How Does RWA Tokenization Work? Read the full explanation.

Two tokens can both claim to be backed 1:1 by gold or government bonds, yet the machinery behind them can be very different. One token gives you a right to gold in a vault, while another is only the issuer’s promise to pay according to the gold price. One token can be sent to anyone’s wallet, while another is automatically rejected if the recipient has not passed identity checks. None of these differences show up in the token’s name or in how it looks in your wallet.

How RWA tokenization works can be understood as five layers working together. The legal layer sets the token holder’s rights. The asset and custody layer holds the real asset. The token layer, a smart contract, controls who may hold and move the token. The data layer brings real-world information onto the blockchain. The lifecycle layer governs how tokens are issued, how returns are paid, and how tokens are redeemed.

The short version of the flow is in What Is Tokenization? How Real Assets Move Onchain. This article opens up each layer in turn, in language you can follow without a programming background.

The five layers behind an RWA token

Think about withdrawing cash from an ATM. All you see is a screen and some buttons. Behind them are your account agreement with the bank, the vault where the cash is kept, the system that checks your card and PIN, the server that records your balance, and the rules for deposits and withdrawals. An RWA token works in a similar way. The token in your wallet is only the part you can see.

Layer	Question it answers	ATM equivalent
Legal	What rights do you hold, and which record counts?	Your account agreement with the bank
Asset and custody	Where is the real asset kept, and who looks after it?	The bank’s cash vault
Token (smart contract)	Who may hold and move the token?	The card and PIN check
Data (oracle)	How does real-world information reach the blockchain?	The server that shows your balance
Lifecycle	How is the token issued, how does it pay returns, and how is it redeemed?	Deposits, interest, and withdrawals

Layer 1: legal structure

Issued directly on a blockchain, or representing an existing asset?

The International Organization of Securities Commissions (IOSCO), the international body of securities regulators, distinguishes two main models in its November 2025 report:

• Digital native. The asset is issued directly on a blockchain from the start. One example is the digital bond UBS issued on SIX Digital Exchange in 2022. According to IOSCO, its legal status is the same as a regular UBS bond. The only difference is the register: a distributed ledger instead of a centralized electronic system.
• Digital twin. The token represents a financial asset that was originally issued off-chain.

Outside the financial assets IOSCO discusses, gold tokens follow a pattern similar to a digital twin: the gold stays in the vault, and only the proof of the right moves on the blockchain.

What rights does the token represent?

For tokens that represent off-chain assets, IOSCO warns that the range of structures is wide, so investors can misunderstand what rights they actually hold. Based on the examples in this series, the rights include:

• A right to an asset held by a custodian, such as a gold token representing a set number of grams of gold in a vault.
• Fund units, such as BlackRock’s BUIDL. For Franklin Templeton’s BENJI, IOSCO notes that the fund’s shares are actually issued directly on a blockchain, which puts it closer to the digital native model.
• A claim against the issuing entity, such as USDY, covered in What Are Real-World Assets (RWA)?.
• Price exposure only. The token is only the issuer’s promise to pay gains that follow the asset’s price. IOSCO notes that in this structure, the token holder’s counterparty risk is to the token issuer, not to the issuer of the underlying asset.

Another term worth knowing is bankruptcy-remote. The underlying asset can be placed in a separate legal entity whose only job is to hold that asset, often called a special purpose vehicle (SPV), so that the issuer’s creditors cannot reach it if the issuer goes bankrupt. IOSCO warns that not all token issuers use this structure. Some keep the assets on their own balance sheet, which leaves token holders with extra risk tied to the issuer.

Which record counts?

