This article aims to provide clarity on the various tokenization structures available to asset managers, financial institutions, and fund managers. Understanding these structures helps you navigate the evolving landscape of digital assets and choose the model that best aligns with your business goals, investor base, and regulatory obligations.

What Are Tokenization Structures?

Tokenization structures refer to the legal frameworks used to represent ownership or interest in an underlying asset through digital tokens on a blockchain. These tokens typically represent shares, debt, or other rights, and are classified as security tokens in many jurisdictions. Tokenization structures must be designed with legal and regulatory compliance in mind, ensuring that investors’ rights are enforceable and that the tokens are legally recognized.

In essence, the structure determines how the tokenized asset is organized, who manages it, and how it interacts with existing financial regulations.

Four Common Tokenization Structures

1. Tokenized SPVs (Special Purpose Vehicles)

What It Is:
A tokenized Special Purpose Vehicle (SPV) is one of the most common structures used in tokenization. The SPV acts as an intermediary entity that holds the asset and issues tokens representing fractional ownership or interests in that asset. For example, a real estate property could be placed in an LLC, and investors would receive tokens representing shares in that LLC.

How it works (from a high-level perspective):

• The SPV is created to own the underlying asset (e.g., a real estate property).
• Tokens are issued to represent fractional ownership of the asset held by the SPV.
• The asset’s ownership is tracked through blockchain, making it easier to transfer and trade tokens.
• Investors hold tokens that represent their share of the asset, and rights (such as dividends or capital gains) are tied to these tokens.
• Smart contracts automate token transfers and the distribution of returns to investors.

Why Choose This Structure:

• Regulatory Clarity: The SPV structure allows tokenized assets to be treated as traditional securities. This ensures compliance with established securities laws (e.g., in the U.S. through Reg D private placements or Reg S for international investors).
• Familiar Legal Framework: Many financial institutions are already familiar with the SPV structure, making it easier to integrate with existing systems and processes.
• Investor Protection: Tokenized SPVs offer clear ownership rights to token holders, ensuring they are protected under the same legal principles as traditional investments.
• Bankruptcy Remote: The SPV is a separate legal entity which means that the assets held by the SPV are isolated from the insolvency risk of affiliated entities, meaning creditors of affiliated entities cannot claim against the assets held in the SPV.

2. Tokenized Funds (Feeder Funds)

What It Is:
Tokenized feeder funds involve pooling capital from multiple investors and investing it into a larger fund. The feeder fund issues tokens to represent the ownership stakes of the investors, who hold digital shares in the fund. These funds could be equity, fixed-income, or even commodity-based.

How it works (from a high-level perspective):

• The fund pools capital from multiple investors and creates a token that represents fractional ownership.
• Tokens are issued to investors in exchange for their capital.
• The fund manager invests the pooled capital into various assets (e.g., equities, real estate).
• Returns (e.g., dividends or interest payments) are distributed to investors as per their token holdings.
• Blockchain ensures transparency, tracking ownership and automatically distributing earnings.

Why Choose This Structure:

• Broad Market Appeal: Tokenized feeder funds allow smaller investors to access larger, traditionally exclusive funds by lowering the minimum investment thresholds.
• Fractional Ownership: By tokenizing the fund, it becomes possible to issue smaller denominations of ownership, which can democratize access to high-value assets.
• Regulatory Compliance: This structure often complies with existing fund regulations, such as MiFID II in Europe or the Securities Act of 1933 in the U.S., allowing the tokenized fund to be issued under appropriate legal frameworks.

3. Tokenized Debt Instruments

What It Is:
Tokenized debt instruments, such as bonds or promissory notes, are digital representations of debt issued by a borrower. These tokens represent the right to receive periodic interest payments and principal repayment. The issuer of the tokenized debt typically creates a SPV to manage the debt and issue tokens to investors.

How it works (from a high-level perspective):

• The debt (e.g., bonds) is tokenized, and digital tokens are issued to represent ownership in the debt.
• Investors buy tokens to gain exposure to the debt instrument, which includes periodic interest payments and repayment of the principal.
• Smart contracts manage the payment of interest and principal to token holders.
• Blockchain ensures transparency by maintaining an immutable record of all transactions, including interest accrual and redemption.

Why Choose This Structure:

• Efficient Settlements: By tokenizing debt, financial institutions can reduce settlement times and lower operational costs by removing intermediaries.
  Liquidity: Tokenized debt can be traded on digital exchanges, offering enhanced liquidity compared to traditional debt instruments.
• Regulatory Compliance: Debt tokens can be structured to comply with securities laws, such as Reg D or Reg S in the U.S., or MiFID II in the EU, ensuring investors’ rights are legally protected.

4. Direct Asset Tokenization (On-Chain “Wrapped” Assets)

What It Is:
Direct asset tokenization refers to the creation of tokens that directly represent ownership in an underlying asset, such as real estate or commodities. For example, a piece of property could be tokenized, with each token representing a share of ownership in the property itself.

How it works (from a high-level perspective):

• The asset (e.g., real estate or commodities) is tokenized by creating digital tokens that represent fractional ownership.
• These tokens are recorded on a blockchain, ensuring transparency and security of ownership.
• Token holders can buy, sell, or trade their tokens, with each token representing a share in the underlying asset.

Pros and Cons:

• Simplicity: Direct tokenization can reduce the need for intermediaries (e.g., SPVs or funds), offering a straightforward way to represent ownership on-chain.
• Transparency: The use of blockchain ensures transparent ownership records and provides an immutable audit trail.
• Legal Challenges: This structure can face complexities depending on the asset type and jurisdiction. For instance, directly tokenizing real estate might require adherence to property laws and securities regulations if the tokens are considered investment instruments. Ensuring the legal transferability of the underlying asset through the transfer of the token is crucial.

Conclusion: Choosing the Right Tokenization Structure

The choice of tokenization structure is critical to the success of any tokenization initiative. Financial institutions must consider factors such as regulatory compliance, investor protection, liquidity, and operational efficiency. While tokenized SPVs and feeder funds offer clear legal structures and are well-established in the market, tokenized debt instruments and direct asset tokenization provide new opportunities with their own set of challenges. 

For financial institutions considering tokenization, partnering with a regulated platform like InvestaX ensures compliance with local regulations, access to a wide range of institutional-grade assets, and robust investor protections. For tokenization enquiries, please contact us here.

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Read next: 

• Legal Compliance Checklist for The Tokenization of Real World Assets (RWAs). 
• Real World Asset Tokenization - Is a License Needed?

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