Tokenization: A Transformation of Financial Infrastructure

Introduction

Tokenization: Definition and Core Concepts

Tokenization is the process of representing ownership of any asset, whether financial, non-financial, or physical, using a token on a blockchain. These tokens can leverage core features of blockchain infrastructure such as programmability, composability, atomic and near-instant settlement, and (where applicable) fractionalization.

These characteristics can improve operational efficiencies in traditional finance, including reduced costs and settlement times, enhanced collateral management, and expanded investor access.

This technology represents the next stage in the evolution of financial markets, from the early days of paper certificates, fragmented record-keeping, manual reconciliation, and T+5 settlement, to dematerialization, which improved efficiency but created a reliance on centralized intermediaries.¹

Tokenized assets can include anything from stablecoins and bank deposits to securities, commodities, and real estate, as well as non-financial assets such as trade receivables. Equities and fixed income alone represent a $270 trillion total addressable market.² 

Stablecoins are the most successful example of tokenized assets thus far. This is likely due to their simplicity, liquidity, and global demand for dollar-backed instruments. They serve as a harbinger of the benefits tokenization can offer as integration with traditional finance and regulatory frameworks advance. Stablecoins may also represent a potential pool of capital to deploy into new tokenized assets.

Stablecoins first emerged as a way to tokenize the dollar, backed one-to-one by cash or cash-equivalents, allowing traders to park assets in something less volatile than digital assets such as bitcoin or ether. Use cases have since expanded to areas such as cross-border payments, remittances, and as a tool for hedging against volatile currencies and high inflation.

They are a foundational building block, providing the cash component needed for other tokenized instruments to scale. This is one reason why recent regulation in major jurisdictions has proven to be pivotal in driving institutional interest. Tokenized central bank reserves and bank deposits can also support safe settlement and address inefficiencies, specifically in wholesale cross-border payments. This was the conclusion reached by the Bank for International Settlements (BIS) in their public-private collaboration, Project Agora.³

Find more about stablecoins here.

With clearer guidance from regulators, tokenization has reached a stage where systemically important infrastructure providers are recognizing the business case for integrating the technology into capital markets. Adoption is likely to be gradual, however, given the scale and complexity involved.

It is also important to note that tokenization introduces trade-offs, including operational risks as well as custodial and regulatory complexities that must be addressed. This technology is not a panacea for all market inefficiencies, but it is potentially transformative for market infrastructure and the way financial products are created and distributed. 

Additionally, tokenization does not inherently provide the censorship resistance or security guarantees associated with native crypto assets like bitcoin or ether. It instead inherits and adapts elements of the legacy trust model.⁴ Despite this, tokenization remains a compelling approach to improving today’s financial rails, making them more efficient, innovative, and inclusive.⁵

Key Takeaways:

• Tokenization represents ownership or rights to real-world assets (RWAs) on blockchains offering benefits such as programmability, composability, atomic and near-instant settlement, operational efficiency, and broader accessibility.
• Adoption is accelerating—though still early—as regulators take a pro-innovation stance, investors express demand and leading financial institutions begin tokenizing assets and integrating blockchain rails. Against this backdrop, the market can reach meaningful scale within a few years.
• Over time, tokenization may evolve toward native issuance, which would unlock greater benefits once current bottlenecks are resolved—likely within permissioned frameworks that align with institutional requirements.
• Key challenges include custodial and regulatory complexity, as well as privacy and interoperability hurdles, all of which require continued infrastructure build-out across legacy financial systems. Tokenization also lacks the censorship resistance and robust security assurances associated with assets like bitcoin and ether.
• Tokenization is not a speculative trend. It is a structural upgrade to asset infrastructure that has reached critical mass, with meaningful strategic implications for institutional investors, including the way investment products are structured and distributed.

Digital Twins vs. Native Tokenization 

Tokenization is a broad concept that includes two general approaches that are important to differentiate and represent different degrees of tokenization. Adoption is evolving in stages and is likely to phase in gradually, as has been the case historically. Most institutional projects, outside of stablecoins, are initially being deployed in a controlled environment and do not yet achieve full native issuance.