A token is recorded on a blockchain, but that does not mean the blockchain record is the legally valid proof of ownership. The IOSCO report shows three tokenized money market funds taking different approaches:

Product	Legally valid ownership record	What it means for token holders
BUIDL (BlackRock)	The transfer agent’s off-chain records	A blockchain transfer only takes effect once it is reconciled with the transfer agent’s records
BENJI (Franklin Templeton)	A mix of blockchain and book-entry records, with the blockchain as part of the primary record	Transfers between whitelisted wallets take effect immediately, but the transfer agent can correct erroneous transactions or recover a wallet whose key was lost
Spiko EU T-Bills Money Market Fund	The blockchain record	Under French law, valid proof of ownership as long as there is no fraud. If the system is compromised, the fund manager can ask the tokenization platform to burn the affected tokens and reissue them to the correct addresses

A transfer agent is the party appointed to record who owns fund units or securities. When two records run in parallel and disagree, which one prevails is decided by the product documents and the law that governs the product.

Layer 2: asset and custody

In RWA tokenization, two things need safekeeping, and they are often confused.

The underlying asset. The gold, bonds, or cash behind a token is held by a custodian, such as a custodian bank or a vault operator. For BUIDL, Bank of New York Mellon is both the custodian of the fund’s assets and its administrator. IOSCO describes one of a custodian’s core tasks as keeping client assets in accounts separate from the custodian’s own assets and liabilities. That separation is what protects your assets if the custodian runs into trouble.

The token. The token sits in a wallet controlled by a private key, something like a PIN that the bank cannot reissue if you lose it. You can hold this key yourself (self-custody) or leave it with a digital asset custodian. BUIDL investors, for example, are given several options for holding their tokens. IOSCO notes that letting investors hold tokens themselves without a custodian can create its own custody risk, and it lists the loss of private keys among the risks of blockchain infrastructure.

A secure gold vault does not protect you from losing your wallet key, and a secure wallet does not guarantee the gold is in the vault.

Layer 3: smart contracts and identity

Why an ordinary token is not enough

Most crypto tokens, such as those built on the ERC-20 standard on Ethereum, can be sent to any wallet address. For assets like securities, that is a problem, because capital market rules usually limit who may hold them: investors must pass identity checks (KYC), live in certain countries, or meet certain investor criteria. That is why tokens representing securities are usually permissioned. Only verified wallets can receive and transfer them.

ERC-3643: a security guard at every door

One open standard for permissioned tokens is ERC-3643, also known as T-REX (Token for Regulated EXchanges). It was proposed in 2021 and has reached Final status in the Ethereum Improvement Proposals. ERC-3643 tokens remain compatible with ERC-20, but every transfer has to pass checks first.

Picture an office building with a security guard at every door. Before a token moves, the smart contract checks:

• The recipient’s identity. The recipient’s wallet must be linked to an on-chain identity (ONCHAINID) that holds claims, such as proof of passing KYC, from claim issuers the token issuer trusts.
• Offering rules. A compliance contract checks rules such as a cap on the number of investors per country or a cap on holdings per investor.
• Wallet and token status. The transfer is rejected if the sender’s or recipient’s wallet is frozen, or if the whole token is paused.

If any one condition fails, the transfer fails. So a permissioned token you send to a friend’s unverified wallet will be rejected.

Issuer powers: protection and control

ERC-3643 also requires special powers held by a party called the agent: freezing a wallet (some or all of its tokens), pausing all transfers, moving tokens by force (forced transfer), recovering tokens to a new wallet if an investor loses their key (recovery), and creating and destroying tokens (mint and burn).

These powers cut both ways. An investor who loses their key can get their assets back, and legal orders such as seizures can be carried out. But the token is also not fully under your control, because whoever holds the agent role can freeze or move it. Before you buy, find out who holds those powers and under what conditions they may use them.

Other networks have similar features, such as Token Extensions on Solana. Some issuers also build their own permissioned systems. According to IOSCO, BUIDL and BENJI do this on top of public blockchains.

Layer 4: oracles and proof of reserve

A blockchain cannot see the world outside it. A smart contract does not know today’s gold price, a fund’s net asset value (NAV), or how many grams of gold are in a vault. That data has to be sent in from outside by an oracle, a service that brings real-world data onto the blockchain.

