What the Hell is Tokenization?
- Blockchain Team
- 7 days ago
- 10 min read
Updated: 6 days ago
What is Tokenization in crypto and finance?
Tokenization refers to the process of representing assets, value, or rights as digital tokens on a blockchain. Tokenization has become a buzzword in crypto circles, often tied to bold claims about how blockchain will reshape financial markets. But beneath the hype, the idea itself remains straightforward. These assets can range from traditional financial instruments like bank deposits, stocks, bonds, and funds, to real-world assets such as real estate or commodities, as well as digital-native crypto assets like fungible tokens (ERC-20s), stablecoins, governance tokens, and other assets created directly on blockchains.
This shift is made possible by blockchain technology. Unlike traditional systems that depend on centralized intermediaries, blockchains enable true peer-to-peer (P2P) exchange, allowing participants to transfer value directly to one another. Ownership changes are recorded across a shared network, removing the need for clearing houses or manual reconciliation.
In practical terms, this means tokenized assets can be traded globally, 24/7. An investor in London can transfer a tokenized asset to a buyer in Singapore late at night, with settlement occurring instantly. Beyond simple transfers, these tokens can interact with decentralized finance applications, where they can be used as collateral or earn yield while remaining fully under the owner’s control. That level of speed and composability simply isn’t achievable when ownership records sit inside closed, centrally managed databases.
Where Tokenization Actually Matters
Tokenization isn’t a single use case, it’s the same technology being asked to do wildly different jobs.
Sometimes it’s solving real infrastructure problems. Other times, it’s just putting a blockchain between a problem and a solution that already worked.
1) Asset Tokenization (Real-World Assets / RWA's)
Tokenizing real-world assets such as real estate, commodities, and private credit improves liquidity in traditionally slow, illiquid markets. Assets remain the same; what changes is how ownership, income distribution, and transferability are handled. Fractional interests, programmable payouts, and secondary trading become possible without altering the underlying asset. As of January 2026, tokenized distributed RWAs (excluding stablecoins) represent roughly $22B on-chain, with total represented asset value exceeding $350B, driven largely by Treasuries, private credit, and funds.
Note: Numbers accurate as of January 21, 2026 (Excludes stablecoins)
Source: RWA.xyz | January 21, 2026
2) Financial Tokenization (Securities, Funds, and Money) Tokenization modernizes financial infrastructure by enabling near-instant settlement, extended trading hours, and fewer intermediaries. This includes tokenized securities and funds, as well as stablecoins, which serve as on-chain representations of fiat and power liquidity across crypto markets. By January 2026, stablecoins exceed $295B in market cap, with total tokenized financial assets projected to push the broader tokenized market beyond $400B by year-end.
3) NFTs and Unique Assets NFTs represent non-divisible assets where uniqueness matters—art, collectibles, licenses, or digital identity. Rather than fractionalization, NFTs focus on authenticity, provenance, and ownership history, enabling direct ownership and royalty models without centralized platforms. As of January 2026, NFT monthly sales average ~$300M, with market cap estimates in the $2–3B range.
4) DeFi-Native and Utility Tokens
Some tokens don’t represent real-world assets at all. DeFi-native and utility tokens enable governance, incentives, and programmable money within decentralized systems. Here, tokenization isn’t digitization—it’s the foundation of new on-chain economies. DeFi total value locked (TVL) stands at approximately $100–150B, led by Ethereum.
Note: Numbers accurate as of January 21, 2026 (Excludes stablecoins) Source: DefiLlama | Jan 21, 2026
Across assets, finance, and digital goods, tokenization matters most where it increases liquidity, efficiency, and ownership flexibility without adding friction where none is needed.
What are the benefits of Tokenization?
Liquidity unlock Illiquid assets can be split into fractions and traded continuously. What once took months to sell can now change hands daily.
Fractional access Fractional ownership existed long before crypto through funds and syndicates. Tokenization improves it by allowing fractions to be transferred and settled directly, without fund lockups or manual approvals, so smaller investors can exit when they choose, not just hold smaller portions.
Near-instant settlement Settlement shifts from minutes or seconds, reducing counterparty risk and releasing trapped capital faster.
Lower structural costs Smart contracts automate issuance, transfers, and compliance—removing layers of intermediaries and recurring fees.
Transparent ownership records On-chain histories are immutable and auditable, reducing disputes, reconciliation errors, and opaque bookkeeping.
Global, always-on markets Assets are tradable across borders, 24/7, enabling continuous price discovery instead of local market windows.
Composability with DeFi Tokenized assets can be used as collateral, yield instruments, or inputs in financial products without re-custody. To Capture the benefits of tokenization without inheriting regulatory risk, CryptoCompliance.ai helps you safeguards every layer.
