Tokenisation of Real-World Assets & AFSL Legal Considerations for the Future of Finance

Introduction

Real-world asset (RWA) tokenisation is the process of converting rights to physical or traditional financial assets into digital tokens on a blockchain. This innovation is poised to reshape global financial markets by enhancing liquidity, transparency, and accessibility for traditionally illiquid assets like real estate, private equity, and commodities.

As the tokenisation of RWAs moves beyond initial hype, the focus has shifted to the critical need for robust legal structuring and regulatory compliance. For issuers in Australia, navigating this complex landscape is paramount, as the rights attached to a token—not the technology itself—determine its classification as a financial product under the Corporations Act 2001 (Cth), often triggering significant Australian Financial Services Licence (AFSL) obligations.

Legal Nature of Tokenised Real-World Assets

Applying ASIC’s Look-Through Approach to Tokenised Assets

Australian regulators, including the Australian Securities and Investments Commission (ASIC), apply a “look-through” or “substance over form” approach when determining the legal status of a tokenised RWA. In practice, this means the technological “blockchain wrapper” is set aside in favour of examining the underlying economic substance—and, in particular, the specific rights the token grants to its holder. Ultimately, the legal classification hinges not on the digital format itself, but on the actual rights and benefits attached to the token.

This analysis is critical for assessing whether a tokenised asset qualifies as a financial product under the Corporations Act 2001 (Cth). Regulators will scrutinise all related documents—such as white papers and terms of service—to understand precisely which rights are being offered. Key rights that influence this classification include:

• Entitlements to income streams, such as rental yield or dividends 
• A share in the profits or sale proceeds of the underlying asset 
• Voting rights in decisions concerning the asset or its management 
• Ownership interests in the entity that holds the asset

Tokenised RWAs as Managed Investment Schemes (MIS)

A tokenised RWA is highly likely to be classified as an interest in a Managed Investment Scheme (MIS) if it meets the criteria set out in section 9 of the Corporations Act 2001 (Cth). This outcome—often referred to as the “fractionalisation trap”—arises when an arrangement exhibits three key features:

Feature	Description
Pooling of Contributions	Investors contribute money or assets that are combined to pursue a common enterprise (e.g., funds from multiple token buyers are aggregated to purchase a single property).
Common Enterprise	Contributors expect to receive financial benefits, such as profits, rental income or capital gains, from the scheme.
Lack of Day-to-Day Control	Investors do not manage the day-to-day operations; instead, a third-party manager or issuer oversees the underlying asset.

For instance, consider a developer who places a commercial building into a Special Purpose Vehicle (SPV) and issues tokens granting holders a share of the rental income. This structure is functionally a pooled investment and would therefore be regulated as an MIS. Consequently, the issuer must be a licensed Responsible Entity, and the scheme requires a formal constitution—each imposing significant compliance obligations.

SPV Structuring & Avoiding the Fractionalisation Trap

Understanding the Fractionalisation Trap

The central legal hazard in RWA tokenisation is often called the “fractionalisation trap.” This trap involves the unintentional creation of an unregistered MIS. The risk emerges when an asset is fractionalised into digital tokens that grant investors rights to a share of the income, such as rental yield, or proceeds from the asset’s sale. Under section 9 of the Corporations Act 2001 (Cth), such an arrangement is highly likely to be classified as an MIS.

An MIS is defined by three key elements, all of which are typically present in fractionalised RWA models that offer financial returns:

• Pooling of contributions: Investors’ funds are combined to acquire or manage the underlying asset.
• Common enterprise: Token holders share the objective of generating a financial benefit or return from the scheme.
• Lack of day-to-day control: Investors do not have daily operational control over the management of the asset.

For instance, if an SPV owns a building and issues tokens entitling holders to rental distributions, the structure is functionally a pooled investment. This triggers the full scope of MIS regulations, which includes:

• The requirement to appoint a licensed Responsible Entity (RE)
• The need to establish a formal constitution for the scheme
• The obligation to register the scheme with ASIC if it is offered to retail investors

Contrasting Pooled Investments with Digital Twin Models

In contrast to the pooled investment structure that defines an MIS, a “digital twin” model may avoid this classification. This structure involves creating a token that acts as a direct representation or receipt for a specific, identifiable, and un-pooled asset. The key distinction is the absence of pooling; each token corresponds to a unique, segregated asset rather than a share in a common pool.

A clear example is the tokenisation of precious metals:

Model Type	Example & Likely Classification
Pooled Investment	A token representing a generic share of a vault containing many gold bars would likely be classified as an MIS.
Digital Twin	A token representing ownership of a single, uniquely numbered gold bar held in a specific, segregated package may be treated as a bailment or safekeeping arrangement.

Because there is no pooling of contributions to acquire an interest in a common enterprise, the structure may fall outside the MIS definition.

While this digital twin model can circumvent MIS classification, it does not escape regulation entirely. Such an arrangement is often considered a facility for providing custody of assets. Consequently, it may be subject to different regulatory obligations, including the licensing requirements for a Tokenised Custody Platform (TCP) under the Australian government’s Digital Asset Platform (DAP) reforms.

Asset Custody & Tokenised Platform Reforms

Physical Asset Custody Requirements

The custody of tokenised RWAs involves two distinct layers: safeguarding the physical asset and securing the digital token. When a tokenised asset is classified as an MIS, the RE is legally obligated to protect the scheme’s assets. These duties are detailed in ASIC Regulatory Guide 133 (RG 133), which sets minimum standards for holding assets.