Oracle providers such as Chainlink, for example, supply NAV data for tokenized assets and funds, which can be used for issuing and redeeming tokens. Some issuers record their data directly on the blockchain. For BENJI, IOSCO notes that the blockchain records NAV and dividend distributions.

Proof of reserve

Proof of reserve is data on the reserve assets behind a token, recorded on the blockchain so it can be compared with the number of tokens in circulation. Chainlink’s documentation splits the sources of off-chain reserve data into three:

• Third party. An auditor, accounting firm, or other party checks the reserves, and the figure is reported.
• Custodian. The data is pulled directly from the bank or custodian holding the assets.
• Self-reported. The data is read from a system run by the token issuer itself.

For the third source, Chainlink states that it is not responsible for the accuracy of the data and asks users to assess issuer risk themselves. So proof of reserve is only as strong as its data source. A figure on the blockchain that came from the issuer’s own report is still the issuer’s figure.

Proof of reserve can also be wired directly into a token’s minting function. Chainlink calls this Secure Mint: the smart contract only mints new tokens if reserves are sufficient according to the proof of reserve data, so the token supply does not exceed the reported reserves.

Proof of reserve is different from an attestation, which is an independent party’s report that assets existed on a particular date, as explained in How to assess an RWA token. Proof of reserve is updated regularly and can be read directly by smart contracts. The two complement each other.

Layer 5: the token lifecycle

Issuance

RWA tokens are usually minted when an investor deposits money or assets. For BUIDL, prospective investors must register through the transfer agent’s website and be added to the list of approved wallets (whitelist) before they can buy. In what IOSCO calls “last mile” tokenization, where the fund units are tokenized while the underlying assets are still managed conventionally, tokens are issued when an investor buys units and burned when the units are redeemed with the fund.

Paying out returns

There are two common approaches. BUIDL aims for a stable value of US$1 per token and pays dividends accrued daily as new tokens each month, so the number of tokens you hold grows. The other approach builds returns into the token’s price, as with USDY, covered in the RWA article, so the number of tokens stays the same but each token is worth more.

Redemption and ways out

Token holders have two ways out:

1. Redeeming with the issuer (redemption). The token goes back to the issuer and is destroyed (burned), and the holder receives money or the asset. This route usually comes with conditions, such as identity checks, a minimum amount, and processing time.
2. Selling to someone else on the secondary market. For permissioned tokens, the buyer must also be verified.

One example of the second route is the smart contract Circle launched in April 2024. Through it, BUIDL holders can transfer their shares to Circle and receive USDC, a US dollar stablecoin, almost instantly and at any time. IOSCO also notes that BUIDL investors can exchange their tokens for USDC in near-instant on-chain transactions with other fund investors, as an alternative to redeeming with the fund and waiting for settlement in fiat currency.

Who is involved?

The table below uses BUIDL as an example, because its division of roles is disclosed in some detail.

Role	Task	Party for BUIDL
Issuer	Issues the fund units the token represents	BlackRock USD Institutional Digital Liquidity Fund Ltd., a British Virgin Islands company
Investment manager	Manages the fund’s assets	BlackRock Financial Management
Asset custodian	Holds the underlying assets and acts as fund administrator	Bank of New York Mellon
Transfer agent and tokenization platform	Manages the tokens, records ownership, and reports on subscriptions, redemptions, and distributions	Securitize
Placement agent	Offers the fund to eligible investors	Securitize Markets
Exit provider	Exchanges the token for a stablecoin	Circle (USDC)

Other tokens may also involve identity claim issuers, oracle providers, and auditors. IOSCO notes that having this many parties can erode one of the benefits tokenization promises: fewer intermediaries.

RWA tokenization in Indonesia: sandbox models and draft rules

The tokenization models that have passed the regulatory sandbox of Indonesia’s Financial Services Authority (OJK) can be read through the same five layers.

