The self-deception of RWA functional tokens: the true face in the eyes of regulators

Most RWA project teams almost always blurt out the same words when consulting a lawyer for the first time:

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

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

“We are utility tokens, definitely not security tokens.”

These statements are no longer fresh. But the problem is—regulators never determine based on what you call yourself, but on what you are actually doing. More critically, the once blurry gray area of “functional RWA” is being gradually squeezed and eliminated across major regulatory jurisdictions worldwide.

This is not a prediction; it is a reality already established through case law.

Projects say one thing, but what do regulators see you doing?

Let’s peel back the phenomenon. The vast majority of so-called “functional RWA tokens” have an actual economic structure roughly as follows:

Project team’s claim: “I put real assets like mining rigs, power plants, real estate, accounts receivable, etc., on the blockchain via smart contracts.”

User interaction: “I buy your tokens.”

Underlying real economic relationship:

• User funds flow into an asset pool controlled by the project team
• The project team uses these funds to purchase and operate RWA assets
• Income generated is distributed proportionally to token holders
• The project further adds “governance rights,” “usage rights,” and other packaging

On the surface, you’re talking about functionality, ecology, and on-chain certificates. But in the eyes of regulators, this structure contains four key elements.

Four key elements that determine the “securities” status

Regulators in mature jurisdictions like the US, EU, Switzerland, and Hong Kong have long established a set of standards: if a token structure simultaneously satisfies the following four points, it will be directly classified as an Investment Contract, i.e., a security.

1. Investment of funds—users pay money to obtain the token.

2. Common asset pool—funds from multiple investors are pooled together and managed collectively by the project.

3. Expectation of profits—users have a reasonable expectation of returns when purchasing the token.

4. Profits derived from the efforts of others—these returns mainly depend on the professional operation of the project team, not on the users’ own actions.

Once these four points are all met, regulators will no longer consider your self-proclaimed “functional” or “governance” token, but will treat it directly under the full securities regulatory framework. Whether you call it RWA, Token, or NFT, changing the name does not alter the legal conclusion that “it is a security.”

DMM case: governance tokens also can’t escape the “security” label

The 2023 DeFi Money Market (DMM) case is a classic counterexample. The project’s design at the time appeared quite “reasonable”:

• Underlying assets were standard real-world debt claims, including auto loans, etc.
• Two types of tokens issued: a “fixed income token” (promising an annualized 6.25% return) and a “governance token” DMG
• Publicity emphasized that DMG has governance functions and ecological attributes, a typical functional token

At first glance, this design tried to circumvent securities regulation by separating “income functionality” and “governance functionality.”

But the SEC’s ruling was straightforward: both tokens are unregistered securities.

The regulator’s reasoning was blunt:

Funds flow into a unified asset pool via these two tokens, and user returns depend entirely on the project team’s professional management of the underlying RWA assets. The so-called “governance rights” do not change the essence of these tokens—they are investment contracts representing expectations of future returns from the asset pool.

The harshest part of this case is: even if the project truly owns real assets, generates real income, and the tokens are genuinely on-chain, as long as the structure is “the project manages the assets, users passively earn returns,” there is no way to escape the classification as securities.

Unicoin case: asset backing actually reinforces securities features

Let’s look at a more current market example.

The SEC’s 2025 lawsuit against the Unicoin project can be seen as a prototype for many existing RWA projects. Its positioning is very standard:

• The project claims the tokens are backed by real estate and pre-IPO equity
• Emphasizes that these are “safe, stable, real-asset-backed crypto assets”
• States that they are “rights certificates,” not securities

Such descriptions are common in current RWA whitepapers.

But the SEC’s conclusion was very direct: this is a classic unregistered securities issuance and fraudulent asset-backed promotion.

What is the regulator’s logic? Investors are not buying “usage rights certificates,” but rather expectations of future income from an asset pool. No matter how you package this expectation or what technical means you use to turn it into a token, its essence remains a security—a financial instrument representing investment income rights.

In fact, the more you emphasize “real asset backing,” the more you reinforce its securities characteristics. Because asset backing inherently involves cash flows, return expectations, and an asset pool—these are the typical features of securities.

The inherent contradiction between functional tokens and RWA

It’s necessary to acknowledge a difficult reality: “functional tokens” and “RWA” are conceptually mutually incompatible in terms of economic attributes.