Under RG 133, the RE holds ultimate responsibility for the safekeeping of the underlying asset. If a third-party physical custodian is used, such as a vault operator for gold, the RE must:

Requirement Category	Specific Obligation
Custodian Vetting	The RE must assess the third-party custodian’s capacity to hold the asset securely.
Legal Documentation	The custody arrangement must be documented in a legally enforceable agreement.
Asset Segregation	The physical asset must be clearly segregated and identified as belonging to the scheme members, keeping it separate from the custodian’s own balance sheet.
Investor Protection	Controls for reconciliation and insurance must be in place to protect investors.
Insolvency Protection	Measures must be taken to ensure the underlying asset is insulated from the custodian’s or issuer’s insolvency risk.

The updated RG 133, revised in December 2024, formally extends these minimum standards to the custody of crypto-assets, reinforcing the need for robust governance and security.

Impact of Digital Asset Platform Reforms on RWA Issuers

The Australian government’s introduction of the Corporations Amendment (Digital Assets Framework) Bill 2025 has created a new, regulated financial service category that directly impacts RWA issuers. This legislation defines a TCP as a facility where an operator holds a real-world asset on trust for a token holder and creates a digital token representing that asset.

This reform clarifies that holding an underlying asset to back a digital token is now a regulated financial service. Consequently, any entity operating a TCP must obtain an AFSL with the specific authorisation to provide this custodial service.

This creates a critical distinction for businesses in the RWA space:

Entity / Role	Regulated Activity & AFSL Requirement
Issuer	An issuer of a tokenised asset that qualifies as a financial product (like an MIS) is dealing in that product and requires an AFSL for that activity.
Platform Operator	The platform that creates the digital token and holds the underlying physical asset is providing a custodial financial service and requires its own Tokenised Custody Platform (TCP) authorisation.

While some issuers may build their own licensed TCP, many will likely engage a third-party provider for this specialised, regulated function.

Managing the On-Chain & Off-Chain Settlement Gap

Legal Ownership Risks from Settlement Gaps

A significant compliance risk in RWA tokenisation arises from the settlement lag between on-chain and off-chain systems. While a digital token can be transferred instantly on a blockchain, the corresponding legal title—especially for assets like real estate—may take weeks to be updated in an official off-chain registry, such as a state-based Land Registry.

This discrepancy creates a “legal gap” or “mapping problem,” leading to a period of ownership uncertainty. During this interim period:

• The on-chain record of ownership (the token holder) does not align with the off-chain legal record (the registered titleholder).
• The legal owner recorded in the government registry, often the SPV, may not be the same as the beneficial owner who holds the token.

This ambiguity can create disputes and complicates the enforcement of rights until the traditional legal transfer is fully executed.

Bridging the Gap: Blockchain Technology & Land Registries

To mitigate the risks associated with the settlement gap, robust legal frameworks must be established within the scheme’s governing documents. These mechanisms contractually bridge the divide between the instant finality of blockchain technology and the slower processes of traditional registries.

Key legal strategies to manage this gap include:

Legal Strategy	Description / Function
Irrevocable Instruction	The scheme’s constitution can define a token transfer as a legally binding instruction to update the off-chain register and execute the legal title transfer.
Trust Structures	The RE or SPV can hold the legal title as a bare trustee for the buyer during the settlement lag until off-chain registration is complete.
Contractual Obligations	The issuing SPV can be contractually obligated to perform all necessary off-chain legal steps to ensure the official title reflects the on-chain ownership record.
Digital Registry Integration	Platforms can integrate with e-conveyancing systems (e.g., PEXA) to synchronise financial settlement with title lodgement in near real-time.

Wholesale & Retail Distribution Strategies 

Retail Investor Compliance & DDO

Offering tokenised RWAs to retail clients in Australia triggers significant and continuous compliance obligations under the Corporations Act 2001 (Cth). This pathway is subject to the comprehensive Design and Distribution Obligations (DDO) regime, which is guided by ASIC Regulatory Guide 274 (RG 274). The DDO framework is designed to ensure that financial products are targeted and sold to appropriate consumer groups.

Issuers and distributors must adhere to specific requirements when engaging with the retail market. These requirements include:

Requirement	Description
Product Disclosure Statement (PDS)	A mandatory disclosure document must be prepared, outlining the product’s features, benefits, risks, and fees to help retail clients make informed decisions.
Target Market Determination (TMD)	The issuer must create a TMD defining the specific class of retail customers for whom the tokenised asset is appropriate, based on their characteristics, risk tolerance, and objectives.
Distributor Obligations	The distributing entity must take reasonable steps to ensure sales are consistent with the TMD and report any significant dealings outside the target market to the issuer.

Wholesale Distribution Pathways for Tokenised Real-World Assets

For many issuers of tokenised RWAs, limiting distribution to wholesale clients is the preferred strategy. This approach significantly reduces the regulatory burden by leveraging exemptions available under the Corporations Act 2001 (Cth).

By focusing on sophisticated or professional investors, projects can bypass the complex and costly requirements associated with public retail offerings. The primary advantage of a wholesale-only strategy is the exemption from several key retail-focused regulations. This pathway offers greater legal certainty and lower compliance friction because it avoids the need to:

• Prepare a full PDS.
• Create and adhere to a TMD.
• Comply with the broader DDO regime.

Conclusion

Successfully launching a tokenised RWA in Australia requires a “licensing first, technology second” approach, as the rights attached to a token determine its classification as a financial product, often an MIS. Building a compliant business model involves navigating the complex AFSL regime, dual-layer custody rules under ASIC RG 133, new TCP reforms, and strict distribution laws.

To ensure your RWA tokenisation project is structured for success from the outset, contact our expert AFSL lawyers at AFSL House for specialised guidance. Our team provides the trusted expertise needed to navigate the AFSL framework, manage compliance obligations, and build a sustainable business model for the future of finance.

Frequently Asked Questions (FAQ)