Introduction: DeFi, RWA & TradFi Structuring Solutions

Decentralized Finance (DeFi) is evolving beyond purely on-chain financial instruments, giving rise to a new category of so-called Real-World Assets (RWA). This tokenization trend involves integrating off-chain collateral and yield-bearing instruments – such as treasury bills, investment fund units, private credit, securities, and other financial products – into blockchain-based financial ecosystems. While this expansion increases the scope and utility of the DeFi ecosystem, it also introduces significant centralization risks.

Web3 and DeFi principles emphasize decentralization, non-custodial structures, trustlessness, and permissionlessness. However, RWA projects inherently rely on centralized counterparties, since someone has to administer the tokenized underlying asset in the real world. This introduces trust and counterparty risks, legal complexities, and financial vulnerabilities that are absent in fully on-chain protocols.

Despite these challenges, the risks associated with tokenizing RWAs are not novel. The structured finance industry has long dealt with similar issues and has developed robust solutions to address and efficiently manage them. By applying structured finance solutions in tokenization, the RWA projects can mitigate legal risks, improve transparency, and ensure the security and efficiency of RWA-based financial instruments in their decentralized systems.

Key Legal Risks of RWAs in DeFi

First, let’s take a closer look at these risks. The integration of real-world assets into DeFi challenges the fundamental principles of decentralization, as any connection with off-chain elements is neither decentralized nor permissionless and inherently requires trust.

First of all, this introduces the counterparty risk, since RWA-based instruments depend on centralized entities responsible for their issuance and performance. The issuer or holder of an RWA-backed instrument may default or become insolvent, exposing investors to unforeseen losses. Similarly, custodians entrusted with holding off-chain assets introduce a layer of dependency that contradicts DeFi’s core principles of a non-custodial, trustless financial system. Furthermore, underwriting entities and financial intermediaries responsible for structuring and managing these RWA instruments may fail to perform as expected, creating additional vulnerabilities.

Beyond counterparty risk, bankruptcy and legal risks arise due to the involvement of multiple centralized players. If any key participant – whether the issuer, custodian, or other – becomes insolvent, enforcing claims over real-world collateral may become legally complex or even impossible. Unlike on-chain transactions, which are governed by smart contracts, RWA-related disputes often require intervention from traditional legal systems, creating uncertainty regarding asset recovery and investor protections.

Another significant challenge is the risk of rehypothecation and misuse of funds. In traditional finance, intermediaries frequently reuse assets as collateral for additional transactions, a practice that can introduce hidden leverage and systemic risks. If custodians or financial entities involved in RWA management engage in such practices, DeFi participants may unknowingly be exposed to cascading failures. Additionally, custodians may commingle funds, creating liquidity mismatches that could hinder withdrawals or redemptions.

Underlying all these risks is a fundamental trust issue. In a traditional DeFi system, reliance is placed on code execution rather than human discretion. However, in RWA-based projects, the need to rely on centralized players raises the bar significantly for evaluating and selecting these entities. These projects must be assessed based on business reputation, regulatory authorizations, financial standing, and operational resilience. Investors and protocol users now need to consider whether a custodian has proper regulatory approvals, whether an asset issuer has a solid track record, whether intermediaries involved can ensure business continuity, and whether underwriting is done properly with accurate evaluations of financial instruments or collateral.

This shift from trustless execution to trust-based verification makes governance and due diligence far more criticalthan in purely on-chain environments.

Structured Finance Solutions for Tokenizing RWAs

In fact, structured finance solutions are already widely used in DeFi. For example, credit enhancement mechanisms such as overcollateralization ensure that the value of collateral exceeds the value of debt, DAO reserve funds create liquidity buffers to cover potential defaults, and blockchain-based insurance or guarantee structures leverage third-party guarantees to reduce investor risk.

Structured finance is based on one central core solution: a defined group of assets can be structurally isolated and serve as the foundation for financing that is independent of the bankruptcy risks of the originator. In other words, a tokenized asset should be legally separated from the originator of tokenization. By isolating these assets, an originator gains access to capital markets.

The parties involved in structured financing typically include many entities, but for the purpose of this article, Special Purpose Vehicles (SPVs) and Regulated Intermediaries are the two most critical elements in terms of legal protection and risk mitigation.

Special Purpose Vehicles (SPVs)

An SPV serves as a legally distinct entity created specifically to hold assets, issue financial instruments, or manage risk in a way that isolates it from the originating entity’s financial health. In the context of RWA tokenization and DeFi, SPVs can be instrumental in ensuring bankruptcy remoteness, safeguarding investor interests, and structuring financial flows in a transparent and legally enforceable manner.

It is crucial that an SPV is structured as a bankruptcy-remote entity. Otherwise, if the project uses a company labeled as an SPV but, in reality, operates as a private limited company controlled by the team or its affiliates, which is used as a custodian of collateral or issuer of financial obligations, this does not mitigate risks but instead amplifies them.

Including an SPV in an RWA-based DeFi structure enhances regulatory clarity by establishing a formal entity that can interface with off-chain institutions such as custodians, banks, and auditors, without compromising the RWA project’s decentralized nature. The SPV serves as a stable counterparty in contractual agreements, making it easier to enforce contracts with off-chain actors.

Key SPV Types and Considerations

1. Segregated Portfolio Companies

For RWA-based projects, SPVs can be structured in different forms depending on jurisdictional and regulatory considerations. One effective approach is the use of segregated portfolio companies (SPCs), which allow for the separation of different pools of assets within a single legal entity.

Each portfolio within an SPC operates independently, ensuring that the liabilities of one portfolio do not spill over into another or SPC generally. This is particularly useful for multi-asset platforms where various RWAs, such as real estate-backed tokens, private credit instruments, treasury bill-based or money market products, require distinct risk treatment.

