Fundamentals of Asset Tokenization
Date: 14 February 2025
Author: Gaya Chandrasekaran
Larry Fink, the chairman and CEO of BlackRock, said in January 2024: “We believe the next step going forward will be the tokenization of financial assets, and that means every stock, every bond … will be on one general ledger.”
A new report from Security Token Market, a global hub of security token data and research, forecasts $30 trillion in asset tokenization by 2030, led by stocks, real estate, bonds and gold.
Asset Tokenization
- Asset tokenization is the process of converting rights to an asset into a digital representation (called ‘token’) on a blockchain.
- Tokens can represent a broad range of assets, including physical assets such as real estate or art; financial assets such as equities or bonds; intangible assets such as intellectual property; and even identity and unstructured data.
- The tokenization process can produce either fungible tokens that are readily exchanged, or non-fungible tokens (NFTs) that each represent unique assets.
- The nature of the asset and the desired use case typically determine the type of token that is minted.
Evolution
- In traditional financial markets, asset ownership and transactions rely on intermediaries such as banks, brokers, and clearinghouses, resulting in slow processes and additional costs. Blockchain-based tokenization removes these intermediaries, allowing for direct, transparent, and efficient transactions.
- For example, in real estate, traditional investment requires extensive legal paperwork and third-party verification. Tokenization, however, enables fractionalized ownership, allowing investors to trade real estate-backed tokens instantly.
Mechanics
- Tokenized assets are recorded on decentralized blockchain ledgers, ensuring immutability, security, and transparency. Smart contracts, which are self-executing contracts with predefined rules, automate transactions, enforce ownership rights, and reduce counterparty risks. Each asset token exists as an entry on a blockchain ledger, preventing duplication and fraud.
- The asset backing the token can be (a) Fully asset backed where each token directly represents a real-world asset or (b) Utility based where tokens grant rights or access rather than ownership such as NFTs
Tokenized Asset Types
Theoretically, many types of real-world assets could be tokenized. These include real estate, commodities, art and collectibles, financial instruments, insurance policies and loans, intellectual property, luxury goods, wines and spirits, natural resources, industrial infrastructure, transportation assets, agricultural assets, renewable energy infrastructure, health care assets and telecommunications infrastructure.
The most popular types of tokenized assets are in the image below.
Benefits of Asset Tokenization
- Increased Liquidity: Trading on digital marketplaces improves accessibility resulting in greater liquidity.
- Fractional Ownership: Investor participation is significantly expanded as assets of high-value can be fractionally owned.
- Transparency & Security: Using blockchain technology provides an immutable record which helps fraud prevention.
- Reduced Transaction Costs: Eliminating intermediaries lowers fees and speeds up transactions.
- 24/7 Global Market Access: Trading can happen anytime, anywhere providing users global market access.
Challenges and Risks of Asset Tokenization
- Regulatory Concerns: Lack of clear regulatory frameworks creates legal uncertainties.
- Security Vulnerabilities: Bugs and hacking risks relating to smart contracts can compromise tokenized assets.
- Adoption Barriers: Blockchain technology and its applications, including tokenization of assets, still remains unfamiliar to many investors and institutions resulting in barriers to adoption.
- Market Liquidity Issues: Although there is increased liquidity and global access secondary markets for tokenized assets are still developing, which affects pricing stability.
Asset tokenization is expected to revolutionize asset ownership and investment by enhancing liquidity, accessibility, and security. However, challenges such as regulatory uncertainty and technological risks need to be addressed for widespread adoption. With the evolution of blockchain technology, tokenization is predicted to reshape traditional finance and global markets.
In the next article I will be discussing how blockchain and smart contracts power asset tokenization.
References
- https://www.britannica.com/money/real-world-asset-tokenization
- https://www.chainalysis.com/blog/asset-tokenization-explained/
- https://www.merklescience.com/blog/asset-tokenization-benefits-challenges-and-use-cases
- https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-tokenization#/
- https://cointelegraph.com/news/wall-street-is-betting-on-30-t-rwa-tokenization
- https://www.mckinsey.com/industries/financial-services/our-insights/from-ripples-to-waves-the-transformational-power-of-tokenizing-assets/
- https://www.coindesk.com/opinion/2025/02/07/rwa-tokenization-is-going-to-trillions-much-faster-than-you-think
About the Author
Gaya works in the Global Digital Solutions Group (DSG) within Santander Corporate & Investment Banking (SCIB), which focusses on developing innovative, sustainable and profitable digital capabilities and providing state of the art advisory services to clients.
She joined Santander in 2014 gaining broad experience across Corporates & FIG in SCIB and has also worked on several strategic initiatives including regulatory deliverables. Her work involved deal structuring, due diligence and portfolio management. During this period, she has won awards and nominations to Accelerating You Programme for Future Leaders and Global Risk Leadership Programme.
Gaya recently completed the Fintech Programme from Oxford University. She holds a Masters in Finance from London Business School (Recipient of Graduating Student Award) and an MBA (Gold Medallist) from India.
She has contributed actively to alumni engagement at LBS since graduation through several leadership positions, most recently as an ExCo Member of London Alumni Club where she led events on identifying fintech winners, cyber risk, sustainability & factor investing involving C-suite speakers, industry experts and faculty.
Gaya is a Mentor and the Head of Personal Excellence Programme (PEP) for London with Women in Banking & Finance (WIBF). She is passionate about supporting women in their ambitions and enjoys organizing knowledge-sharing networking events.
Outside her day job, Gaya is a self-taught artist and has been influenced by art right from her early childhood. She loves learning new techniques and underwent training in India as well as in the UK (Slade School of Art). Her choice of themes are inspired by key life moments. An expression of her thoughts and emotions, her artworks invite the audience to go deep within, explore and connect with their own experiences.
Gaya offers NFTs in lieu of a Certificate of Authenticity to all her collectors – its her mission to facilitate digitisation to her audience. Based on feedback from a renowned NFT Collector she is now exploring software tools to mint NFTs of pure digital artworks.
Gaya’s first solo exhibition was in 2018 at Santander’s London office, a fundraiser where she sold >70% of artworks donating 50% of proceeds to charity. Her painting, ‘The Golden Lion’ won a special commendation in the David Shepherd Wildlife Foundation’s #sketchforsimba competition in 2019.
She conceptualised the first ever Art Exhibition within the LBS community, which led to LBS Art Week in 2021 where her paintings were selected for the online exhibition and she was a chosen speaker of the Artists Panel. She exhibited her artworks with The Holy Art Gallery and The Boomer Gallery in London during 2022. Her artworks are published in the Artist Talk Magazine Issue 22 & 23.
“Please note the opinions expressed within the content above are solely the author’s and do not reflect the opinions and beliefs of people, institutions, or organisations that the owner may or may not be associated with in a professional or personal capacity.”
You might also be interested in
