The Tokenization Mirage: When Digital Promises Meet Legal Reality

Among the rapidly evolving landscape of financial technology, tokenization has emerged as a buzzword promising to revolutionize capital markets. Companies proudly advertise their “billions in assets tokenized” and dozens security tokens issuers, presenting tokenization as the future of asset ownership and transfer. Their glossy brochures detail sophisticated processes of onboarding, issuance, servicing, and secondary trading, all powered by blockchain technology. Yet beneath this veneer of innovation lies a fundamental legal question that threatens to render much of the enterprise a sophisticated illusion – though perhaps not entirely empty. 

The Promise and Peril of Digital Ownership 

The core issue with tokenization as it currently exists is deceptively simple: there is often no binding legal provision ensuring that the transfer of a digital token automatically transfers the underlying asset the token purports to represent. This creates a worrying disconnect between the digital world of blockchain and the legal reality of asset ownership. 

When an investor purchases a security token, they might reasonably believe they are acquiring ownership of the underlying asset – be it a fraction of real estate, a share in a company, or a debt instrument. The technical reality, however, is that they have merely acquired a digital entry on a distributed ledger. Without robust legal frameworks explicitly connecting these digital representations to their real-world counterparts, token holders may find themselves grasping at digital shadows rather than tangible assets. 

Breaking the Tokenization Fantasy 

The tokenization industry often presents a fantasy where blockchain technology magically solves all the complex legal questions of asset ownership and transfer. This technological determinism – the belief that technology alone can resolve fundamentally legal and social questions – underlies much of the hype around tokenization. 

In reality, blockchain is merely a record-keeping technology. While it can provide a transparent and tamper-resistant ledger of token transfers, it cannot independently confer legal rights to assets without corresponding legal frameworks. The technology can execute a token transfer flawlessly, but it cannot force a court to recognize that transfer as conveying ownership of an underlying asset. 

This disconnect between technological capability and legal reality is not merely a temporary growing pain but a fundamental challenge that requires deliberate addressing. Tokenization platforms that gloss over these legal challenges in their marketing materials do a disservice to investors who may not understand the legal limitations of their token ownership. 

The Dual-Layer Legal Complexity 

Traditional securities have centuries of legal precedent behind them. When you purchase stocks, bonds, or real estate, established legal mechanisms ensure your ownership rights are recognized and enforceable. The transfer of these assets involves legal documentation, registration with relevant authorities, and recognized processes for enforcement. 

Tokenized assets, by contrast, must navigate two separate legal domains simultaneously – traditional securities/real estate regulations and newer digital asset rules. This dual-layer complexity creates precisely the type of legal uncertainty that makes tokenization problematic. In most jurisdictions, the mere possession of a digital token does not automatically confer ownership rights to the underlying asset in the eyes of property law or securities regulations. 

The blockchain may flawlessly record that Investor A transferred a token to Investor B, but this transaction may have limited standing in court if the underlying legal agreement fails to recognize the token transfer as legally binding for the asset itself. This creates a situation where the token risks becoming merely a sophisticated digital artifact – not entirely empty like “cans of fresh air,” but potentially hollow in its enforceability. 

The Evolving Regulatory Landscape 

Many jurisdictions are actively developing frameworks to address these gaps, though progress is uneven and fragmented globally. 

In March 2025, Dubai Land Department launched a pioneering initiative to tokenize property title deeds, becoming the first land registry in the Middle East to implement blockchain-based property tokenization. This initiative is projected to create a AED 60 billion (USD 16.3 billion) tokenized real estate market by 2033, demonstrating official recognition of the legal connection between tokens and property rights. 

The European Union has taken steps to classify certain tokenized assets within existing regulatory frameworks. A real estate token granting investors economic rights is likely classified as a security under MiFID II regulations, bringing it under established legal structures. Regulators increasingly apply the principle of “same activities, same risks, same rules” to digital assets. 

In the UK, the Property (Digital Assets Etc.) Bill explicitly clarifies that “certain digital assets, such as crypto-tokens, can be recognised as property, even if they do not fit into the 2 traditional categories of personal property in English and Welsh law.” This legislative development directly addresses one of the key challenges: explicit legal recognition of digital assets. However, recognizing tokens as property in themselves is distinct from ensuring they confer rights to other underlying assets. 

The Technical-Legal Chasm 

The documentation from tokenization companies illustrate this technical-legal divide perfectly. While it meticulously details the technical aspects of tokenization – KYC processes, smart contract deployment, digital identities, and trading mechanisms – it gives considerably less attention to the critical legal infrastructure required to give these tokens actual meaning. 

The platform emphasizes that “digital securities can be transferred peer-to-peer to another qualified investor, which is impossible in the traditional world,” but offers limited insight into whether such transfers would be recognized by courts or regulatory bodies as constituting actual transfers of the underlying assets. 

The Fragmented Regulatory Environment 

Tokenized assets increasingly operate in a complex and developing regulatory environment that varies significantly across jurisdictions. This inconsistency itself creates substantial legal risks for investors. 

In the US, the regulatory landscape is particularly fragmented, with various bodies claiming jurisdiction: the SEC and state regulators view many digital tokens as securities, the CFTC has deemed virtual currencies to be commodities, and FinCEN may regulate Token Sponsors as money transmitters.  