2. DAO-Based Structures

In DAO-based projects, an SPV can be structured in the form of a DAO legal wrapper so that key operational decisions – such as asset allocation, liquidation processes, or changes in collateral requirements – are governed by DAO mechanisms, ensuring that the community retains ultimate control. A compelling model is the use of a DAO LLC with separate series akin to segregated portfolios. This structure allows a DAO to manage different financial products or asset classes under a unified framework while maintaining separate liability protections for each segment. Such an approach ensures that even if one series encounters legal or financial difficulties, other parts of the ecosystem remain unaffected.

Another approach involves structuring the SPV as an entity owned by an ownerless foundation, which in turn is subordinated to the DAO governance or governed by the purpose of serving the project or its users as a class, verified by their token ownership. This model aligns legal entity control with decentralized governance, ensuring that the SPV remains accountable to the DAO or token holders as a class rather than to individual founders or centralized executives.

3. Purpose Trusts

Additionally, purpose trusts can be incorporated into RWA-based DeFi structures to provide an added layer of legal clarity and asset protection. Unlike traditional trusts, which are established to benefit specific individuals or entities, purpose trusts are designed to fulfill a particular legal objective – such as holding assets in alignment with the goals of a decentralized protocol. This structure can be particularly beneficial for ensuring long-term sustainability, as it can prevent unauthorized asset disposal and enforce protocol-level rules even in the absence of specific individual beneficiaries.

4. Investment Funds

In addition to traditional SPV structures like Segregated Portfolio Companies (SPCs) or Series LLCs, an investment fund can also serve as an effective SPV for RWA-based DeFi projects. Investment funds offer a regulated framework for managing pooled assets, ensuring compliance with investor protection laws, KYC/AML requirements, and structured financial reporting.

Funds can be designed with segregated asset pools, allowing different RWA-backed instruments—such as private credit, tokenized real estate, or yield-bearing securities—to remain legally distinct. This structure is particularly appealing for institutional investors, who require transparency, regulated custodians, and clear legal recourse. A DAO-controlled ownerless foundation can act as the general partner (GP) of the fund, ensuring that strategic decisions remain community-driven while day-to-day asset management is handled by regulated intermediaries.

Regulated Intermediaries

Once financial interest or collateral is secured in a bankruptcy-remote SPV, another set of questions arises: Who will have access to or control over that SPV? Who will manage assets and perform the necessary operations? And, crucially, who will have the authority to liquidate collateral in the event of default and ensure that creditors are repaid?

This is where regulated intermediaries play a crucial role. Unlike fully on-chain DeFi systems, where smart contracts autonomously enforce financial agreements, RWA-based structures require off-chain actors who can legally interact with real-world financial systems. These intermediaries may include regulated asset managers, licensed custodians, trustees, administrators, and auditors, each performing specific functions to ensure the integrity and enforceability of the financial structure.

While the introduction of regulated intermediaries introduces a degree of centralization, it is a necessary trade-off to enable DeFi projects to interact with real-world financial systems while maintaining security and investor confidence.

Key Types of Tokenization Intermediaries

1. Regulated Asset Manager

A regulated asset manager can take on the responsibility of managing the underlying assets held within the SPV, ensuring that they are invested in compliance with regulatory requirements and project guidelines. This is particularly important when dealing with yield-bearing RWAs such as private credit, real estate-backed instruments, or tokenized securities, where active management is required to optimize returns while mitigating risk. An asset manager may also handle the reporting obligations required by financial regulators, providing greater transparency and trust for investors.

2. Licensed Custodian

A licensed custodian is essential when dealing with off-chain collateral, as it provides secure storage and regulatory oversight of the assets backing RWA instruments. A regulated custodian ensures that assets are properly segregated, safeguarded against misappropriation, and protected in the event of insolvency. In many jurisdictions, custodians are subject to stringent financial and operational requirements, offering additional investor protections that go beyond what is typically available in purely DeFi-based protocols.

3. Security Trustee

The role of a security trustee becomes particularly important in the context of secured lending or structured financial products. The security trustee acts on behalf of investors or creditors, holding security interests in collateral and ensuring that the liquidation and repayment process follows predefined legal frameworks.

In the event of a default, the security trustee is responsible for enforcing the security, seizing and liquidating assets, and distributing proceeds to creditors in accordance with agreed-upon priority structures. This role mirrors the function of a liquidation agent in traditional financial markets, providing a clear, legally recognized process for resolving defaults.

4. Administrators & Auditors

In addition to these operational roles, regulated administrators and auditors help reinforce the credibility of RWA-based DeFi structures. Administrators oversee the financial and legal administration of the SPV, ensuring compliance with reporting obligations, investor disclosures, and operational guidelines. Auditors, on the other hand, provide independent verification of the SPV’s financial health, ensuring that assets are accounted for and properly managed. This layer of oversight can significantly reduce risks related to mismanagement, fraud, or unauthorized asset rehypothecation.

Conclusion

As the DeFi ecosystem matures, RWA-backed protocols have the potential to bridge the gap between on-chain and off-chain finance, unlocking new markets while maintaining the core principles of transparency and decentralization.

By applying structured finance solutions, DeFi projects can mitigate risks associated with RWAs, enforceability and exercise of associated rights. Among the baseline components that DeFi can borrow from TradFi are the use of SPVs and regulated intermediaries, which can provide the legal, financial, and operational safeguards necessary for sustainable and scalable RWA integration. While some degree of centralization is inevitable when it comes to tokenization, thoughtful structuring can ensure that decentralization, transparency, and investor protection remain at the core of the RWA-based DeFi.