5.2 Custody and Legal Title: Who Actually Owns What
Why a token and its asset are two legal objects, how each intermediary adds an insolvency the holder bears, what Prime Trust, Celsius, and FTX show about how courts decide ownership, which record wins when chain and register disagree, and how far property law and custody rules have caught up.
A token proves control, not ownership. Who owns the asset is settled off the chain, and usually only after something has failed. The OECD states the first half: "ownership of a token does not necessarily accord ownership to the underlying asset"1. The cases below show the second half. A trust company's customers, a crypto lender's depositors, an exchange's account holders, and a real-estate platform's token holders each learned what they held from a document, a reconciliation, or a court, never from the chain. The chain recorded who controlled which token. It could not say whether that control carried a property right.
Section 5.1 treated the information layer, on the thesis that "An oracle does not bring the world on-chain. It brings someone's report of it." This section moves from what the chain is told about the asset to who holds the asset and what the holder's claim actually is. Section 1.2 described every RWA as a dual structure, a token on one side and a claim on the other, and named the risk "that the claim represented by the token is not what the holder believed it was." Section 2.4 promised that "Section 5.2 returns to custody as a risk surface, including the harder question of legal title." Section 4.3 named the issuers, custodians, and wrappers, recorded Nevada's order against Prime Trust, and left "the legal-title analysis" to this section. Section 2.1 asked what happens "when a court has to decide who owned what at a given moment." This section is about that moment.
Holding the Token Is Not Holding the Asset
The Law Commission of England and Wales, in its 2023 final report, describes the holder of a linked token as having "rights in two distinct things: the crypto-token instantiated on a particular network or contract ledger and the underlying asset (or entitlement thereto) to which it is linked or stapled." It adds that this "is not however true of a mere register/record token, the holder of which would not necessarily be the holder of the asset that such a mere register/record token records"2. A token that only records a fund share is evidence of a holding, not the holding. They also behave differently: "a crypto-token, on the other hand, like a car or a watch, can as a matter of fact be alienated from a person without a legal process and without their consent"2. Control is a fact about keys. Ownership is a fact about law.
US commercial law writes the separation into statute. Under Article 12 of the Uniform Commercial Code, added by the 2022 amendments, a good-faith "qualifying purchaser" takes a controllable electronic record "free of a claim of a property right in the controllable electronic record," but takes any "right to payment, right to performance, or other interest in property evidenced by the controllable electronic record subject to a claim of a property right" in that interest3. The token can pass clean while the asset behind it stays contested. The UNIDROIT Principles on Digital Assets and Private Law, a May 2023 model for national legislators, reach the same point by abstaining: "Other law applies to determine the existence of, requirements for, and legal effect of any link between the digital asset and the other asset"4.
The Central Bank of Ireland's March 2026 discussion paper calls tokenization "a potential change in the form of the record of ownership, rather than a change in the underlying asset in substance"5, and BIS/CPMI, noting that it may be unclear whether a tokenised asset reflects "a legal claim or property right," says such issues "will be especially relevant in cases of default or insolvency"6. The link from token to asset is made of documents and statutes, and it is tested when a party in the middle fails.
Every Layer Adds a Balance Sheet
The SEC staff's January 2026 statement on tokenized securities describes two third-party models; Section 2.3 already covers its issuer-sponsored ones. In the custodial model, "the third party issues a crypto asset representing the underlying security, such as a tokenized security entitlement." In the synthetic model, the token represents the third party's "own security that provides synthetic exposure to the underlying security," which "confers no rights or benefits from the issuer of the referenced security." In both, "holders of the crypto asset may be exposed to risks with respect to the third party, such as bankruptcy, to which a holder of the underlying security would not necessarily be exposed"7.
Each layer between holder and asset is a legal person with a balance sheet of its own. Table 1 sorts the claims a live token can carry.
| Claim the token carries | What the holder owns | Whose failure reaches the holder | Example |
|---|---|---|---|
| Ledger-based security | The security itself, recorded on the ledger | The issuer's, as obligor | Swiss ledger-based securities |
| Fund share | A share in a fund that owns the assets | The fund's; the custodian's only if segregation fails | BUIDL, FOBXX |
| Custodial entitlement | A claim on securities an intermediary holds for the holder | The intermediary's, within the statute's protection | Ondo's US stock tokens |
| SPV note or certificate | A debt claim on a vehicle, secured on collateral | The vehicle's, and its collateral custodian's | xStocks, USDY |
| Derivative | A contract with the issuer, who owns the underlying | The issuer's, with no claim on the underlying | Robinhood's EU stock tokens |
Real products stack rows, and every row adds a balance sheet. The derivative row is where expectation and claim diverge furthest. Robinhood's EU stock tokens, derivative contracts with Robinhood as obligor (Section 4.3), disclose that "Investors may lose up to the full amount of their invested capital due to market conditions or the insolvency of Robinhood"8. When Robinhood distributed tokens referencing OpenAI in July 2025, OpenAI stated that "These 'OpenAI tokens' are not OpenAI equity," while Robinhood cited its "ownership stake in a special purpose vehicle (SPV)," TechCrunch reported9. The name on a token and the firm that owes its holder can differ.
