A tokenized government bond can be transferred across blockchains in just a few seconds. Tokenized stocks can be traded around the clock. However, none of these address the most important question when problems arise:
What do you legally own if the company behind the token goes bankrupt?
The answer depends less on blockchain and more on the legal structure behind the tokens.
The U.S. Securities and Exchange Commission (SEC) now clearly distinguishes between tokenized securities supported by issuers and tokens created by independent third parties. In the issuer-supported model, blockchain records may constitute a part of the issuer's official ownership system. However, in the third-party tokenization model, tokens may only represent a contractual claim, and holders may also face bankruptcy risks related to the intermediary itself.
When these two types of products look almost identical in the wallet, this difference can easily be overlooked.
Tokens are not necessarily equivalent to the assets themselves.
Blockchain tokens are, in essence, a form of digital record.
What endows it with economic value are the legal arrangements that connect this record to something outside of the blockchain: stocks, government bonds, real estate, credit, or investment funds.
Coinpaper explains in its broader guidelines regarding the tokenization of RWA how traditional assets are represented on the blockchain. However, in the event of bankruptcy, a lower level of this structure is exposed: who actually holds the underlying assets, and on whose behalf are they held?
We can look at two simplified structures.
In the first structure, a regulated fund holds US Treasury securities, while investors hold the tokenized shares of that fund. These securities may be held by an independent custodian and are separated from the operating company's own assets.
In the second structure, a fintech company purchases securities on its own and issues tokens, promising investors to provide an equivalent economic exposure.
Both of these products can be referred to as “tokenized government bonds.”
However, their approaches to handling bankruptcy may be vastly different.
The importance of asset isolation may outweigh that of blockchain itself.
One of the most important concepts is asset isolation.
If customer assets are held separately from the issuer's corporate property, then these assets may not necessarily become general property available for distribution to the issuer's creditors. However, if the tokens represent unsecured debts of a failed company, investors may instead be merely creditors in the bankruptcy proceedings.
Crypto investors have seen similar differences on centralized platforms before. When a exchange collapses, the outcome depends to a large extent on the custody terms, asset isolation arrangements, and the applicable bankruptcy laws.
The same principle also applies to more traditional investment structures. For example, with Bitcoin ETF, fund assets are typically placed in a legally independent entity, rather than being considered part of the initiator's general property.
Tokenization adds another layer of complexity, as the issuer, tokenization service provider, special purpose vehicle (SPV), custodian, and blockchain operator can all be different entities.
What Investors Should Really Verify
The most crucial question is not just: “On which blockchain is this token?”
Instead:
"What legal rights of claim does this token grant to me?"
Before purchasing tokenized securities or funds, investors should understand:
Tokenization can make settlements faster, but it does not eliminate the traditional financial systems that underlie transactions. An explanatory article on tokenized asset settlements by Coinpaper points out that even blockchain-based securities may still rely on banks, custodian institutions, and traditional payment infrastructure.
