By David Kermaani, Director of Sales Americas, ChainUp
Key Takeaways
- Tokenization deals fail on legal and accounting groundwork, not technology. RealT’s $140M collapse proved that.
- On the accounting side: no reconciliation process between the asset and its on-chain twin is the most common gap.
- On the legal side: undefined token rights, missing KYC/AML at issuance, and no regulated secondary market kill deals before they launch.
- Regulatory clarity is improving. The GENIUS Act, FASB’s stablecoin update, and OCC’s PPSI pathway are removing ambiguity.
- Before starting: define your reconciliation controls and what rights your token conveys — before writing any code.
Tokenization deals rarely fail because the tech breaks. They fail because nobody did the legal and accounting groundwork first.
I moderated a panel recently with Kevin Fitzgerald (HT Digital) and Cris Cicala (Chapman and Cutler). An auditor and a securities lawyer, both of whom have watched a lot of these projects stall. What they described lines up with what I see from the infrastructure side, and it is worth walking through.
The short version: on the accounting side, deals die because nobody built a process to keep the token and the underlying asset reconciled. On the legal side, they die because the team never defined what the token is, skipped Know-Your-Customer (KYC) and Anti-Money Laundering (KYC/AML) at issuance, or never planned a regulated secondary market. Meanwhile, the regulatory picture is getting clearer, not murkier. The GENIUS Act, the Financial Accounting Standards Board (FASB) work on stablecoin accounting, and the Office of the Comptroller of the Currency (OCC) Permitted Payment Stablecoin Issuer (PPSI) pathway are removing a lot of the ambiguity that used to be the excuse.
If you are planning a project, figure out your reconciliation controls and figure out what rights your token actually conveys. Do both before anyone writes a line of smart contract code.
How a $140 million tokenized real estate deal collapsed
In July 2026, RealT, once the largest tokenized real estate platform, announced voluntary liquidation. It had raised roughly $140 million from somewhere between 14,000 and 22,000 investors through tokens tied to Detroit rental properties. The tokens worked fine. The physical layer underneath did not.
The City of Detroit sued in 2025 over more than 400 properties, alleging building code violations, more than 100 of them sitting vacant, and millions in unpaid taxes and water bills. Payouts stopped. In April 2026 a court placed roughly 700 Detroit properties under a special fiduciary. By the time of the liquidation announcement, the wind-down escrow held about $640,000, which works out to somewhere between $30 and $45 per investor.
Worth noting: RealT never sold to US investors. The offerings were made under Regulation S, which excludes US persons. This was not a US securities-law failure. It was an operating failure.
A transparent ledger does not maintain buildings, pay property taxes, or keep an operator solvent. Token holders took on ordinary landlord risk. It just had a digital wrapper on it.
Why Tokenization Fails Without Asset Reconciliation
Kevin is a partner at HT Digital, a digital assets audit firm. His view is that this gap shows up long before a crisis does. Most tokenization projects bring in auditors after they go live. Accounting gets treated as something to deal with later rather than something to design around.
His core point: tokenization creates two versions of the same asset. The real-world asset and its on-chain twin. Most teams never build a real process for keeping the two matched.
How to Reconcile Tokenized Assets in Real Time
Start by defining what “match” means for your asset. For a stablecoin, it is simple: one token, one unit of reserve. For a tokenized fund holding treasuries and on-chain assets, it is layered. You are matching token supply against a portfolio that moves in value, with different settlement times across different asset types.
Then decide on cadence. Traditional finance reconciles at end of day because markets close. Blockchains do not. If someone can redeem on a Sunday night, your process has to cover that. Daily reconciliation is the floor. Where this is heading is automated reconciliation running alongside the smart contract instead of checking in after the fact.
What Auditors Expect From On-Chain Data
Know whether you are reading from your own node or from a third-party provider. If it is a third party, auditors will want a SOC 1 or SOC 2 (System and Organization Controls) report. If there is not one, the audit engagement stalls. The workaround is to cross-validate several independent providers against each other. Two sources agreeing on circulating supply at a given timestamp is a much stronger position than one unverified feed.
This is not that different from how traditional finance handles market data. The difference is the assurance infrastructure for on-chain data is still maturing, so you cannot assume it is already there.
How to Build Controls for 24/7 Tokenized Assets
Traditional controls are built around a close. End-of-day positions, overnight batch processing. When the asset never closes, those control points go away and you have to decide what replaces them.
At minimum: automated monitoring that flags anomalies in real time (minting spikes, reserve shortfalls, supply mismatches), with alerts that reach someone who can act, whatever the time zone. Beyond that, think through the scenarios that do not exist in traditional markets. What happens when a smart contract processes a large redemption while the reserve assets are mid-settlement in a T+2 market (trade date plus two business days)? That timing gap, left alone, is how you end up in RealT territory.
The teams that get this right build it into the product. Reserve buffers for redemption peaks. Circuit breakers above set thresholds. Clear escalation paths. None of it is technically hard. It is operational discipline.
Why Tokenization Fails Without Legal Structure
Cris is a partner at Chapman and Cutler, a finance-focused law firm that has represented crypto ETFs and institutional clients since 2013. He came at this from the opposite direction. His failure mode happens well before any asset is at risk. Deals die on the legal side, and it is almost always the same root cause: the team built the technology without building the legal architecture around it.
His sequencing advice inverts how most teams approach this. Start with jurisdiction, because jurisdiction determines the applicable law, the regulatory structure, and the tax treatment. Then build the legal wrapper. Then, and only then, the business model and technology. Teams that go tech first and retrofit compliance are the ones that get stuck. They tend to hit one of three walls.