• Gold tokenization. One token represents one gram of physical gold and can be redeemed directly for physical gold. The trial covered every stage, from buying the gold, recording the tokens, and verifying that the physical gold was available, to recording the smart contract and reviewing audit results on the underlying asset. As of August 2025, OJK reported that 3,750 grams of gold had been tokenized and that users had redeemed 126 tokens for physical gold.
• Securities tokenization under a fund management contract (kontrak pengelolaan dana, or KPD). Its legal layer uses an existing capital market instrument, the KPD: a contract between an investment manager and one specific client to manage that client’s securities portfolio individually. According to OJK, the tokenization of Indonesian government securities (Surat Berharga Negara, or SBN) in the sandbox breaks up SBN holdings and opens them to retail buyers, so SBN can be held in smaller units.
• Tokenization of property ownership benefits. As the name suggests, the token represents the benefits of owning a property. The exact form of the right should be checked in the operator’s documents. In one of the models that passed, the operator acts as both owner and custodian of the tokenized property. That means one party holds two layers at once, so assessing that operator means assessing both.

OJK’s sandbox has also tested supporting players, including a digital financial asset custodian and token issuance infrastructure that covers everything from validating the underlying asset to settling transactions automatically through smart contracts.

Dedicated rules are still being drafted. In September 2025, OJK published a draft OJK regulation (RPOJK) on offerings of digital financial assets for public comment. According to a summary by the law firm SSEK, the draft splits tokenized assets into those backed by underlying assets and those that are not, requires their issuers to obtain an OJK business license before making a public offering, and requires information documents to be approved by OJK. In 2026, OJK said it is drafting an RPOJK on offerings of tokenized assets, or real-world asset tokenization, which will cover, among other things, the criteria for assets that can be tokenized, offering procedures, licensing, consumer protection, and financial recording and reporting by token issuers. As of early October 2026 this RPOJK is still in progress, so its final content may differ.

Risks that come from token design

General tokenization risks are covered in the risk section of the tokenization article. This section focuses on risks that come from how a token is built.

• Centralized control. Whoever holds the agent role or acts as transfer agent can freeze, move, or correct transactions. For BENJI, for example, IOSCO notes that the transfer agent has unilateral control over all transactions in the fund’s securities. This control can protect investors, but it also leaves you relying on that party’s integrity.
• Code that can be swapped. Smart contracts are essentially unchangeable, but a design pattern called a proxy lets the logic be replaced with a new version while the contract address stays the same. If a token uses this pattern, the rules can change after you buy.
• Two records out of sync. If the on-chain and off-chain records differ, the record that counts is the one set by the product documents and the governing law, not what you see in a block explorer.
• When a transaction is truly final. IOSCO notes that on layer 2 networks (additional networks built on top of a main blockchain), it is not always clear whether a transaction is legally final once it is recorded on the layer 2 or only after it is confirmed on the main network.
• Code flaws. IOSCO also lists smart contract bugs as a risk specific to blockchain infrastructure.

How to read an RWA token before you buy

The RWA article already gives three core questions from the asset side. The list below adds the token design side:

1. Law and records. What rights do you hold, and which record is the legally valid proof of ownership?
2. Safekeeping. Who holds the underlying asset, is it kept separate from the issuer’s own assets, and who holds the key to the wallet where your token sits?
3. Powers. Who can freeze or move the token, under what conditions, and can the contract code be upgraded?
4. Data. Where does the reserve or NAV data come from, and how often is it updated?
5. Exit and licensing. Can the token be redeemed with the issuer, and on what terms? For products offered in Indonesia, is the provider licensed by OJK?

You can check some of the answers yourself. In a block explorer, such as Etherscan for the Ethereum network, you can see how many tokens are in circulation and their transfer history. The rest can only be answered from the issuer’s documents.

The payment side, not yet covered

The five layers above handle the asset side. Every RWA token transaction also has a payment side: the money moving from buyer to seller. IOSCO names the lack of credible settlement assets on blockchains as one of tokenization’s structural challenges. The Circle and BUIDL example above shows the role stablecoins play on this side.

