Tokenized Assets
May 20, 2024
Tokenized Assets
Tokenization refers to a form of digitized finance in which
reduce the number of intermediaries required for some
real-world assets (RWAs)—financial assets such as
transactions. Fractionalization—the ability to divide whole
securities, bank deposits, and real estate—are recorded and
assets into smaller shares—may be another benefit of
traded on a programmable platform, such as a blockchain.
tokenization. In the realm of traditional securities, token
The term has become a byword for how discussions about
fractionalization allows the creation of fractions smaller
blockchains have shifted from cryptocurrency—one of their
than a share. For other physical asset classes, such as art or
primary uses—to other applications. While crypto has been
collectibles, fractionalization offers opportunities to
characterized by volatility and scandal, some members of
disaggregate ownership of an indivisible object. Proponents
decentralized and traditional (centralized) finance,
believe that, combined, these benefits may also help reduce
including former skeptics of crypto, perceive tokenization
costs, making certain services more accessible and liquid.
as the next step in the evolution of finance. One consulting
firm estimates that as much as $16 trillion in assets could be
Tokenized RWAs
available for tokenization by 2030.
Various types of RWAs could potentially be tokenized:
What Is Tokenization?
Stablecoins: Stablecoins are financial instruments that aim
Transacting with RWAs usually entails a few key functions:
to tie their value at one-to-one to a fiat (i.e., government-
a repository and ledger to store and record ownership of the
issued) currency, such as the dollar. To do this, stablecoin
asset and a process and infrastructure for transacting with
issuers hold reserves—currency, bank deposits, government
the assets. Different entities may perform these functions
securities, etc.—that back the value of tokens minted on
depending on the type of asset. Banks store and record
public blockchains. When consumers redeem stablecoins,
customer deposits, but various card networks, wire services,
issuers return the fiat. Hence, stablecoins are essentially
and, ultimately, master accounts at the central bank
tokenized reserves, and they have a market capitalization of
facilitate movements of deposits. With securities,
roughly $160 billion as of May 2024.
brokerages maintain client-facing ledgers, but a
clearinghouse finalizes transactions by updating its central
Commodities: Some issuers have established set-ups
ledger. Proponents claim that tokenization may combine all
similar to stablecoins for commodities, such as gold.
of these functions—storing, recording, and transacting—on
the blockchain.
Non-fungible tokens (NFTs): NFTs are blockchain-based
representations of digital or physical objects, such as pieces
Despite using similar technologies, cryptocurrencies and
of art. The tokenization standards used in the NFT process
tokenization are distinct products. Cryptocurrencies—such
differ from those used for fungible assets, such as
as bitcoin and ether—are natively digital assets that were
stablecoins, allowing each token to account for the
originally created solely on their associated blockchains.
uniqueness of the underlying (nonfinancial) asset. In most
Tokenization, in contrast, uses blockchains’ network
applications, NFTs record ownership and trade of unique
capability to write programs that create, store, track, and
digital assets on the blockchain, while the asset is stored
transact RWAs. For example, developers can follow ether’s
elsewhere. Some believe NFTs can be used to tokenize
network and coin standards to record preexisting assets into
physical assets or music royalties.
fungible (interchangeable) or non-fungible (unique) tokens,
which can then be traded on that blockchain. These
Tokenized securities: Tokens may also reference
tokenized assets are also compliant with smart contracts—
traditional securities such as stocks and government bonds,
blockchain programs that self-execute transactions when
among others. In tokenization, a security is converted from
predetermined conditions are met.
conventional forms to one in which the security has an on-
chain token, and ownership and trading are conveyed on the
Why Tokenize?
blockchain. In an early example from 2016, the furniture
Suggested—although largely unproven—benefits of
company Overstock.com registered digital shares of its
tokenization are similar to those of other forms of
company and traded them on an affiliated blockchain.
cryptocurrency and digital assets, including potentially
Additionally, certain exchanges and other platforms have
faster transaction times, cost savings, improved efficiency,
offered tokenized stocks for trade (though these have been
and greater access. Transactions on public blockchains are
closed to U.S. investors). Various companies also tokenize
real-time and final, which is an improvement over
U.S. Treasuries for different purposes, including allowing
traditional payment and transaction settlement times that
clients to earn interest. According to one May 2023 report,
can take a couple of days. Also, smart contracts allow
the market capitalization of tokenized securities was $225
various legs of multipart transactions to be preprogrammed
billion. As of May 2024, there were reportedly $1.3 billion
to execute at the same time. Smart contracts may also help
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Tokenized Assets
of tokenized Treasuries, still a small fraction of the $27
Blockchain versus offline: In some cases, intertwined legal
trillion market.