IOSCO's November 2025 report, whose balance-sheet warning Section 4.3 quotes, adds that investors may face "the issuer's loss of title to the underlying asset or the sale of the underlying asset without investor knowledge or recourse"10. The custodial row can carry protection the others lack: under UCC 8-503, assets a securities intermediary holds for customers "are not property of the securities intermediary, and are not subject to claims of creditors of the securities intermediary"11. Whether a holder sits inside a protection of that kind is what the failures below turn on.
The SPV in the Middle: Ring-Fenced, Not Risk-Free
A special purpose vehicle keeps the sponsor's creditors away from the assets. It does not give holders control, it does not make the vehicle solvent, and it cuts both ways, because a ring-fenced vehicle has no claim on its parent. Section 4.1 and Section 4.3 already showed Harbor Trade's court workout and USDY's change of issuing entity.
The base prospectus of Backed Assets (JE) Limited, the Jersey issuer of xStocks, states the trade-off. The issuer "is a special purpose vehicle ('SPV')," it "is currently not profitable and depends on capital and financing from its Parent," and "Neither PEL nor Payward have guaranteed the Issuer's obligations," PEL being Payward Europe Limited, its indirect parent12. Each investor "has a sole claim to the Collateral allocated to the specific Product they are holding," and once that collateral is realised "an Investor has no residual claim against the assets of the Issuer"12. It warns that "Any insolvency of the Custodian may result in delayed or impossible access to the Underlyings," and at the UK custodian "the omnibus structure may affect the speed and efficiency of asset recovery"12. The ring-fence is a claim on a specific pool with named custodian risk, not a guarantee.
RealT shows the control half. Its 2019 private placement memorandum described a system that lets a token holder "retain all legal rights and protections that are provided by traditional ownership of real estate," through one Delaware series LLC per property13. Owning all of a series' tokens, it says, is "effectively ownership of the property held by that Series with, however, very limited control over the management and disposition of the property," and investor votes are limited mainly to amendments of the operating agreement13. In July 2025 the City of Detroit announced a public-nuisance lawsuit against Real Token, two individual defendants, and "their 165 affiliated corporate defendants" over more than four hundred properties, and a Wayne County judge ordered tenants' rent into escrow14. On 22 April 2026 the court approved an agreement putting RealT's roughly 700 properties under a special fiduciary who can "sell property to raise cash, or demolish buildings he deems dangerous and beyond saving," Outlier Media reported15. The city's claims are allegations, and the sponsor's conduct is a counterparty question. The title lesson is narrower: management sat with the sponsor from the start, control then passed to a court's fiduciary, and the tokens recorded the same holdings throughout.
Prime Trust: A Trust Company Whose Customers Held No Trust
Prime Trust was not an RWA issuer. It was a Nevada-chartered trust company holding crypto and fiat for about 140 integrators and thousands of end users, and at its peak it "held over $3.8 billion in cryptocurrency and fiat"16. It belongs here because it did the token-custody job Section 2.4 separated from asset custody, and the court's reasoning would apply to any custodian of tokenized assets.
Nevada's receivership petition says Prime created a wallet in 2018 "for the purpose of holding digital currency in trust for its customers," later moved custody to Fireblocks, and in January 2021 "reintroduced specific legacy wallet forwarding addresses to customers"17, inadvertently, the bankruptcy court later stated16. Around December 2021 Prime "discovered that it was unable to access the Legacy Wallets," and until March 2022 it met withdrawals by buying replacement currency "using customer money from its omnibus customer accounts"17. By 26 June 2023 it owed clients $85,670,000 in fiat against $2,904,000 held, and $69,509,000 in digital currency against $68,648,000 held17. Chapter 11 followed on 14 August 202316.
