Original Author: Lawyer Shao Jiadian

Introduction

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

“We are not a security; we are just a functional RWA token.”

“We are just putting real assets on the blockchain, with no financing attributes.”

“We are a utility token, not a security token.”

To be honest, I have become numb to such statements.

But the problem is—regulation is never defined by how you "label 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 cases in major regulatory jurisdictions worldwide.

In this article, I will do just one thing:

Without abstract legal provisions or vague theories, I will use real regulatory cases to show you how "functional RWA tokens" are gradually classified as "security tokens."

What do you think you are doing as "RWA functional," but what does regulation see you doing?

Let’s clarify a bit. The real structure of most so-called "functional RWA tokens" in reality is as follows:

• Project Party:

“I am putting real assets like mining machines, computing power, power stations, charging piles, real estate, and accounts receivable on the blockchain.”

• Users:

“I buy your tokens.”

• Actual Economic Relationship:
• Money enters an asset pool controlled by the project party;
• The project party purchases and operates RWA assets;
• Profits are distributed to token holders proportionally;
• At the same time, you give them some "governance rights," "usage rights," and "ecological benefits."

What you present externally is:

Functionality, governance, ecology, on-chain certificates.

But what regulators see are four standard elements of securities:

1. Investment of funds (spending money to buy tokens)
2. Entry into a common asset pool (you operate RWA uniformly)
3. Expectation of returns (dividends, interest, profit distribution)
4. Returns come from the efforts of others (you are operating the assets)

Once these four points are established, in the U.S., EU, Switzerland, Hong Kong, and all other mature jurisdictions, they will be directly classified as: Investment Contract = Security.

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

Real Case One:

“RWA + Governance Token” was directly punished by the SEC as “security issuance”

This is a name you must remember:

DeFiMoney Market (DMM)

How did the project present itself?

• It is a “DeFi + real asset income protocol”
• The underlying assets are: auto loans and other real-world debts (standard RWA)
• It offers users two types of tokens:
• One is a “fixed income token” (promising an annualized return of 6.25%)
• The other is a “governance token DMG,” claimed to have “governance + ecological functions”

What the project said was:

One is an income tool, and the other is a functional governance token.

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

In one sentence:

Both types of tokens are securities.

The reasoning is very straightforward:

• Funds enter a unified RWA asset pool;
• Returns come from the project party's operation of real assets;
• Investors are merely passively waiting for distribution;
• The so-called “governance rights” do not change its “investment nature.”

The final result:

• Unregistered securities issuance was established;
• The project party was fined;
• Investors entered the refund process.

The most brutal aspect of such cases is:

Even if you are genuinely dealing with real assets, genuinely have returns, and genuinely put them on-chain,

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

Real Case Two:

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

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

Unicoin Case (SEC lawsuit in 2025)

The initial positioning of this project was very standard:

• Issuing so-called “rights certificates” + future redeemable RWA tokens;
• Publicly claiming:
• Tokens are backed by real estate + Pre-IPO equity;
• It is a “safe, stable, crypto asset backed by real assets.”

Doesn’t it sound very “compliant”?

Doesn’t it resemble the language in many current RWA white papers?

The SEC’s (U.S. Securities and Exchange Commission) determination was summed up in one sentence:

This is a typical case of unregistered securities issuance + fraudulent asset-backed promotion.

The core logic is very harsh:

• Investors are not buying “usage rights”;
• But rather an “expectation of future returns from an asset pool”;
• You packaged this expectation into a Token, which is still essentially a security.

Why does the concept of “functional” particularly not hold up 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, profits

Once your RWA token possesses any of the following:

• Regular dividends
• Proportional profit distribution
• Corresponding cash flow from real assets
• Redeemable underlying assets according to rules

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

• Certificate of profit rights
• Asset-backed certificate
• Investment contract
• Security token

This is not abstract reasoning; this is the logic that global regulators have already uniformly practiced.

A reality you must face:

In the future, RWA tokens will only become “more like securities”

This is not a trend judgment, but a fact that has already occurred:

• United States:

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

• European Union (MiCA + Securities Law):

Any that is “transferable + has income attributes + is aimed at the public” naturally falls under securities regulation.

• Switzerland:

Utility Tokens that “also have investment purposes” are directly treated as securities.

• Hong Kong:

As long as it constitutes a “Collective Investment Scheme (CIS),” regardless of whether it is a Token, it will still enter the securities regulatory system.

In other words:

Regulators do not misunderstand RWA; they are looking at RWA entirely through the lens of “upgraded securities.”

A brutally honest summary

You may not like this statement, but it applies to the vast majority of “functional RWA token projects”:

You are not unaware that you are financing; you are just unwilling to admit that you are conducting a financing that cannot be done as a security.

The problem is:

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

So does RWA “only have to be securities”?

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

Not all RWA must be made into securities, but as long as you want to “raise funds from the public + provide expectations of returns,” you must accept the straightforward path of securities regulation.

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

First, completely depersonalize, retaining only the “pure functional RWA certificate” with on-chain usage and consumption attributes;

Second, strictly confined to the range of qualified investors in private placement RWA;

Third, the “securities logic virtual assetization” path represented by Dubai VARA—this does not avoid securities but allows RWA Tokens with securities attributes to comply under a specialized regulatory system for virtual assets, reaching retail investors.

Apart from this, any RWA structure that involves “raising funds from the public + has profit distribution + is freely tradable” will almost inevitably be pulled back into the securities regulatory framework in major global jurisdictions.

In addition:

• Aimed at retail investors
• Tradable
• Has returns
• Has dividends
• Has an asset pool

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

One last sentence for all projects struggling with “functional RWA”:

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

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