RWA functional tokens, stop fooling yourself

Original Author: Shao Jiadian Lawyer

Introduction

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

“We’re 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 hearing these kinds of statements.

But the point is—regulation is never determined by how you “call yourself,” but by “what you are actually doing.”

And a very 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 turned into “security tokens.”

What do you think you’re doing when you call it “RWA functional,” in the eyes of regulators?

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

• Project Party:

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

• Users:

  “I buy your tokens.”

• Actual economic relationships:

  • Funds enter an asset pool controlled by the project party;
  • The project party purchases and operates RWA assets;
  • Profits are distributed proportionally to token holders;
  • At the same time, you give them some “governance rights,” “usage rights,” or “ecosystem rights.”

What you package externally is:

Functionality, governance, ecology, on-chain credentials.

But regulators see four standard securities elements:

1. Investment of funds (pay money to buy tokens)
2. Entry into a common asset pool (you operate RWA collectively)
3. Expectation of profits (dividends, interest, distribution of output)
4. Profits derived from others’ efforts (you operate the assets)

Once these four elements are present, in the US, EU, Switzerland, Hong Kong, and all mature legal jurisdictions, it is directly identified 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 Law 1:

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

This is a name you must remember:

DeFi Money Market (DMM)

How does the project describe itself?

• It’s a “DeFi + real asset yield protocol”
• Underlying assets are: real-world debt claims like auto loans (standard RWA)
• It offers users two types of tokens:
  • 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.

How does the SEC (U.S. Securities and Exchange Commission) describe it?

A one-sentence classification:

Both types of tokens are securities.

The reasoning is very straightforward:

• Funds enter a unified RWA asset pool;
• Profits come from the project’s operation of real assets;
• Investors are passively allocated;
• The so-called “governance rights” do not change its “investment nature.”

The final outcome:

• Unregistered securities issuance;
• The project is fined;
• Investors go through refund procedures.

The cruelest part of cases like this is:

Even if you truly have real assets, real profits, and have put them on the chain,

As long as your structure is “you manage assets, users receive profits,” in the face of securities law, you cannot escape.

Real Case Law 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:

Unicoin case (SEC lawsuit in 2025)

This project’s initial positioning was very standard:

• Issuance of “rights certificates” + future exchangeable RWA tokens;
• Publicly claimed:
• The tokens are backed by real estate + pre-IPO equity;
• It’s “secure, stable, real-asset-backed crypto asset.”

Sounds “compliant,” right?

Doesn’t it resemble the rhetoric in many RWA whitepapers now?

The SEC’s (U.S. Securities and Exchange Commission) determination is just 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”;
• But expecting “future returns from an asset pool”;
• Packaging this expectation into tokens, which is fundamentally still a security.

Why is “functionality” 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, profits, cash flow, returns

Once your RWA token has any of the following:

• Periodic dividends
• Proportional profit sharing
• Corresponding to real asset cash flows
• Redeemable underlying assets under rules

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

• Profit rights certificate
• Asset-backed certificate
• Investment contract
• Security token

This is not abstract reasoning; it is the unified practical logic that global regulators have already 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:

• United States:

All RWA + yield structures will first enter the unregistered securities issuance review path.

• EU (MiCA + securities law):

Any “transferable + profit-bearing + public-facing” tokens will naturally fall under securities regulation.

• Switzerland:

Utility tokens that also have an investment purpose 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 will be under the securities regulatory system.

In other words:

Regulators are not unfamiliar with RWA; they are simply viewing RWA through the lens of “upgraded securities.”

A brutally honest summary:

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

You are not unaware that you are raising funds; you are unwilling to admit that you are conducting a “fundraising that cannot be classified as securities.”

The problem is:

• You can fool the market;
• You can talk about functionality, ecology, and narratives in groups;
• But you cannot fool the legal classification of real regulation.

So, are RWA “only capable of being securities”?

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

Not all RWA must be securities, but as long as you aim for “fundraising from the general public + expecting profits,” you must accept the path of securities regulation.

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

1. Completely de-yielded, retaining only on-chain usage and consumption attributes as “pure functional RWA certificates”;
2. Strictly private placements within qualified investor scope;
3. The “virtual assetization” path represented by Dubai’s VARA — it does not avoid securities but allows RWA tokens with securities attributes to be compliant and reach retail investors under a dedicated virtual asset regulatory system.

Beyond these, any RWA structure that involves “public fundraising + profit sharing + free circulation” will almost inevitably be pulled back into the securities regulatory framework in major jurisdictions.

In addition:

• Targeting retail investors
• Tradeable
• Yield-bearing
• Dividends paid
• Asset pools

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

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

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