Nevada said Prime "has breached its fiduciary duties to its clients, in violation of Nevada trust laws"18. On 18 July 2025 the Delaware bankruptcy court read the documents differently: "Other than the corporate name of 'Prime Trust, LLC, a Nevada chartered trust company,' the End-User Agreement and the Custodial Agreement submitted into evidence do not establish that a trust relationship exists"16. The custodial agreement let Prime buy assets with customer fiat and use them "with all attendant rights of ownership." The records would have defeated a trust anyway. Prime "did not maintain separate or segregated digital wallets" for customer crypto and "did not perform regular reconciliations" between its internal ledger and its wallets. The court held that "the Debtors hopelessly commingled Currency such that the Currency is not traceable," and approved "the dollarization of the cryptocurrency held and a pro rata distribution to all unsecured creditors"16.
A forensic accountant told the court that "The ledger was fraudulently manipulated, and so we can't rely upon that ledger, and that's why we rely on the blockchain records, as well as the bank statements"16. The blockchain was the evidence the experts trusted, and it still decided nothing about title. The agreements and the books did. A charter, a company name, and a regulator's description did not create a property right.
The Terms Decide Before the Court Does
Prime Trust fits a pattern: contract language decides first, then segregation, then records. None of the rulings below concerns a tokenized fund or security. They are crypto-lending and crypto-custody cases, analogues rather than precedents, and still the best evidence available, because this paper's research found no insolvency judgment yet on the rights of holders of a tokenized fund, note, or stock token.
Celsius's Earn program held about 600,000 accounts with crypto worth approximately $4.2 billion as of 10 July 2022, under terms giving Celsius "all right and title to such Eligible Digital Assets, including ownership rights"19. On 4 January 2023 Chief Judge Martin Glenn held that "the Terms unambiguously transfer title and ownership of Earn Assets," leaving account holders with "unsecured claims against the Debtors in dollars or in kind"19. In BlockFi's case in May 2023, Judge Michael Kaplan ruled from the bench that "all digital assets held by the debtors in custodial omnibus wallets are indeed client property," while interest-account assets stayed in the estate, CoinDesk reported20.
FTX shows what silence does. A June 2023 report to the FTX debtors' independent directors found that FTX.com's terms of service "were silent on what FTX Trading Ltd. would do with customer fiat currency," while FTX Japan told its customers their fiat sat in "a segregated user management trust"; on the debtors' analysis, approximately $8.7 billion in customer-deposited assets was misappropriated from FTX.com21. Customers argued they "had property interests in certain assets, rather than an unsecured claim ranking equally with general creditors," and the October 2023 settlement gave them a claim that, "although unsecured, has an equitable priority to certain property segregated at or taken from the exchanges"22.
Where the contract is silent, statute supplies a default, and the defaults share a shape. UCC 8-503 gives each entitlement holder "a pro rata property interest in all interests in that financial asset held by the securities intermediary"11. Swiss bankruptcy law lets a client separate crypto-based assets the debtor undertook "to hold ... in readiness at all times," provided they are allocated individually or held in a pool where the client's share is clear23. UNIDROIT Principle 13 keeps client assets out of a failed custodian's estate and spreads any shortfall across a pool's clients "in proportion to the respective quantity" each is owed4. The Law Commission is blunter: under a non-custodial arrangement users "will instead rank as general unsecured creditors," and for unallocated trust pools there is "some uncertainty as to the correct approach to apportioning any shortfall losses"2. Each protection rests on facts established off the chain: that the holding was custodial, that it was allocated, and that the records show it.
When the Chain and the Register Disagree
Every tokenized product keeps two records, the chain and a legal register, and only one can win a dispute. IOSCO found that "different operators have taken different approaches to maintain the authoritative source of ownership for financial assets they have tokenized," differences that could "potentially lead to disputes, if not properly disclosed"10. Its examples are three money market funds. For BUIDL, "The official record of ownership is maintained in the transfer agent's off-chain books and records." For Franklin's on-chain fund, the blockchain is "an integral part of the primary record," but the transfer agent "can, for example, take corrective measures where erroneous or impermissible transactions have occurred." For Spiko's euro fund, the ledger record "is valid as proof of ownership if there is no fraudulent activity"10.
In the United States the register wins. The SEC's September 2026 transfer agent proposal calls the master securityholder file "the authoritative record of who owns an issuer's securities" and the "golden record" of ownership, and lets a blockchain serve as that file "or a component thereof" only if "the transfer agent maintains at all times exclusive control"24. Franklin's prospectus shows the override in practice: the transfer agent "can effectively correct an unauthorized or erroneous transaction by adding an appropriate instruction to another subsequent block"25. Section 5.5 returns to that correction power as a key someone else could want.