How Tokenization Actually Works
The journey from an asset to tradeable token follows a systematic path.
1. Asset or value definition Tokenization begins by defining what is being represented, an asset, right, claim, or economic interest and establishing its value, scope, and constraints.
2. Legal and rights structuring Where legal enforceability matters, ownership or economic rights are mapped to a legal structure (such as an SPV, trust, or issuer framework) to ensure token holders have clear, enforceable claims.
3. Technical implementation A blockchain and token standard are selected based on the use case. Ethereum remains dominant, with networks like Avalanche, Polygon, and Solana also used. Fungible representations often use ERC-20, unique representations ERC-721, and standards like ERC-1400 or ERC-3643 support compliance-focused tokens.
4. Smart contract logic Smart contracts define how tokens are issued, transferred, recorded, and where applicable how revenue, rewards, or other rights are distributed. As we know Ethereum remains the leading network and its ecosystem is well documented with a massive community. The following are a few smart contract guidelines commonly used for various tokens for smart contracts.
ERC Name | Primary Use Case (for Financial Institutions / RWAs) |
ERC-20 | Fungible tokens (e.g., stablecoins, tokenized securities, commodities, shares in funds) |
ERC-721 | Non-fungible tokens (unique assets, e.g., distinct real estate titles, unique collectibles/art as RWAs) |
ERC-1155 | Multi-token (both fungible and non-fungible in one contract; e.g., mixed gaming/virtual assets or hybrid RWAs) |
ERC-3643 | Permissioned/compliant security tokens (regulated RWAs like equities, bonds, funds, real estate, private credit; built-in KYC/AML, transfer restrictions, jurisdiction rules) |
5. Custody and security Control over tokens and underlying assets is protected using institutional-grade custody solutions, often relying on Multi-Party Computation (MPC) or similar models to reduce single points of failure.
6. Distribution and trading
Tokens are issued through appropriate channels, with verification or compliance checks applied when required. Once live, tokens can trade on regulated venues or open marketplaces, depending on their classification.
What are the legal and regulatory challenges of tokenization?
Despite the cross-border growth of tokenization, jurisdictions have different approaches in how they regulate and legally recognize tokenized assets. All major jurisdictions have each adopted distinct regulatory approaches, shaped by their existing financial laws, regulatory philosophies, and their aim for innovation. While tokenization promises efficiency, fractional ownership, and broader market access, it also raises challenges related to legal classification, investor protection, enforceability, and cross-border compliance.
In the United States, tokenization is not governed by a single, bespoke statute. Instead, regulators apply existing financial laws to tokenized assets. The Securities and Exchange Commission (SEC) plays a central role, particularly where tokens are deemed to be securities under the Howey Test, which assesses whether an arrangement constitutes an “investment contract.” Many tokenized assets, especially those offering profit expectations, fall into this category, triggering registration requirements or the need to rely on exemptions. Other agencies, such as FinCEN and the IRS, impose anti-money laundering (AML), know-your-customer (KYC), and tax obligations. The main challenge in the U.S. is regulatory fragmentation and uncertainty, as issuers often struggle to determine in advance whether their tokens will be classified as securities, commodities, or another regulated instrument, exposing them to enforcement risk.
The United Arab Emirates has positioned itself as a more innovation-friendly jurisdiction for tokenization, supported by purpose-built regulatory frameworks. Authorities such as the Securities and Commodities Authority (SCA) and the Virtual Assets Regulatory Authority (VARA), along with financial free zones like ADGM and DIFC, have issued detailed rules governing virtual assets and tokenized securities. These frameworks often emphasize legal enforceability, requiring that token holders’ rights be clearly defined and legally recognized off-chain as well as on-chain. While this provides greater certainty for issuers, challenges remain due to the coexistence of multiple regulators and licensing regimes across different emirates and free zones, which can increase compliance complexity for cross-jurisdictional projects.
In the United Kingdom, tokenization is regulated primarily through the Financial Conduct Authority (FCA) under existing financial services legislation. Tokens that qualify as security tokens are subject to the Financial Services and Markets Act (FSMA), prospectus rules, and ongoing disclosure obligations, while other cryptoassets may fall under tailored crypto regulations. The UK has adopted a pragmatic and incremental approach, seeking to balance innovation with strong AML and consumer protection standards. However, classification uncertainty persists, as issuers must determine whether a token is a security, a utility token, or another form of cryptoasset, each carrying different regulatory consequences.
