Why Most Tokenized Properties Are Glorified Security Offerings

Tokenization creates securities by default. The Howey Test defines a security as an investment of money in a common enterprise with an expectation of profits from others' efforts. Tokenizing real-world assets like real estate or royalties creates this exact structure, making them securities under U.S. law.

Protocols become unlicensed exchanges. Platforms like Centrifuge or Maple Finance that facilitate trading of these tokens operate as de facto securities exchanges. This subjects them to SEC registration requirements they universally lack, creating an existential compliance liability.

The legal risk is non-dilutable. This liability extends to all participants. Using a DAI vault collateralized by tokenized invoices or a Compound fork listing tokenized bonds does not insulate users; it propagates the security status through the financial stack.

Evidence: The SEC's case against LBRY established that even utility tokens with secondary trading constitute securities. This precedent directly applies to any tokenized property with a secondary market, which is their entire purpose.

Tokenized property is a security. The SEC's Howey Test defines an investment contract as a transaction where a person invests money in a common enterprise with an expectation of profits from the efforts of others. A token representing a fractional share of a building, managed by a sponsor for rental income, fits this definition perfectly.

Passive income guarantees failure. The primary selling point of tokenized real estate—passive yield from rents or appreciation—is the exact feature that triggers the Howey Test's 'expectation of profit'. This contrasts with a pure utility token like Filecoin's FIL, which is a claim on storage capacity, not a financial return.

Decentralization is a legal shield, not a feature. Projects like RealT or Propy often centralize key functions: property management, distribution, and investor communications. This centralized 'effort of others' cements the security designation. True decentralization, as seen in MakerDAO's RWA vaults, separates the asset from a single promoter's efforts.

Evidence: The SEC's 2023 case against Blockchain Credit Partners established that offering tokenized assets with promised returns constitutes an unregistered securities offering. No tokenized real estate platform operating in the U.S. has received a regulatory no-action letter.

Tokenized deeds are securities. The SEC's Howey Test hinges on an investment of money in a common enterprise with an expectation of profits from others' efforts. A token representing a property deed that relies on a central issuer for dividend distribution and legal title enforcement is a textbook security offering.

The legal wrapper is centralized. Projects like RealT or Propy use an SPV or LLC to hold the underlying asset. Token holders own a beneficial interest in that entity, not the property itself. This creates a centralized legal bottleneck that defeats the purpose of decentralized ownership.

Cash flow rights are not native. Rental income distribution requires a centralized payment rail from a property manager to the token issuer, then to wallets. This is not a native yield mechanism like an Aave interest-bearing token; it is a manual, off-chain promise vulnerable to failure.

Evidence: The SEC's 2023 action against NFTs as unregistered securities established that digital assets linked to underlying revenue streams are securities. This precedent directly applies to tokenized real estate with promised rental yields.