Smart contract audits check "whether the code is written correctly", while legal vehicle reviews check "whether you legally own the underlying asset" — the two address completely separate issues.
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An audit report stating "the smart contract has no vulnerabilities" does not mean "you will win a lawsuit if the borrower defaults". Code can automatically execute interest payment logic, but once the debtor breaks the agreement, code cannot appear in court for you, apply for asset freezes, or tell you your priority rank among all creditors under the law.
Audit reports fail to apply when you trust only code, but end up needing to deal with court systems. Below we break down why an audit can never replace a full review of a project's legal structure.
1. What audits cover, and what they do not
Smart contract auditing only covers code logic, including common contract-level security risks like arithmetic overflow, reentrancy attacks, and permission control flaws. It does not verify if the underlying asset is real, or what legal rights you as a token holder have to recover funds if the borrower defaults.
Audit checks if "this car can drive", while legal vehicle checks if "the insurance pays you when a crash happens".
In practice, for most tokenized credit structures, the core of tokenization is not moving "the asset" on-chain, but moving "the ownership record" on-chain. The actual asset is still held by an off-chain custodian or special purpose vehicle (SPV), and the chain only records "you own a portion of this asset". If the legal vehicle does not place the asset in a bankruptcy-remote SPV, or the token is not explicitly defined as an equity certificate in the SPV's legal documents, your token may only be proof that "the project owes you money" rather than proof that "you own a share of the underlying asset" if the project goes bankrupt.
2. SPV Structure and True Sale: What Determines Your Creditor Priority in Bankruptcy
The basic compliance requirement for RWA (Real World Asset) projects is to set up an SPV (Special Purpose Vehicle) to achieve bankruptcy remoteness and true sale. Centrifuge's model sets up one separate SPV for each financing deal, so the borrower's risk never passes through to investors. Ondo's OUSG product uses a similar structure: a Delaware US SPV holds the underlying ETF, then issues tokenized shares to users.
"True sale" is the core here. If the asset transfer is legally deemed a "secured loan" instead of a full "sale", then the project's own creditors can lay claim to these assets when the project goes bankrupt, and your token will be classified as a general unsecured claim, with a very low priority for repayment.
Audit reports will never alert you to this problem. The code may show that the token can be transferred normally, but the legal documents may prove you only hold an IOU, not direct ownership of the underlying asset.
Tokenization never changes the legal nature of the underlying asset, it only changes how that ownership is recorded and transferred. An audit report is a technical due diligence check, while legal structure review is the real credit investment due diligence you need.
3. The Financely Case: Underwriting Capability Matters More Than Technical Capability
Financely's industry practice makes this point very clear: what tokenization platforms really need is not "better code", but "transaction documents that make the assets underwritable". All documents including invoices, contracts, and cash flow forecasts must be complete, verifiable, and legally enforceable.
Audit reports rank very low in Financely's evaluation framework — the team cares far more about: who the debtor is, how the repayment schedule is arranged, how default scenarios are handled, and whether the legal structure remains valid even when a default occurs.
In other words, if a project team only highlights "we passed an audit" and avoids talking about their legal vehicle, it is a clear red flag that they may have skipped the critical required due diligence steps.
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4. Practical Verification Checklist
If you are evaluating a trade finance token project, complete these steps even after the smart contract audit is done:
Confirm the SPV is fully legitimate: Do not take the project team's word that "we have an SPV". Look up the SPV's public registration information, official legal opinion letters, and confirm it operates completely independently from the core project team. Protocols like Centrifuge fully disclose their SPV structure, so if a project refuses to share basic SPV details, that is a dangerous signal.
Confirm the legal definition of the token: Does your token represent "equity/beneficial ownership of the SPV", or just "a general unsecured claim against the project team"? The latter means you rank at the very end of all repayment priority if the project goes bankrupt. Read the project's full legal documents to confirm the explicit clause about "token holder repayment priority in default scenarios".
Confirm the allowlist mechanism is active: Compliant tokenized securities use a smart contract-level allowlist to control transfers, so only wallets that have passed KYC/AML checks can hold and trade the tokens. If the token can be freely sent to any random wallet, it means the project is not treating the token as a regulated security at the compliance level.