Shortened settlement cycles provide a useful parallel. The transition from T+5 to T+1 to reduce settlement risk has unfolded over multiple decades, illustrating the gradual nature of infrastructure change.⁶

Digital twin tokenization: This is a hybrid model in which a digital token represents an RWA, while the asset and its legal record, such as title deeds, contracts, or certificates, remain off-chain. The token does not replace the underlying asset or its legal records but represents ownership rights. These rights are not inherent to the token and instead depend on the applicable contractual and regulatory framework. 

The token can be sponsored by the issuer or a third-party unaffiliated with the issuer. In the latter case, structures can be custodial or synthetic. In its January 2026 statement on tokenized securities, the SEC noted that, in the case of securities, the underlying asset is held in custody, while the token evidences the holder’s direct or indirect ownership interest in that security.⁷

The SEC also defined a third-party issued token, or “linked securities,” as instruments that provide synthetic exposure to a referenced security but are not obligations of the issuer and confer no rights or benefits from them. Many tokenized equities offered by exchanges outside of the U.S. fall into this category.  

Presently, many tokenized assets take the form of digital twins, where the asset lives with a regulated custodian. This type of tokenization enables programmability, fractional ownership, collateral mobility, efficiency, and immutable transparency but is still reconciled with traditional records, eliminating the need to revamp existing infrastructure. 

Natively issued digital assets: These assets are issued and exist entirely on-chain, with no off-chain representation. Ownership and transactions are recorded on a single ledger, eliminating the need for reconciliation with external records. 

This enables true atomic settlement, or delivery versus payment, where smart contracts verify the conditions for exchange. If any condition is not met, the transaction fails and reverts in full.

However, native issuance does not guarantee legal finality, which still hinges on the legal framework. Operationally, both digital twins and natively issued tokens can embed functionality via smart contracts, including cash flow rules, corporate actions, compliance, ownership accounting, transfer rules, and permissioning. 

Smart contracts are computer programs that follow “if this, then that” logic and execute according to the rules defined by their code.⁸

Both digital twins and natively issued tokens are likely to co-exist with legacy systems for the foreseeable future, gradually substituting the existing infrastructure over time. At present, the market remains small relative to traditional financial markets but is growing rapidly, as explored later in this report.⁹  

Permissioned vs. Permissionless Blockchains

The tokenization of traditional assets for on-chain distribution by issuers has largely taken place on public, permissionless blockchains, and Ethereum in particular, as it unlocks access to DeFi applications for activities such as lending and borrowing. As Ethereum is permissionless, anyone can participate without approval, running nodes, validating transactions, and interacting and building on top of the network. 

Issuers can then apply permissioned smart contracts, controlling access to their products through mechanisms such as whitelisting on permissioned applications.

However, permissioned networks that can integrate with legacy systems are also relevant. The Depository Trust & Clearing Corporation (DTCC) initially launched its program to tokenize select stocks, exchange-traded products (ETPs), and fixed income securities entitlements on a hybrid network that is open to builders but requires validator approval and includes privacy features.¹⁰

Repurchase agreements are some of the most traded instruments on the network, following a digital twin model.

Many institutional projects have been developed on private, permissioned ledgers, where only approved participants can access, validate, or modify the network and where transaction visibility can be managed. These networks can be centralized, with a single entity in control, or operated as part of a consortium. 

While firms may prefer this approach for internal operations, a key limitation is reduced interoperability with other blockchains, which can fragment liquidity. Industry participants are working to address this challenge, including through the application of hybrid designs.

The Tokenization Landscape

Tokenization is among the fastest-growing sectors of the digital assets industry, driven by increasing regulatory clarity and the reliability of underlying blockchain networks, which has encouraged major financial institutions to deploy investment products on-chain. This momentum accelerated meaningfully from early 2024. Since then, tokenized RWAs grew twentyfold through May 2026 to reach $33.8 billion.¹¹

Ethereum has been the primary settlement layer for these assets, accounting for over half of market share and enabling integration with DeFi applications.

If represented RWAs are included—traditional off-chain assets reflected on-chain exclusively within closed systems—the figures are higher and consist largely of repurchase agreements, with total notional value locked in the hundreds of billions of dollars.¹² In traditional markets, repos trade in high volumes, involve multiple intermediary steps, and serve as a core collateralization mechanism, making them well-suited for tokenization.

