The Evolution of Tokenization: From Concept to Allocation

The world of tokenization is rapidly shifting from a conceptual phase to a practical application, with significant implications for advisors and investors. In recent years, major companies such as BlackRock, Franklin Templeton, and Fidelity Investments have launched blockchain-based products, including Treasury funds and private credit strategies, marking a substantial milestone in the evolution of tokenized assets. As a result, investors are taking notice, and the numbers are on the rise. The basic idea behind tokenization is straightforward: bonds, private credit, and money market funds are now available on-chain, without traditional intermediaries, enabling faster settlement. However, the real challenge lies in the decisions surrounding compliance, identity, transfer rules, sanctions, and lifecycle management. These are the areas where most projects slow down, and the market is currently evolving. The compliance question is essentially an architecture question, with issuers facing a crucial choice: where to place the compliance rules. Compliance can be built into the token and enforced by smart contracts, managed outside the token using tools such as whitelisting, or enforced at the network level. Each method has its pros and cons, and the choice directly affects how an asset behaves. For advisors, this is not an abstract design choice; it has a direct impact on how an asset can move across chains, integrate with decentralized finance (DeFi) protocols, and serve as collateral in lending strategies. The transition from theory to practice is most evident in the use of tokenized assets in lending markets, with deposits of tokenized real-world assets in DeFi lending protocols surpassing $840 million. The mechanics are new, but the logic is not, as investors post tokenized assets as collateral, borrow against them, and re-deploy the borrowed capital. As these assets move into lending and structured strategies, credit risk is evolving alongside specific DeFi strategies, such as looping, with emerging risk ratings frameworks like Credora introducing continuous, on-chain risk assessment. For advisors, this reframes the role of tokenized assets, which are not simply wrappers around existing products but can become productive collateral, generating additional yield and participating in broader strategies while remaining in the portfolio. However, some structural gaps remain, with corporate actions still relying heavily on off-chain processes and illiquid assets such as private credit and real estate not yet fully compatible with DeFi standards. Until these pieces are solved, tokenization will continue to scale unevenly, with the most complex assets lagging behind the simplest ones. In the 'Ask an Expert' section, Kieran Mitha answers investor questions about tokenized investments, highlighting the need for interoperability between blockchains, custodians, and traditional market infrastructure, as well as regulatory clarity, for tokenization to become a standard layer in global capital markets. Mitha also addresses common misconceptions surrounding tokenized assets, such as the assumption that tokenization automatically creates liquidity, and the challenges posed by the early stage of the market, including fragmented liquidity and the need for infrastructure, regulation, and investor participation to catch up with technological advancements.