The European Union has developed one of the most comprehensive and harmonized regulatory regimes for tokenization. The Markets in Crypto-Assets Regulation (MiCA) establishes a unified framework for cryptoassets that are not already covered by traditional securities law, such as asset-referenced tokens and utility tokens. At the same time, the EU’s DLT Pilot Regime allows regulated entities to experiment with trading and settlement of tokenized financial instruments under controlled conditions. Security tokens remain subject to existing rules such as MiFID II. Despite this high level of regulatory clarity, challenges arise from differing interpretations and supervisory practices among member states, as well as limited liquidity and infrastructure for secondary trading of tokenized assets.
Across all four jurisdictions, several common legal challenges emerge. One major issue is asset classification, as the regulatory treatment of a token depends heavily on how it is defined under local law. Cross-border tokenization projects also face friction due to inconsistent rules, licensing requirements, and enforcement standards. AML/KYC compliance is universally required but implemented differently, adding operational burdens. Another key challenge is ensuring that smart contracts and blockchain records are legally enforceable and aligned with traditional concepts of ownership and contractual rights. Finally, tax treatment and investor protection remain complex and evolving areas, with regulators increasingly focused on ensuring transparency and preventing investor misunderstanding.
Recent Developments and the Future Outlook
If tokenization feels inevitable now, that’s because the data finally caught up to the theory. Looking at the current landscape, it is almost comical to pretend that any asset class would lead before stablecoins. Of course stablecoins dominate. They are not just another token category, they are the value layer itself. Every other on chain asset ultimately settles, prices, collateralizes, or yields in dollars. Expecting tokenized equities, Treasuries, or credit to scale before stablecoins would be like expecting apps to grow before the internet existed.
Once that is accepted, the rest of the asset composition starts to make sense. Tokenized Treasuries and private credit have grown meaningfully, but only where standardization, liquidity, and legal clarity already existed off chain. Commodities like gold appear in small but credible size. Real estate, despite being the favorite conference slide for years, barely registers with having a total valuation of not more than $400M. Sourced from rwa.xyz
Category | Leading Assets (Top 3) | Combined Market Cap (Approx) |
Stablecoins | USDT, USDC, USDS | ~$297B+ |
U.S. Treasuries | BUIDL, USYC, USDY | ~$9-10B |
Commodities | XAUT, PAXG, JSOY_OIL | ~$4.7B |
Private Credit | syrupUSDC, syrupUSDT, PRIME | ~$20B (Active Loans Value) |
Corporate Bonds | BMN2, PKH2, NRW1 | ~$1.6B |
Institutional / Structured Funds | JAAA, BCAP, USCC | ~$2.6B |
Source: RWA.xyz | January 21, 2026
Looking at networks instead of assets clarifies the picture. Canton leads RWA value because it hosts represented institutional balance sheets, and provides institutional privacy not because of broad adoption. Its scale reflects infrastructure usage, while public blockchains show smaller numbers because their assets are truly distributed and visible. Institutional privacy can weaken price discovery, since key signals about stress, liquidity, and risk stay hidden. It tends to concentrate power among incumbents, fragment liquidity across closed systems, and slow innovation by limiting third-party access.
Ethereum dominates this public segment, controlling about 59% of distributed RWA Network That leadership cements it as the main settlement layer for real world assets, but it also introduces concentration risk as scalability, cost, and governance become systemically important concerns.
Rank | Network | Total RWA Value (USD) | Market Share | RWA Type |
1 | Canton Network | $342.6B | 89.05% | Represented |
2 | Provenance Blockchain | $14.6B | 3.80% | Represented |
3 | Ethereum | $13.3B | 3.47% | Distributed |
4 | ZKsync Era | $2.6B | 0.67% | Distributed |
5 | BNB Chain | $2.2B | 0.56% | Distributed |
Source: RWA.xyz | January 21, 2026 With this context, the New York Stock Exchange announcement looks less like a breakthrough and more like the logical next step. Tokenized equities, continuous trading, instant settlement, and stablecoin-based funding are not attempts to follow crypto trends. They reflect where settlement, liquidity, and operational efficiency are already moving. With DTCC planning to tokenize Treasuries and banks such as BNY Mellon and Citi supporting tokenized deposits, core market infrastructure is steadily shifting onto blockchain rails.
What matters now is not whether tokenization works. That question has largely been answered. The focus has moved to execution. As assets become interoperable and accessible across the same underlying infrastructure, differentiation no longer comes from controlling assets but from how effectively they are delivered, integrated, and managed.
Blockchain did not displace traditional finance. It has been absorbed into it. The next stage will be shaped less by who tokenizes the most assets and more by who can offer reliable, efficient, and intuitive ways to interact with them at scale with the right infrastructure.
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