In addition, tokenized deposits are being used by major financial institutions to transact billions of dollars daily on permissioned ledgers, on par with stablecoins in business-to-business payments.¹³  

A range of factors has driven the acceleration of tokenization, including cyclical forces such as DeFi demand for exposure to traditional asset classes, as well as the search for yield and greater capital efficiency in a higher interest rate environment.

Simultaneously, a more mature and scalable market structure, along with increasing regulatory clarity, has encouraged major market infrastructure players to announce large-scale pilots aimed at bridging liquidity between traditional markets and DeFi.¹⁴

In the U.S., the GENIUS Act established a federal framework for stablecoin legislation in 2025. Subsequent developments provided further clarity, including CFTC guidance on the use of tokenized bonds, equities, and money market funds as derivative collateral, and a non-objection letter from the SEC for the DTCC tokenization pilot. The DTCC is the parent of DTC, which custodies over $100 trillion in assets in the U.S.

In March 2026, a joint statement from the SEC and CFTC further advanced this framework by introducing a formal taxonomy including “digital securities”.¹⁵ Additionally, SEC Chairman Paul Atkins has emphasized the goal to enable America’s financial markets to move on-chain under “Project Crypto”.¹⁶

In Europe, a DLT pilot regime has been in place since 2023, with institutions seeking to expand its scope. In the UK, a Digital Securities Sandbox launched in 2024 allows regulated participants to run DLT-based trading and settlement in controlled environments.¹⁷  

The bulk of today’s tokenized assets on permissionless chains represent U.S. Treasuries and gold, followed by asset-backed credit, issued with permissioned controls. Demand for tokenized Treasuries surged as interest rates rose, with on-chain traders seeking to capture yield within DeFi, where returns had compressed. Demand for commodities has been supported by the rising price of gold and other materials. 

Trading volumes of these assets can be thinner than the underlying reference markets, particularly when those markets are closed.

To date, traditional financial institutions have been exploring the tokenization of financial instruments for at least a decade, following the launch of Ethereum, the first smart contract-enabled Layer 1. However, activity has largely remained at product level, accessible to a limited set of investors, with some issuers tokenizing their own products. 

Industry consensus has been that fixed income products are among some of the most suitable instruments for this technology, given their pre-defined cash flows, standardized templates, and utility as collateral and yield. This is reflected in U.S. debt accounting for nearly half of distributed tokenized assets on public blockchains.¹⁸

Broader traction is now emerging, supported by initiatives such as the three-year DTCC tokenized entitlement pilot and partnerships between leading traditional and digitally native exchanges to tokenize listed equities and futures. These efforts aim to combine deep, regulated market liquidity with public blockchain infrastructure.

Since they involve listed securities, these models must still rely on regulated clearing agencies such as the DTCC or Intercontinental Exchange (ICE) and operation within existing regulatory frameworks. The technology does not change these requirements.

In January 2026, the New York Stock Exchange (NYSE), whose parent company is ICE, announced the development of a multi-chain platform for trading and on-chain settlement of tokenized securities. Subject to regulatory approval, the venue is expected to support trading of tokenized assets fungible with traditional securities, accommodate natively issued tokens, operate 24/7, and enable T+0 settlement funded in stablecoins.¹⁹ NYSE is simultaneously participating in the DTCC’s pilot program, for which it received regulatory approval in May 2026.

Meanwhile, Nasdaq’s pilot, announced and approved by the SEC in March 2026, will rely on the DTCC for settlement and trade tokenized securities on the same order book as traditional assets, with full fungibility. This approach aims to eliminate liquidity fragmentation and allow issuers to maintain control of their equity across different formats.²⁰

Both entities are also partnering with digital asset exchanges to enable the on-chain distribution of tokenized products through these platforms.

The Tokenization Process

Once the asset being tokenized is defined, valued, and ownership rights are established, the token should legally map to the underlying so that investors have enforceable claims. The process typically involves several parties, including the issuer or fund manager, the tokenization platform, a custodian, and an administrator. 

This is not the case for synthetic tokens, as they are derivatives that track price, with claims held against the third-party issuer rather than the underlying asset.

