Asset Tokenization: Benefits, Challenges, and Use Cases

The increasing adoption of cryptocurrencies and stablecoins highlights how both retail and institutional investors are seeing the advantages of crypto assets and blockchain technology. Now, attention is shifting toward how these benefits could be applied to traditional assets we’re all familiar with, from real estate to art, through an evolving concept known as asset tokenization. 

By recording ownership of these assets on a blockchain, tokenization has the potential to transform the way we transact and invest, offering more efficient processes, broader access to investment opportunities, and increased liquidity in markets that have traditionally been illiquid. However, while the possibilities are exciting, there are also significant challenges that must be overcome for the full adoption of this concept. 

In this blog post, we will explore both the benefits and the hurdles of asset tokenization and what it could mean for the future of finance.

What is Asset Tokenization?

Tokenization is the process of turning rights to assets into digital tokens recorded on a blockchain. These tokens can represent a wide variety of assets, including physical items like real estate or art, financial instruments like stocks and bonds, or even intangible assets such as intellectual property or carbon credits. 

Essentially, it’s a way of taking something that exists in the physical or financial world and creating a digital version of it, making it easier to buy, sell, and trade in a secure and transparent way. At its core, tokenization involves transferring ownership or claims from traditional paper-based ledgers onto a blockchain, a programmable platform that is more secure, efficient, and versatile. 

According to a BIS Bulletin, tokenizing these assets and contractual claims means transforming them into tokens on a common programmable platform. These tokens consist of two main parts: a core layer, which holds the critical information about the asset and its ownership, and a service layer, which incorporates the platform’s rules and governance to ensure smooth and compliant transactions.

How Off-Chain Assets are Tokenized on the Blockchain

Assets are resources with inherent economic value, owned by either individuals or organizations. These assets can vary widely, from everyday items to more complex holdings like real estate properties or shares in a mortgage-backed security. Some assets, particularly physical ones like houses, require a formal record of ownership on a ledger, such as property registries, to keep track of who owns them. Others, like personal items, do not need such formal records to determine ownership.

The tokenization process involves the digitization of these off-chain assets (real-world assets), which exist in the physical or traditional digital world but can be represented on a blockchain. These assets can include real estate, commodities (like gold or oil), intellectual property, stocks, bonds, or other financial instruments that exist outside the digital or blockchain-native environment. 

Off-chain assets that can be tokenized include:

• Physical Assets: Tangible assets like real estate properties, commodities (such as gold, oil, or other valuable resources), or physical works of art.
• Financial Instruments: Traditional financial products, such as stocks, bonds, mortgages, or real estate titles.
• Digital Assets Not Native to Blockchain: Intangible assets like intellectual property (trademarks, patents, copyrights), non-blockchain digital files, or even software licenses.

Understanding Exogenous Assets in Asset Tokenization

Exogenous assets originate outside the blockchain ecosystem but are integrated into it through the tokenization process. These assets are typically real-world assets or traditional financial instruments that exist independently of the blockchain but are represented digitally within the blockchain system, allowing them to interact with decentralized technologies.

According to the International Monetary Fund (IMF) taxonomy, tokenized assets that are linked to real-world assets or services are classified as “tokens associated with off-line assets or services”. These tokens typically grant rights related to the specific asset or service they represent. 

The process of incorporating exogenous assets into a blockchain involves creating tokenized representations of the external asset. These assets are not originally part of the blockchain ecosystem, meaning they do not exist natively on the blockchain. Instead, they are symbolized by a digital token, which serves as a proxy for the asset and allows for its ownership, transfer, or management within the blockchain system. The ownership or control over the off-chain asset is directly linked to the ownership of the token, which represents the underlying asset in the blockchain network.

These tokenized versions rely on off-chain collateral, which is either stored or managed by an external party, such as a custodian, or controlled through a smart contract or oracle. The role of this off-chain collateral is crucial, as it maintains the value and functionality of the tokenized asset on the blockchain. The Federal Reserve Board’s Paper supports this view, defining "tokenization" as the process of connecting reference assets to crypto tokens through design features that align the token’s price with the value of its underlying reference asset.

