Summary
The community feedback on Horizon was clear: strong opposition to a new token, reduced revenue share, and genuine interest in RWA opportunities. RWAs represent a massive growth vector with $16T potential but face a fundamental challenge: Aave DAO cannot legally custody real-world assets, making direct RWA lending impossible through our decentralized structure. Below, we briefly analyze key considerations and examples of successful integrations.
We remain committed to collaborating with @AaveLabs on a structure that integrates RWAs.
Borrowing/Lending tokenized RWAs - legal implications
Tokenized real‐world assets (RWAs) represent an innovative domain in which tangible or traditional financial assets assume a novel digital form on the blockchain. When such tokens serve as collateral for lending and borrowing, they engage a wide array of legal and regulatory implications. Although restricting a protocol’s participation to institutional clientele may mitigate certain legal uncertainties, the act of lending or borrowing tokenized real‐world assets continues to demand adherence to intertwined legal, operational, and security prerequisites.
The discussion below highlights the principal legal and regulatory considerations pertinent to the proposed protocol design. In addition, it examines whether an entityless DAO structure can effectively address the obligations imposed by regulators.
Securities Classification
Jurisdictions differ in their treatment of tokenized real‐world assets, with many of these tokens likely to be classified as securities. If so, they must comply with applicable securities laws, such as those administered by the U.S. Securities and Exchange Commission or under MiFID II in Europe, which mandate disclosure, registration, or reliance on certain exemptions like those available through Regulation D. The trading venue for digital securities also may be subject to licensing or authorization requirements, contingent on the regions in which it operates. Although one might consider establishing an entity in a jurisdiction lacking a well-defined legal framework as a form of regulatory arbitrage, that approach could severely limit client access in countries with more robust regulatory systems.
Even if a platform can be deemed technically decentralized, complete decentralization does not align with regulatory expectations for licensing. Regulators typically require a legal entity to function as the platform’s operator so that a centralized counterparty can be granted a license and subsequently held responsible for ensuring compliance.
AML/KYC Standards
Given the imperative of preventing unlawful activities and safeguarding investors, the platform operator must implement thorough Know-Your-Customer and Anti-Money Laundering procedures. In nearly every jurisdiction, such measures are mandated for regulated entities and become even more essential when institutional participants, who often transact significant amounts, are involved. These compliance responsibilities usually rest with a licensed operator with established internal teams to oversee customer due diligence and ongoing monitoring. Outsourcing these functions tends to be narrowly limited by regulation.
Assessing whether a DAO structure could fulfill these requirements leads to the conclusion that compliance is theoretically possible if the DAO engages a specialized AML service provider like other DAO service arrangements. However, that provider would likely be subject to confidentiality constraints that limit public disclosure of its findings or decision-making processes.
Custody
Institutions handling real‐world assets demand secure custody solutions, either from regulated digital asset custodians or traditional institutions holding the underlying assets off-chain. The trading facility might select an external custodian, rely on the custodian designated by the asset issuer, or manage custody internally, depending on its operational framework. Regardless of the chosen model, the entity providing custody services must hold the requisite license. A fully decentralized DAO without a legal wrapper faces significant obstacles here, as regulators typically recognize only formal legal persons for licensing purposes. The DAO can retain a licensed custodian, but forming and enforcing the requisite contractual relationship could become complicated without legal personhood.
A look at existing setups
Several protocols already facilitate the integration of real‐world assets into crypto lending and borrowing arrangements, each adopting distinct legal strategies to mitigate risk.
- Maple Finance: Participants undergo KYC checks, and all borrowers enter into legally binding agreements prior to receiving funds. These agreements explicitly grant lenders the right to seek legal remedies in the event of default and contain provisions specifying the choice of forum and arbitration. Maple employs bankruptcy-remote special purpose vehicles (SPVs) to reduce credit exposure and collaborates with regulated custodians.
- Centrifuge: Investors benefit from extensive protection through reliance on an SPV model, allowing recourse to the underlying real‐world assets pledged in each pool. Every pool is connected to a dedicated SPV, which is structured to isolate the asset originator’s business from financing activity. The borrower formalizes a financing agreement with the SPV and deposits an NFT representing the asset into the Centrifuge pool. Investors receive ERC20 tokens designated as either Senior or Junior but must complete KYC and AML checks before participating.
- Goldfinch: Presents a comparable model in which investors are required to mint a Unique Identity NFT as proof of having passed OFAC, AML, and sanctions checks. Those investing through the Senior Pool also enter into a specific agreement governing compliance with Regulation D and other non‐U.S. obligations.
Conclusion
In light of the legal and regulatory considerations surrounding tokenized real‐world assets, it becomes clear that incorporating RWAs into lending and borrowing protocols demands a carefully crafted compliance strategy. Securities classification often triggers disclosure and registration obligations, while AML/KYC processes remain critical to curbing illicit activity and sustaining trust among institutional players. Moreover, the requirement for licensed custody arrangements—and the obligation for a recognized legal entity to hold the relevant licenses—reinforces the challenges of adopting a DAO‐only framework without a formal corporate wrapper. These factors indicate that protocols aiming to embed RWAs must adapt their operational structures, often forming partnerships or establishing specialized entities, to meet investor protection imperatives and evolving regulatory expectations across multiple jurisdictions.