The token is typically held within a special purpose vehicle, with compliance rules and permissioning controls embedded in the token. Another structure involves a trust or fund, where the token holder is a beneficiary, and the governing framework defines rights, redemption terms, and insolvency treatment. Regulation depends on the underlying asset and jurisdiction.

A less common model is where the token itself serves as the legal register of ownership, such that holding the private key equates to holding the legal title. 

The issuer sponsors or owns the underlying asset and determines its structure. First, the blockchain and any required oracles for off-chain data, such as pricing, are selected. The tokenization platform then creates and deploys the compliance-enabled smart contracts, mints the tokens, and manages record-keeping, flows, and allocations to investors. 

These entities may also act as transfer agents, alternative trading systems (ATSs), or broker-dealers, and can provide custody and secondary liquidity. Independent auditors verify the underlying holdings.

In a digital twin model, on-chain and off-chain processes must be mirrored. Native issuance reduces the need for reconciliation because ownership, transfer, and entitlement data are recorded on a shared ledger rather than across separate systems. 

In contrast, traditional financial transactions move through multiple ledgers, including banks, custodians, and clearinghouses. Each party maintains its own records, which require ongoing reconciliation. 

The Value Proposition

Atomic and Instant Settlement

A single source of truth removes the need for reconciliation across separate records and enables atomic delivery versus payment. Both legs of the transaction must be present at settlement, which either occurs simultaneously or does not happen at all, eliminating counterparty risk. 

Some digital twin tokens can support atomic settlement at the token level. However, this still ultimately requires off-chain reconciliation.

Faster settlement, particularly coupled with atomicity, can also help mitigate risks such as counterparty default, market shocks, and operational errors. This holds even when an off-chain record must still be updated, as there are fewer ledgers to reconcile and a shared transaction reference. Reduction in settlement times has been an ongoing theme across traditional finance. In the NYSE’s early days, every transaction had to be paid in full, and shares delivered within one business day. Eventually, settlement increased to T+5 as the markets expanded, straining funding and paper-based infrastructure.²¹

That trend reversed when markets shifted back to T+3 in 1995, and more recently to T+1, a shift that took decades and aimed to reduce risks associated with unsettled trades and collateral requirements. The SEC noted that market volatility in 2020 and 2021 revealed vulnerabilities that could be mitigated through shorter settlement times, reducing the settlement window further to T+1.²²

Programmability and Composability

Programmability allows rules to be embedded directly into the tokens via smart contracts, enabling the automation of processes such as compliance, corporate actions, payments, and proxy voting.

Composability is another key characteristic of tokenized assets. It allows smart contracts to be reused and interoperate with others, enabling products to bundle or build on existing components in either permissioned or permissionless environments. This creates a modular software stack that can reduce production time, integration costs, and reliance on intermediaries, while potentially expanding distribution and creating a compounding effect. 

The modular nature of tokenized financial instruments could enable new forms of value exchange across asset classes in ways that are difficult to anticipate today.

Operational Efficiency

A significant share of trading costs occurs post-transaction and is operational in nature, including slow manual processes, creating incentives for institutions to enhance profitability. For example, a McKinsey study estimates a 40% to 60% improvement in operational efficiency in the bond market with full-cycle tokenization, driven by enhanced data transparency, automation, embedded compliance, and streamlined processes.²³

Corporate actions and proxy voting are another area of focus. A 2025 ISSA report highlighted that this key market function remains data-heavy, error-prone, and costly.²⁴ Broadridge, for example, now provides on‑chain governance for tokenized equities, supporting proxy voting, corporate actions, and disclosures across both traditional and tokenized securities within existing workflows.

Accessibility

Tokenization enables assets to be represented in smaller units, allowing fractional ownership and lowering investment thresholds for assets such as private funds. It can also expand distribution channels through wallets and digital asset exchanges, simplifying cross-border transfers where legal frameworks permit.

In its January 2026 statement, the SEC noted that securities could be issued in multiple formats, including tokenized form, with investors able to move between them.

24/7 trading can improve collateral mobility, treasury management, and funding outside standard markets, unlocking idle capital. In a higher-for-longer rate environment, this can be a meaningful advance.