• External Value Dependency: The value of an exogenous asset is tied to an external source or underlying collateral that exists outside of the blockchain. For instance, a token representing gold is only valuable because the equivalent amount of gold is held off-chain by a custodian, ensuring that the token has real-world backing.
• Proxy Representation: On the blockchain, a token acts as a proxy for the real-world asset. While the asset itself is not held or stored on the blockchain, the token enables ownership transfer, trading, or access to the asset through the decentralized system.
• Off-Chain Management: The collateral backing these exogenous assets is typically managed off-chain. This may involve a centralized authority (like a bank or custodian) or more decentralized mechanisms like smart contracts or oracles that ensure the blockchain-based tokens remain in sync with the real-world value of the asset.

Exogenous assets differ fundamentally from endogenous assets which are native to a specific blockchain or platform, created and existing entirely within the blockchain environment, with their value and functionality determined solely by the rules and dynamics of the blockchain itself, without any reliance on external or off-chain references.

5 Key Benefits of Asset Tokenization for Investors

Tokenization enables a more accessible, transparent, and efficient financial ecosystem where traditional and real-world assets can interact with blockchain technology to create new opportunities for both investors and asset owners. 

1. Increased Liquidity: Tokenization transforms traditionally illiquid assets, such as real estate or fine art, into digital tokens that can be easily traded on blockchain platforms. This process enhances the marketability of these assets by enabling them to be bought, sold, or transferred quickly in digital markets, often 24/7. By doing so, tokenization opens up new opportunities for liquidity, even for assets that were previously difficult to convert into cash without lengthy processes.
2. Fractional Ownership: Through tokenization, high-value assets can be divided into smaller digital tokens, allowing investors to purchase fractions of an asset rather than the entire asset. This lowers the entry barrier for individuals who would otherwise be unable to invest in expensive assets, such as luxury properties, expensive works of art, or large infrastructure projects. Fractional ownership democratizes access to investments, enabling a broader pool of participants to diversify their portfolios across a wider range of assets.
3. Democratization of Access: Tokenization and fractional ownership create new opportunities for a broader range of investors by making previously exclusive asset classes accessible to a global audience. Smaller investors can now participate in markets that were traditionally reserved for high-net-worth individuals or institutional investors, such as luxury real estate, rare art, or infrastructure projects. Tokenization removes geographic and financial barriers, allowing people from all over the world to invest in diverse asset classes, thereby democratizing access to investment opportunities and enabling a more inclusive financial ecosystem.
4. Enhanced Transparency: Blockchain technology inherently provides transparency by recording all transactions in an immutable, distributed ledger. Every trade, transfer, or change of ownership is logged on the blockchain, creating a permanent and tamper-proof audit trail. This ensures that participants have full visibility into asset history, reducing the risks of fraud or manipulation and fostering trust among investors and stakeholders.
5. Reduced Costs: Tokenization, coupled with automation through smart contracts, reduces many of the costs typically associated with traditional asset trading and management. Smart contracts can automate processes such as trade execution, settlement, and dividend distribution without the need for intermediaries like brokers or clearinghouses. This automation cuts down on administrative fees, legal costs, and transaction delays, providing a more efficient and cost-effective framework for asset trading and management.

Asset Tokenization vs Dematerialization: Key Differences

Dematerialization refers to the process of converting physical certificates or documents representing ownership into digital records. It is primarily used in traditional financial markets, particularly for securities such as stocks and bonds. This process focuses on improving the efficiency of handling and managing existing assets by digitizing ownership records within centralized systems like stock exchanges and depositories, eliminating the need for physical documentation.

On the other hand, tokenization involves creating blockchain-based digital tokens that represent ownership or rights to real-world or digital assets. This process enables trading, fractional ownership, and decentralized management of assets. Tokenization allows for the creation of new financial instruments and investment opportunities by representing various assets, such as real estate, art, or venture capital investments, as digital tokens. These tokens can be traded on blockchain platforms, enabling investors to buy and sell fractional shares of high-value assets, which increases accessibility and liquidity for a broader range of investors.