Other designs make the ledger win. Swiss law obliges the issuer of a ledger-based security "to render performance only to the creditor indicated in the securities ledger"23. RealT's memorandum warns that "Loss of private keys may render Series #1 RealTokens worthless"13. Where the ledger is authoritative, a holder who loses control loses the asset. Where a register is authoritative, a holder can be restored and a transfer undone. BIS/CPMI names the cost of a gap: if an operational transfer and legal finality do not coincide, the ledger state "could be retroactively reversed eg through legal actions"6.
An unreconciled register has already failed, outside tokenization. Synapse Financial Technologies, a US fintech that kept the records of consumer funds held at partner banks, filed for bankruptcy in April 2024. The Consumer Financial Protection Bureau found it had failed "to maintain adequate records of the location of consumers' funds"; the banks found "a shortfall of between $60 and $90 million," and consumers "did not have any access to their funds for weeks or months"26. Synapse held no tokens, but the risk is the same: two records, no reconciliation, and holders waiting while someone decides which one is right.
Property Law Is Catching Up Unevenly, Custody Rules Faster
Within single legal systems, the law has started to define tokens. The Property (Digital Assets etc) Act 2025, which extends to England and Wales and Northern Ireland, received Royal Assent on 2 December 2025, and its one operative section says that a thing, "including a thing that is digital or electronic in nature," is not prevented from being the object of personal property rights merely because it is neither a thing in possession nor a thing in action27. The Law Commission notes that "The Act leaves it to the courts to develop this 'third category' of personal property"28. New York's enactment of the 2022 UCC amendments took effect on 3 June 2026, joining, in Orrick's count, "more than 30 other states and the District of Columbia"29, but Article 12's definition of a controllable electronic record excludes investment property30, so tokenized securities stay under Article 8. Switzerland's DLT Act, in force since 2021 as Section 1.1 records, created ledger-based securities and the bankruptcy separation above, and Germany's Electronic Securities Act deems an electronic security a "Sache," a thing, under § 90 of the Civil Code31.
Custody rules are moving faster. In December 2025 SEC staff said they "will not object to a broker-dealer deeming itself to have 'physical possession'" of crypto asset securities, which "include tokenized versions of an equity or debt security," if among other conditions the firm can transfer them "to a broker-dealer, trustee, receiver, liquidator" should it fail, and called the position "an interim step"32. FINMA's January 2026 guidance warns of counterparty risk "insofar as the segregability of the cryptobased assets is not guaranteed in the event of the third party's insolvency," and reports that "these risks were not always adequately taken into account by the supervised institutions in the past"33.
Custody rules decide who may hold an asset. Property law decides whether the holder owns it when that custodian fails. Prime Trust held a state trust charter, and its customers still ranked as unsecured creditors. That gap is the question Chapter 6 takes up: who makes sure a token's documents, records, and custody give the holder the claim the product implies, and who checks before a failure rather than after. Section 5.3 turns from title to credit, because even an undisputed owner depends on the obligors and intermediaries who must pay. Section 5.6 takes up what this section kept inside single legal systems: which country's law decides who owns a token when the holder, the issuer, the custodian, and the asset sit in different places.
- A token and the asset it points to are two legal objects. The OECD, the Law Commission of England and Wales, UCC Article 12, and the UNIDROIT Principles all leave the link between them to documents and law outside the token, so a token proves control, not ownership.
- Most live RWA tokens are claims on an intermediary, and each layer adds a balance sheet whose failure reaches the holder. SEC staff warn that third-party tokens can expose holders to the third party's bankruptcy, and Robinhood lists its own insolvency as a loss path for its EU tokens.
- Prime Trust's customers became unsecured creditors in July 2025 because, the Delaware bankruptcy court found, its agreements created no trust and its currency was "hopelessly commingled." Celsius Earn holders lost title under their terms of use, while BlockFi's custodial wallet holders kept theirs.
- When the chain and the register disagree, the law picks a winner, and systems pick differently. IOSCO found BUIDL, Franklin, and Spiko recording ownership three ways, the SEC's September 2026 proposal calls the transfer agent's file the "golden record," and Swiss law pays the creditor shown on the ledger.
- Property law is catching up one jurisdiction at a time, through the UK Parliament's Property (Digital Assets etc) Act 2025, UCC Article 12 in New York and more than 30 other states, Switzerland's DLT Act, and Germany's eWpG. Custody rules are moving faster, and FINMA reports that supervised institutions did not always account for segregation risk.