Extended market access may also increase trading volumes. After-hours trading already accounts for over 11% of U.S. equity volumes, up from just over 5% in 2019, and 24/5 trading is approaching, with Nasdaq expected to launch in 2026. FX and commodities markets already operate largely on a 24/5 basis. However, extending trading into weekends would be more costly and complex under legacy systems.

The Outlook

Although no perfect analogy exists, comparisons can be drawn to both the shift to shorter settlement times discussed earlier and the rise of ETPs. These are often referenced because they created a cost-effective, tradable wrapper that altered how assets are held and transacted, while also enabling intraday liquidity and composability. Investors can take a more modular approach to portfolio construction through the wide range of ETPs available.

However, there are also substantial differences. ETPs are standardized, regulated products that fit within existing financial plumbing, whereas tokenization faces hurdles such as interoperability and legal and custodial complexities.

ETPs provided simple beta exposure when they first launched in 1993, but they did not achieve significant scale for some time, surpassing $1 trillion globally in 2009 and just under $20 trillion by 2025. Tokenization, however, is not just a new wrapper. It represents a broader infrastructure overhaul. As with ETPs, the early years are seeing accelerated growth from a low base. 

Tokenized assets, excluding stablecoins, could reach $1.4 trillion by 2030, assuming conservative compound average growth rates half from recent levels but remaining elevated given the early stage of adoption, with risk to the upside if CLARITY passes Congress. This would represent over 1% of the DTCC’s custody base. A more meaningful rise in adoption will also depend on progress in areas such as interoperability, liquidity and privacy.

Just as important as how much market value moves on-chain in the next few years will be how those assets trade once tokenized, including their potential to widen access, reduce costs, increase activity, and foster new investment vehicles. As reference, ETPs have high turnover, representing 20% of U.S. equity volumes in 2024. The Federal Reserve found that conversion from mutual funds to ETPs improved liquidity and reduced volatility, thus improving market quality.^25,26

Challenges

Regulation

Regulation has often been cited by asset and wealth managers as a key barrier to entry, followed by security concerns, while custodians have emerged as early adopters and are seeing material benefits.²⁷ However, the passage of the GENIUS Act in the U.S., ongoing work on the CLARITY Act, and additional guidance from regulatory agencies are helping to shift the landscape. 

Progress remains uneven across markets, and uncertainty persists around tokens, their creation and transfer, and investor rights, depending on the jurisdiction and the type of tokenization, as highlighted by IOSCO.

Operational Risks

Just as the transition from T+3 to T+1 settlement generated concerns, including reduced time to correct errors, instant settlement has prompted questions around eliminating buffers, the need for continuous liquidity, and a reduced window for central banks and regulators to respond to stress events.²⁸ This would require authorities to adapt their response mechanisms to manage faster-moving, more global markets that may be more interconnected due to programmability and composability.

Security remains an ongoing risk, though not unique to the blockchain, including potential network and data leaks. Smart contracts can introduce vulnerabilities through bugs or exploits that may drain assets or bypass controls, and similar risks apply to oracles that provide the blockchain with real-world data. 

Effective key management is critical to mitigate the risk of losing private keys and unauthorized access. In addition, custodian and issuer due diligence are a necessary and familiar part of the process for investors. 

Privacy and Liquidity

Institutional investors require a level of privacy that the pseudonymous nature of public blockchains does not fully provide, as trading activity and positions can be observable and may raise regulatory concerns. As a result, many organizations are developing privacy-preserving ledgers. However, these solutions are not yet seamlessly interoperable, leading to liquidity fragmentation and potential price discrepancies. 

Conclusion

Tokenization represents a practical evolution of market infrastructure that is gaining traction across asset classes, jurisdictions, and market participants. This reflects the convergence of greater regulatory clarity, rising institutional interest, growing DeFi demand, and more mature blockchain networks capable of operating at scale. 

While challenges around regulation and operational risks remain, meaningful progress has been made and the industry is working to address the most pressing issues. As with prior shifts in market structure, adoption is likely to be incremental and uneven. However, the potential long-term impact on how assets are issued, traded, settled, created, and used could be transformative.

For more on how tokenization could impact portfolios and market structure, get in touch with our team.