Most platforms dealing with tokenized assets in the EU must implement robust Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. The EU’s Markets in Crypto-Assets (MiCA) framework provides additional regulations for qualifying tokens. These compliance requirements demonstrate that tokenization is not entirely unregulated, but the regulations primarily focus on preventing illicit activities rather than ensuring the legal connection between tokens and underlying assets. 

Market Growth Despite Legal Challenges 

Despite these legal uncertainties, the tokenized asset market has shown significant growth. According to a 2025 report, the market for tokenized assets across all classes has surpassed $50 billion, with $30 billion stemming from tokenized real estate alone. This growth positions the tokenized market to potentially reach a $2 trillion market cap by 2030, as projected by McKinsey. 

The question remains whether this growth is sustainable without more comprehensive legal frameworks connecting digital tokens to their underlying assets. The risk is that the market could expand rapidly only to collapse when legal challenges inevitably arise, particularly if courts fail to recognize token holders’ rights to underlying assets in disputes. 

Real-World Implications and Industry Solutions 

Consider a scenario where a real estate property has been tokenized, with 100 tokens representing fractional ownership. If the actual property deed remains registered solely in the name of the tokenization platform or the original property owner, token holders may have no legal recourse if: 

1. The property is sold outside the tokenization platform
2. The property is used as collateral for loans without token holders’ consent
3. The tokenization platform files for bankruptcy
4. The original property owner refuses to recognize token holders’ rights

In each case, the blockchain might show clear ownership of tokens, but courts may not recognize these digital entries as conveying any actual interest in the property itself. 

To address these concerns, companies are developing various solutions, though none has yet become a universal standard: 

1. Legal Structuring: Companies like RealToken have developed legal structures to maintain the connection between tokens and real estate, using a Delaware series limited liability company where “ownership of any or all of the RealTokens gives an indirect ownership interest in the property directly owned by the series.” The deed for the real property asset being acquired by a Series lists the Series as the recorded owner of the real property. This creates a clearer legal connection between the token and the underlying asset.
2. Digital Identity Solutions: As noted by Tokeny, linking digital identity to tokens using standards like ERC3643 enables ownership verification and even token recovery if private keys are compromised, addressing some security concerns.
3. Smart Legal Contracts: Some platforms are developing contracts that establish explicit legal connections between token ownership and rights to underlying assets, with provisions for court enforcement.
4. Trust Structures: Creating trust arrangements where assets are held in trust for the benefit of token holders, with trustees legally obligated to recognize token transfers as transfers of beneficial interest.

While these approaches show promise, they remain piecemeal solutions in a market that lacks standardization. Even more concerning, many tokenization platforms fail to implement any of these legal protections, leaving investors exposed to significant risks that may not be fully disclosed in glossy marketing materials. 

The Path Forward: Bridging the Gap 

For tokenization to fulfill its promise, the gap between technical innovation and legal reality must continue to narrow. This requires: 

1. Explicit Legal Recognition: Further legislation that specifically recognizes certain token transfers as legally binding transfers of the underlying assets.
2. Standardized Legal Frameworks: Industry-wide standards for tokenization contracts that clearly define the legal relationship between tokens and their underlying assets.
3. Robust Custodial Solutions: Legal structures ensuring that underlying assets are held in trust for token holders with clear beneficial ownership rights, protected from the insolvency of the tokenization platform.
4. Regulatory Clarity: Continued development of clear guidance from securities regulators on the treatment of tokenized assets and the legal obligations of tokenization platforms, harmonized across major jurisdictions.
5. Enforcement Mechanisms: Practical methods for token holders to exercise their rights over the underlying assets without requiring the cooperation of the tokenization platform, including court-recognized procedures for enforcing these rights.
6. Legal Recourse: Clear pathways for seeking legal remedies when token holders’ rights are violated, including specific causes of action and jurisdictional clarity for disputes.
7. Transparency Requirements: Mandatory disclosures about the legal status of tokens and their connection to underlying assets, ensuring investors understand what they are purchasing.
   

Conclusion: Beyond the Digital Façade 

The tokenized asset market has shown significant growth, surpassing $50 billion across all asset classes, with projections to reach a $2 trillion market cap by 2030. These numbers suggest that tokenization is not merely a mirage but a developing reality with substantial economic impact. 

However, until the fundamental legal connections between tokens and their underlying assets are strengthened and standardized, investors should approach with appropriate caution and due diligence. The gap between technical innovation and legal reality exists but is gradually narrowing as jurisdictions implement new frameworks and apply existing regulations to digital assets. 

The glossy promises of platforms like Tokeny represent what tokenization could be, and increasingly what it is becoming in certain jurisdictions, but not necessarily what it universally is today. Without robust legal foundations to support these technical innovations, many tokenization schemes risk becoming impressive digital façades – sophisticated in their technical execution but potentially hollow in their ability to provide true ownership rights. 

In an age where digital representation increasingly stands in for physical reality, we must ensure that our legal frameworks evolve to recognize these new forms of ownership. The promise of tokenization remains powerful – increased liquidity, reduced transaction costs, and democratized access to various asset classes – but its full realization depends on successfully bridging the technical-legal divide that currently separates digital tokens from the assets they aim to represent. 

For now, investors would be wise to look beyond the slick marketing materials and technological promises to carefully examine the legal structures that connect their tokens to actual assets. Without this due diligence, they risk discovering too late that their sophisticated digital tokens amount to little more than expensive cans of empty air, regardless of how impressive the blockchain infrastructure behind them may be. 

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Robert Nogacki

Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.