How RWA Tokenisation Works

The Tokenisation Stack

RWA tokenisation involves several layers of technology working together. At the bottom is the blockchain — typically Ethereum, a layer-2 like Arbitrum or Polygon, or a permissioned chain like Avalanche Subnet. On top of that sits a token standard that defines how ownership is represented. Above that are smart contracts that manage issuance, transfers, compliance and redemptions. And behind the scenes, a custodian holds the actual physical or financial asset.

Token Standards

The most common token standards for RWAs are:

• ERC-20 — the standard for fungible tokens. Used by BlackRock BUIDL, Ondo OUSG and most tokenised Treasuries. Each token represents an equal share of the underlying asset.
• ERC-3643 — designed specifically for real-world assets. Adds built-in compliance: identity verification, transfer restrictions and whitelisting. Used by Tokeny and several regulated issuers.
• ERC-1400 — security token standard with partition management, allowing different classes of shares within a single token contract.
• ERC-3525 — semi-fungible tokens that can represent different tranches or vintages of the same asset class.

The choice of standard matters. ERC-20 is simple and widely supported but has no built-in compliance. ERC-3643 is more complex but lets issuers enforce KYC/AML checks at the smart contract level — essential for regulated securities.

Custody: Where the Real Asset Lives

A token is only as good as the claim it represents. For tokenised Treasuries, the actual bonds are held by a qualified custodian — typically a regulated trust company or bank. BNY Mellon acts as custodian for BlackRock BUIDL. Ankura Trust serves as administrator and transfer agent for several tokenised funds.

The custody chain works like this:

• The issuer purchases the underlying asset (e.g., US Treasury bills)
• The asset is held in custody by a qualified, regulated custodian
• A smart contract mints tokens representing pro-rata ownership of the custodied asset
• Investors buy and hold the tokens in their wallets
• On redemption, tokens are burned and the investor receives the cash equivalent

Smart Contracts: The Programmable Layer

Smart contracts automate the mechanics of tokenised assets. Key functions include:

• Issuance — minting new tokens when new capital is deposited
• Transfers — moving tokens between wallets, with optional compliance checks
• Yield distribution — automatically accruing and distributing interest or dividends to token holders
• Redemption — burning tokens and returning the underlying value to the investor
• Compliance — checking whitelists, jurisdictions and transfer restrictions before allowing a transaction

For example, BlackRock BUIDL's smart contract on Ethereum automatically accrues daily dividend yield, which is distributed monthly in USDC directly to token holders' wallets. No manual claim process, no intermediary.

Oracles: Connecting On-Chain to Off-Chain

Tokenised RWAs need accurate, real-time data about the underlying asset. Oracles — services that feed off-chain data to smart contracts — play a critical role:

• Chainlink provides price feeds for tokenised assets, NAV data and proof-of-reserve attestations
• Chronicle (formerly MakerDAO's oracle) provides custom data feeds for specific RWA protocols
• Proof-of-reserve audits verify that the tokens in circulation are fully backed by the custodied assets

Without reliable oracles, tokenised assets could trade at the wrong price or — worse — be backed by assets that don't exist. The proof-of-reserve concept has become an industry standard since the FTX collapse.

Settlement: Why Speed Matters

Traditional securities settle in T+1 or T+2 — one to two business days after the trade. Tokenised assets settle in the time it takes to confirm a blockchain transaction: seconds to minutes on Ethereum layer-2s, under a minute on Solana. This has practical implications:

• Instant settlement enables same-day collateral pledging in DeFi protocols
• Reduced settlement risk — no counterparty exposure during the settlement window
• 24/7 markets — tokenised assets can be traded on weekends and holidays
• Lower operational costs — no clearing house, no transfer agent intermediary for each trade

Permissioned vs Permissionless

Some RWA tokens are permissionless — anyone with a wallet can buy and transfer them (e.g., PAX Gold). Others are permissioned — only whitelisted, KYC-verified wallets can hold or receive them (e.g., BlackRock BUIDL, most tokenised securities). The permissioned approach is necessary for regulatory compliance but introduces friction: investors must complete identity verification before they can transact.

A hybrid model is emerging where compliance checks happen at the wallet level via attestations (e.g., ENS Domain profiles or Privado ID verifiable credentials), allowing transfers to any compliant wallet without the issuer needing to pre-approve each recipient.

The Bottom Line

RWA tokenisation works by combining blockchain token standards, regulated custody, smart contract automation and oracle data feeds. The technology is mature enough that the world's largest asset manager — BlackRock — has deployed billions through it. Understanding how the stack fits together is essential for evaluating RWA investment opportunities and their risks.

Learn More

• What Are Real-World Asset Tokenisation? — start here if you're new
• Tokenised Treasury Bills — the biggest RWA category
• Risks of RWA Tokenisation — what can go wrong

Nothing on this site is financial advice. All content is for educational purposes only. Always do your own research and consult a qualified financial adviser before making investment decisions. Back to all guides