within and between these categories. A company created to serve as an SPV to tokenise real estate could accrue liability that reduces the value of the tokens, despite no change in the underlying property’s value. Even with direct issuance, certain rights and obligations could be retained independently of the token.
More importantly, tokenised assets often cross borders. A tokenised bond issued in Luxembourg, custodied in Switzerland and traded in Singapore faces several regulatory regimes. Institutions must navigate uncertainty and potentially conflicting legal treatments, from taxation to bankruptcy proceedings. While infrastructures allow global exchanges, laws remain fragmented.
The ongoing transformation offers a window for harmonising legal frameworks. Regional efforts, such as the Savings and Investment Union project of the European Union, could develop capital markets. However, their success requires examining all challenges for cross-border operations in depth, including compliance and procedural requirements. Tokenisation is an opportunity, but not a magical wand, to reduce existing burdens.
Promise and risks of composability
Composability, the ability to combine assets and services via programmability, is a defining feature of tokenised finance. Tokenised assets can be wrapped, pooled or used as collateral for lending, settlement or governance. This composability offers potential for innovation and could facilitate ongoing efforts, such as moving settlement from T+2 to instantaneity and improving central bank money availability.
However, composability also introduces new risks. Each added layer, wrapping, pooling or collateralisation, extends the legal chain that links the token to its underlying value. If any link is legally ambiguous or operationally fragile, the entire structure becomes vulnerable. Therefore, legal clarifications are necessary, such as France’s recent recognition of collateralisation through smart contracts.
The path forward
Tokenisation has the potential to modernise financial infrastructures and enable new forms of investment. Realising these benefits depends less on technological improvements than on legal certainty and clarity. The taxonomy presented here offers a lens to evaluate tokenised assets’ design choices and their associated risks. By distinguishing direct, indirect and incomplete forms, it clarifies strategic options for issuers, highlights regulatory implications for policy-makers and facilitates due diligence for investors.
With this high-level framework, practical questions remain to be answered: What is the preferable legal regime for each issuance? Could we prevent conflicts of law and jurisdiction? How do we evaluate risks precisely and consistently? Answering these questions will require collaboration between legal experts, regulators and technologists across jurisdictions.
Xavier Lavayssière is an expert in digital finance advising governments, central banks and international organisations.
The full academic paper is available in the European Journal of Risk Regulation.
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