What do functional tokens emphasize?

• Usage rights
• Consumptive nature
• Access permissions
• Governance participation

What do RWA tokens emphasize?

• Asset attributes
• Income attributes
• Cash flows
• Return mechanisms

Once your RWA token exhibits any of the following features—

• Regular dividends to holders
• Proportional distribution of underlying asset income
• Cash flows from real assets
• Redeemability or traceability of underlying asset value according to rules

—you cannot call it a “functional token.” In the eyes of regulators, it has already become:

• A rights certificate for income
• An asset-backed certificate
• An investment contract
• A security token

This is not just theoretical deduction; it is a logic repeatedly proven through real cases worldwide.

Global regulatory consensus: RWA is being “securitized”

This is no longer a matter of a single country’s attitude but a consensus across major jurisdictions:

In the US: All RWA tokens involving profit distribution are likely to face “unregistered securities issuance” scrutiny and penalties. Cases like DMM and Unicoin are clear evidence.

In the EU: MiCA regulations explicitly state that tokens “transferable, with investment return attributes, aimed at the public” fall directly under securities regulation. This means most RWA tokens are inherently within securities scope.

In Switzerland: The classification standards for Utility Tokens have been adjusted—if a token “also has an investment purpose,” it will be directly treated as a security, regardless of its functional attributes.

In Hong Kong: The regulatory standard is even more direct—if it constitutes a “Collective Investment Scheme (CIS),” regardless of technical form, it falls under securities regulation. The multi-investor, asset-pooling, income-distributing features of RWA tokens almost naturally meet the CIS definition.

From another perspective: regulators are not unaware of RWA; quite the opposite, they see RWA as a “securities upgrade”—regulating it with a stricter, more modern securities law framework.

Only three real paths forward

At this point, a very pragmatic truth must be stated. Not all RWA need to be securities; but if you want to “raise funds from the public” and “offer returns,” you must accept the securities regulatory path—this is a matter of survival, not choice.

From global practice, currently, RWA projects that want to avoid full securities law regulation have only three theoretical options:

First path: Completely de-income-ify

Design a purely functional RWA instrument that only represents on-chain usage rights or consumptive attributes, with no participation in income distribution or asset pool returns. But this sacrifices the core value proposition of RWA—participation in real asset income. This route is theoretically compliant but practically almost impossible.

Second path: Limit to qualified investors

Issue RWA tokens strictly to qualified investors (institutions or high-net-worth individuals) via private placements, avoiding public fundraising. This can trigger “qualified investor exemption” clauses in many regulations. The downside is significantly reduced market size and liquidity.

Third path: Embrace specialized regulatory frameworks

Adopt jurisdictions like Dubai’s VARA (Virtual Asset Regulatory Authority), which explicitly allow RWA tokens to exist as securities but under a dedicated virtual asset regulatory system. This route appears to “avoid securities regulation,” but in essence, it accepts the securities nature within a tailored framework—it’s not about escaping, but about adapting to a new, more suitable regulatory environment.

Beyond these, any RWA model that:

• raises funds from retail investors
• is freely tradable
• implies or promises returns
• distributes underlying asset income
• pools funds into a single asset pool

—almost no mainstream jurisdiction leaves room for “functional exemptions.” Being pulled back into securities regulation is not a risk; it is a highly predictable reality.

An unavoidable multiple-choice question

Finally, a blunt truth: for many projects tangled in “functional RWA,” the choice is not between “functional” or “securities,” but between “long-term compliance” or “short-term luck.”

You can tout your functionality and ecosystem narrative in the market and social media, but you cannot fool the actual regulatory classification. The projects behind DMM and Unicoin initially believed their designs were “smart,” but the result was only direct regulatory crackdown.

For those still insisting “We are just functional RWA,” a painful question: if you are truly just a functional certificate, why do you need to design a profit distribution mechanism? Why do investors need to pay money for it? Why does that money enter an asset pool controlled by you?

The answer is simple: because you know that investors’ real expectation is returns. And this expectation is the core reason for securities classification.

Therefore, rather than deluding yourself with “functional attributes,” face a more realistic choice—either fundamentally change your business model or accept the full securities regulatory framework. In the global mainstream legal practice, this is no longer a gray area but a clear dividing line.

Your choice determines whether your project can survive long-term.