How tokenized assets work
Tokenization
begins when an issuer creates a digital token that mirrors a real asset. That
token is recorded on a blockchain, which acts as a shared ledger tracking
ownership.
The underlying
asset is typically held by a regulated custodian. Investors trade the token,
and ownership updates are recorded on the blockchain without relying on
multiple intermediaries.
Smart contracts
automate processes such as interest payments, redemptions, or compliance
checks. “The asset
itself does not move,” said Sheila Warren, CEO of the Crypto Council for
Innovation. “What changes is the way ownership is recorded.”
Why this matters now
Interest in tokenization has risen as financial firms look to modernize market infrastructure. In most major markets, securities trades still take one to two business days to settle. During that window, capital is locked up and counterparty risk remains.
Boston Consulting Group estimated in a 2023 report that tokenized real-world assets could reach $16 trillion by 2030 if adoption expands across asset classes.
“Tokenization is about improving efficiency in existing markets,” said Umar Farooq, head of JPMorgan’s blockchain unit Onyx.
Who is using tokenization
Large
institutions are leading early adoption. BlackRock launched a tokenized money
market fund in March 2024 backed by short-term U.S. government securities.
Franklin Templeton has issued tokenized money market funds since 2021.
Banks are also
testing the technology. JPMorgan has processed tokenized repurchase agreement
trades on its blockchain network. Deutsche Bank said it is exploring tokenized
deposits for corporate clients.
Central banks
are involved as well. The Monetary Authority of Singapore has run pilot
programs involving tokenized bonds and foreign exchange transactions with major
lenders.
Claimed benefits
Supporters say
tokenization can reduce settlement times and operational costs. Tokenized
trades can settle the same day, cutting the need for collateral and manual
reconciliation.
Fractional
ownership is another cited benefit. High-value assets such as commercial real
estate or private funds can be divided into smaller units, lowering minimum
investment sizes.
“Fractionalization
lowers barriers for investors,” said Robert Mitchnick, head of digital assets
at BlackRock. Transparency is
also highlighted. Blockchain ledgers allow participants to view transaction
records, which can reduce disputes and errors.
Risks and regulatory hurdles
Regulation
remains a key challenge. Tokenized assets are still subject to securities laws,
and regulators have warned firms not to treat tokenization as a way around
existing rules.
The U.S.
Securities and Exchange Commission has said most tokenized securities fall
under current regulations. In Europe, the Markets in Crypto-Assets framework
addresses crypto assets but leaves some uncertainty around tokenized
securities.
“There is no
separate rulebook for tokenization,” said SEC Chair Gary Gensler at a policy
event last year. Technology
risks also persist. Smart contract bugs, blockchain outages, and cybersecurity
threats remain concerns, particularly for large-scale settlement.
Real-world examples
Governments and
public institutions have tested tokenized bonds. The European Investment Bank
issued a €100 million digital bond in 2022 using the Ethereum blockchain, with
major banks acting as intermediaries.
Real estate
platforms have also launched tokenized property offerings that allow investors
to buy fractional interests. Trading volumes remain small, and liquidity is
limited.
Market response
Market reaction
has been cautious. Shares of firms linked to blockchain infrastructure rose
following high-profile tokenization launches, but gains were limited.
Analysts say
investors view tokenization as a long-term operational shift rather than a
short-term revenue driver. “This is about
fixing market plumbing,” said Citi analyst Peter Christiansen. “The impact
shows up over years, not weeks.”
What’s Next
The next phase
will focus on scaling pilot programs and setting industry standards. Banks plan
broader tests in 2025, targeting repo markets, private credit, and fund
administration.
Regulators in
the U.S., Europe, and Asia are expected to issue further guidance on custody,
settlement, and interoperability. Without shared frameworks, tokenized markets
risk fragmentation.
Market participants say adoption will depend on
whether tokenized assets can prove they reduce costs and risk without
introducing new vulnerabilities. If that happens, tokenization is likely to
expand across mainstream finance.