Fiat-backed stablecoins use some of the same layers themselves: reserves held in custody, minting when money comes in, burning on redemption, and reserve reporting. IDRX is a stablecoin pegged 1:1 to the Rupiah and backed by fiat reserves and government securities. Its transparency and audit documents are available on the IDRX documents page. Using a stablecoin as a means of transaction in Indonesia remains subject to the rules in force. The Elucidation of the amended P2SK Law states that a stablecoin used as a means of transaction (alat transaksi) requires a recommendation from the exchange and OJK approval, and that such use is not treated as a means of payment (alat pembayaran). How this payment side works, and its limits, is covered in the next article in this series.

Conclusion

RWA tokenization works through five layers: legal, asset and custody, smart contracts, data, and the token lifecycle. A secure smart contract means nothing if the asset is not in the vault, and tokens that look the same in your wallet can come with different rights and different ways out. So read the product documents and check who holds which powers before you buy.

In Indonesia, gold, securities, and property tokenization models have been tested in OJK’s sandbox, while the offering rules are still being drafted. Follow their progress on OJK’s official website, and only transact through licensed providers.

FAQ

How does RWA tokenization work, in short? A real-world asset is held by a custodian, the rights to it are set out in a particular legal structure, and those rights are recorded as tokens through a smart contract. Oracles bring price and reserve data onto the blockchain. Tokens are issued when investors deposit money and burned when they are redeemed.

What is a permissioned RWA token? A token that can only be held and transferred by wallets that have passed verification, such as KYC. The smart contract checks this on every transfer.

What is ERC-3643? A token standard on Ethereum for regulated assets, also known as T-REX. It links wallets to on-chain identities, checks compliance rules on every transfer, and gives the issuer powers such as freezing, pausing, or recovering tokens.

What is the difference between proof of reserve and an attestation? An attestation is an independent party’s report that assets existed on a particular date. Proof of reserve is reserve data updated regularly on the blockchain that smart contracts can read. How reliable it is depends on its data source.

Can an issuer freeze the RWA tokens I hold? For permissioned tokens that use a standard like ERC-3643, yes. Check the product documents to find out who holds that power and when it may be used.

Is the blockchain record automatically the legal proof of ownership? Not always. Some products use the transfer agent’s off-chain records as the official record, while others use the blockchain. Which one counts is decided by the product documents and the law that governs the product.

References

1. International Organization of Securities Commissions. (November 2025). Tokenization of Financial Assets: Final Report (FR/17/25). https://www.iosco.org/library/pubdocs/pdf/IOSCOPD809.pdf
2. Lebrun, J., Malghem, T., Thizy, K., Falempin, L., & Boudjemaa, A. (2021). ERC-3643: T-REX – Token for Regulated EXchanges. Ethereum Improvement Proposals No. 3643. https://eips.ethereum.org/EIPS/eip-3643
3. ERC3643 Association. ERC-3643 Permissioned Tokens. Official documentation. https://docs.erc3643.org/erc-3643
4. Solana Foundation. What is ERC3643 on Solana? Solana developer documentation. https://solana.com/developers/migrate-to-solana/erc3643
5. Chainlink. SmartData (Proof of Reserve, NAVLink, SmartAUM). Chainlink Documentation. https://docs.chain.link/data-feeds/smartdata
6. Chainlink. (14 October 2024). Secure Mint Explained: How Chainlink Proof of Reserve Enhances the Security of Stablecoins, Tokenized Assets, and Wrapped Tokens. Chainlink Blog. https://chain.link/blog/secure-mint
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21. IDRX. Transparency and Audit Documents. https://idrx.co/en/docs/

Disclaimer

This article is educational content and not an invitation to invest or transact. Crypto assets and tokenized assets carry risk, including the risk of losing value. The products, standards, and service providers named in this article are examples used to explain concepts, not recommendations, and may not be available or permitted to be offered in Indonesia. Do your own research (DYOR) before making any decision.