and technical challenges may impede adoption. There are
established practices and legal frameworks for ownership
Tokenized deposits: Tokenized bank deposits of various
and trading of most assets. Therefore, the ability to record
forms are also being considered. One form of tokenized
transactions of real estate (for example, on a ledger) does
deposit would resemble a stablecoin issued by a bank. The
not necessarily confer legal rights. Moreover, while
tokenized deposit holder would hold a claim on the issuer.
tokenization offers an avenue for “owning” or conveying
The holder would not require permission to transfer the
real estate or art, such physical assets may still be traded
claim to another owner, as there is no need for the issuer to
offline (i.e., in real life). This would require a system that
record the transfer except when it is ultimately redeemed.
reconciles blockchain and physical realities so that a
tokenized property that has been sold on the blockchain
Other tokenized deposits could look similar to traditional
cannot also be sold via traditional methods and vice versa.
account deposits issued by banks and other depository
institutions. The tokenized deposits would be liabilities for
Policy Implications
issuing banks, and, unlike stablecoins, a transfer would
Tokenization may also raise policy issues, including:
require debiting one account and crediting another as in the
traditional banking model. Such tokenized deposits would
Systemic risk: Tokenization’s ability to reduce frictions of,
be another method—on par with checks, debit cards, and
increase accessibility to, and speed up payments may align
automated clearing house transfers—that bank clients could
with common policy goals. However, in moments of
use to access their deposits.
uncertainty, faster transactions may exacerbate stresses. In
the case of tokenized deposits, instantaneous transfers that
Another version would be accessible and transferable only
would allow individuals or companies to pull funds from
to customers of a financial institution or a consortium of
banks or stablecoin issuers could create or exacerbate runs.
participating financial institutions. J.P. Morgan is
To the extent that other financial assets are also tokenized,
developing one such system for wholesale payments,
such panic could spread around the financial system
named JPM Coin System. The system allows J.P. Morgan
quickly. While certain safeguards (such as circuit breakers)
clients to transfer “[d]ollars held on deposit” at the bank
that protect against this are used in traditional finance, it is
within the system using a permissioned blockchain.
unclear whether similar mechanisms are compatible with
tokenization.
Real estate: Tokenized real estate—in which commercial
or residential real estate properties are tokenized and traded
Operational risk: Tokenization built on public,
on blockchains—is similar to other tokenized assets. In
decentralized infrastructure with no central authority poses
practice, there may be differences, in part because the
operational risk. Financial institution infrastructure is often
underlying assets are less uniform and exist in physical
taken for granted until a failure or breach. Financial
form for use, unlike securities. One project offers tokenized
institutions or their customers may find public blockchains
real estate through a single-purpose company that owns the
and associated miners and validators—where no individual
real estate, while tokens represent shares in the company.
can be held accountable for operational failures and who
may lack credibility—to be too risky to consider. Financial
Potential Challenges
institutions may create their own private blockchains to
Despite potential benefits, tokenization may face challenges
manage operational risk, reinforcing challenges for
to implement:
interoperability and adoption.
Adoption and scalability: Because tokenization depends to
Regulatory and legislative frameworks: It is unclear if
some extent on public crypto infrastructure, it may face
tokenization would necessitate changes to statutory or
some of the same challenges affecting crypto, including
regulatory frameworks. Tokenization does not necessitate
whether it can provide affordable services at scale.
the creation of a new asset class, and regulators and/or
Regulated traditional financial applications performing
Congress may decide that existing regulations are adequate.
similar services may also impede adoption.
However, tokenization may implicitly change markets (for
example, with 24/7 trading of securities) or require changes
Interoperability: Tokenization projects may be built on
to accommodate on-chain acknowledgement of transactions
existing public blockchains, such as Ethereum, or they may
(for example, in real estate) in ways that may require
choose to create new blockchains. Different blockchains are
regulatory changes. There is also a question of whether
not usually interoperable, which means that assets created
Congress or regulators would require a security issuer (such
on one blockchain are not compatible with those on
as the U.S. government) to have a say in whether
another. This may lead to fragmentation in the markets for
underlying securities may be tokenized.
tokenized RWAs, in which the same assets trade at different
prices. For example, lack of interoperability among
If Congress were to decide that tokenization warranted
different banks offering tokenized deposits would prevent
changes to legislative or regulatory frameworks, it may
flow of payments. Similarly, while traditional securities
choose to introduce standalone legislation or consider
trading markets have set hours, blockchains are intended to
tokenization among the ongoing legislative efforts on
operate continuously. Simultaneous trading across
digital assets and stablecoins.
platforms may create trading-platform-specific price
differentials.
Paul Tierno, Analyst in Financial Economics
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Tokenized Assets
IF12670
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https://crsreports.congress.gov | IF12670 · VERSION 1 · NEW