Wall One: How Token Rights Determine Your Compliance Path
A team builds a token without deciding whether it conveys equity, debt, a profit share, or plain utility. Without that answer, compliance cannot sign off, counsel cannot draft offering documents, and the deal sits. This is the most common failure Cris sees, and it is completely avoidable if the term sheet comes before the smart contract.
It sounds abstract until you see what happens without it. A token that conveys equity gives the holder ownership. Securities law applies, offering documents are required, and the issuer needs an exemption or a registration. A token that conveys debt triggers a different set of rules, including the Reves test for whether it counts as a security. A profit-sharing interest with no equity sits in a grey area most legal teams struggle to define cleanly. A pure utility token, one that gives access to a service and no financial return, has a completely different profile, but only if it genuinely works as utility and does not look like an investment contract under Howey.
Teams skip this question because the smart contract runs the same way regardless. That is true. The code does not care. But the legal wrapper changes everything around it: what you have to disclose, which regulator has jurisdiction, what investor protections apply, and whether you can offer it to non-accredited investors at all. Defer the decision and you end up with a working product and no legal path to market.
Wall two: Why KYC and AML Must Be Built In Before the First Token
The instinct is to build first and add compliance before launch. The problem is regulators do not grade you on where you ended up. They look at the process from day one. If the first batch of tokens went out without verifying who received them, that is an unregistered distribution regardless of what you added later.
This bites harder in tokenization because the chain is a permanent record. Every wallet that got tokens without KYC is a documented gap that an auditor or regulator can trace. In traditional finance that pre-compliance activity might sit in internal records. On-chain it is visible, timestamped, and immutable. Retrofitting means either chasing down holders you may no longer be able to reach, or carrying a known gap into every future audit and filing.
So the verification flow, the wallet-level screening, and the ongoing monitoring all need to be in the issuance process from the first token. Not the first public token. The first one.
Wall three: Why Investors Won’t Buy a Token They Can’t Sell
Most teams focus on issuance and assume secondary trading will sort itself out once there is demand. Cris’s point is that this kills deals because institutional investors evaluate the exit before the entry. If there is no regulated venue to sell on, the token is illiquid no matter what the technology allows.
Peer-to-peer secondary trading on-chain is technically possible. Technical capability and regulatory permission are not the same thing. A token that qualifies as a security can only trade on a venue licensed for securities in the relevant jurisdiction. An alternative trading system (ATS) in the US, a regulated exchange in Singapore or the EU. Which venue matters less than the fact that one has to exist and be named before the first investor commits.
This ties back to jurisdiction. The secondary market available to your token depends on where you issued, what kind of token it is, and who your investors are. A US-issued security token cannot just list on an offshore exchange and call it solved. Investors who bought under a US exemption are still bound by US resale restrictions. Plan the secondary market alongside the primary issuance or you get a token people can buy but cannot sell. Nobody allocates to that at scale.
Why Tokenization Infrastructure Is Rarely the Bottleneck
This is the part that stood out most to me, and I want to be direct about it. In both of their experiences, technology is rarely what kills a deal. Cris said it plainly. Smart contracts get built and they work. What does not get built is the legal reasoning or the operational controls that should have come first.
That matches what I see from the infrastructure side at ChainUp. Reliable rails, custody, and settlement are table stakes now. Necessary, but never the bottleneck. The bottleneck has always been the legal and accounting scaffolding that determines whether a token can be issued, held, and traded the way it was designed. Infrastructure built to support reconciliation and controls from day one takes one variable off the table. It does not remove the need to get the other two right.
Both panelists pointed to the same regulatory shift. The GENIUS Act gave issuers a federal framework they can point to and say “I can comply with this.” FASB’s proposed update, released August 18 and open for comment until November 19, adds illustrative examples showing when a stablecoin meets the existing definition of a cash equivalent. It does not change the definition. But for a corporate treasury or a bank, being able to carry a qualifying stablecoin alongside T-bills and money market funds instead of as an intangible asset materially changes the decision to hold one. The OCC’s PPSI pathway is opening the door for non-bank institutions to issue stablecoins directly. None of that changes whether the technology works. It changes whether the legal and accounting groundwork can be laid with confidence.
What to Do Before Starting a Tokenization Project
I closed the panel with the question I think matters most to anyone actually planning to do this. If someone in the room wanted to tokenize an asset in the next six months, what is the one thing they should do before picking up the phone?
Kevin: build the reconciliation process first. Know how you will track on-chain supply against the underlying asset, and put real controls around it before you need them. Getting it right on day one saves far more time than fixing it later.
Cris: figure out what rights your token conveys before anything else. Once that is answered, compliance follows. He has seen plenty of deals fail because a team showed up with a smart contract and no term sheet. He has never seen one fail because they showed up with a term sheet and no smart contract yet.
How ChainUp’s tokenization infrastructure addresses these failure points
Every major failure mode above comes from a disconnect between the token and the asset underneath it. ChainUp’s end-to-end tokenization platform is built to close those gaps across the full lifecycle.
Consulting and architecture: guidance on defining legal structure and compliance frameworks up front.
Continuous reconciliation: white-label multi-party computation (MPC) wallet and trading engines share one infrastructure, running continuous reconciliation between on-chain supply and reserves with automated asset segregation.
Embedded compliance: KYC/AML screening through Trustformer, ChainUp’s know-your-transaction (KYT) engine, integrated from the first token issued, with transfer restrictions coded directly into the smart contracts.
Structured liquidity: tokenization tooling and a white-label exchange engine built to the standards a licensed venue has to meet, so a regulated operator can stand up secondary trading on the same stack instead of sourcing and integrating a separate one. The license still has to be yours or your partner’s. The infrastructure is built so that it is the only thing left to source.
If you are planning a tokenization project and want it built with institutional rigor from day one, reach out to our team.