The key distinction between tokenization and dematerialization lies in their scope and functionality. Tokenization involves creating a new digital asset on the blockchain, allowing for fractionalization and global trading of a wide range of assets. This innovation provides new investment opportunities that were previously out of reach for many investors. In contrast, dematerialization is focused on converting existing physical assets into digital records, streamlining traditional financial systems without creating new types of assets or fundamentally changing how they are traded or owned.

Case Study: Tokenization of Picasso’s ‘Fillette au Béret’

Sygnum, a Swiss-regulated digital asset bank, in partnership with Artemundi, a pioneer in art investment, has made history by tokenizing ownership of Picasso’s Fillette au béret painting. This is the first time ownership rights in a Picasso artwork, or any piece of art, have been tokenized and placed on a public blockchain by a regulated financial institution.

The tokenization process has created Art Security Tokens (ASTs), which represent fractional ownership in the painting. Investors can purchase and trade these tokens, allowing them to own a portion of the artwork without needing to buy the entire piece. This marks a significant milestone in the art market by bringing liquidity, accessibility, and transparency to high-value art investments.

The tokens are available exclusively to professional and institutional investors through Sygnum, which is regulated by the Swiss Financial Market Supervisory Authority (FINMA). Ownership rights granted to the token holders are fully recognized under Swiss law, ensuring legal protections.

Additionally, secondary trading of these art tokens will be facilitated on SygnEx, Sygnum’s digital asset trading platform. This enables ongoing buying and selling of shares in the artwork, offering liquidity and the potential for a wider investor base to participate in the high-value art market.

Case Study: How St. Regis Aspen Was Tokenized on Blockchain

The St. Regis Aspen Resort, a five-star luxury hotel located in Aspen, underwent tokenization as a pioneering example of how real estate can be fractionally owned through blockchain technology. At the time of tokenization, the resort was valued at approximately $18 million.

The tokenization process was conducted on the Ethereum blockchain, where 18 million tokens, named Aspen Digital Tokens (Aspen Coins), were created. Each token represents a fractional ownership stake in the resort, enabling investors to hold a portion of this prestigious property. This initiative marked one of the early examples of real estate being tokenized on a blockchain, bringing liquidity and investment accessibility to high-value real estate.

The tokens were issued through a Security Token Offering (STO) on SolidBlock's platform, which operates under regulatory compliance. The STO structure ensured that only accredited investors could purchase the tokens, allowing them to gain fractional ownership of the resort without needing to acquire the entire property. This offering provided a way for investors to diversify into real estate while benefiting from liquidity through tokenized shares.

Regulatory Challenges in Asset Tokenization

Regulatory challenges are a significant barrier to the widespread adoption of tokenized assets. Varying national regulations, especially concerning ownership rights and foreign investment, create uncertainty and can hinder the enforcement and global coordination of tokenized assets.

Legal Recognition: Tokenized assets must be legally equivalent to their real-world counterparts. This means the ownership rights, responsibilities, and protections associated with the tokenized asset should align with traditional legal frameworks. Without proper regulatory alignment, ownership of a tokenized asset may not be enforceable in court or recognized in certain jurisdictions.

Jurisdictional Differences: Regulations for financial assets, real estate, and securities vary significantly from one country to another. This variation makes ensuring compliance across multiple jurisdictions a time-consuming and complex process. The lack of standardized legal frameworks for tokenized assets further complicates global coordination, leading to potential conflicts or legal uncertainties.

Foreign Ownership Restrictions: Many countries have specific rules regarding foreign ownership of real estate, which adds another layer of complexity to tokenization, particularly when foreign investors are involved. Countries may limit or prohibit foreign individuals or entities from owning certain types of property. Ensuring that tokenized assets comply with these restrictions requires careful navigation of national laws.

Why Interoperability is Key for Asset Tokenization Success

Interoperability is the ability of different blockchain systems and traditional financial systems to communicate and operate seamlessly with one another. This is essential for ensuring that tokenized assets can be transferred, traded, and managed across various platforms and integrated with legacy financial infrastructure. 

Lack of Standardized Protocols: Blockchain platforms often operate on different protocols, making it difficult to enable compatibility between them. The lack of standardized protocols means that various blockchains may not be able to share data or execute transactions seamlessly. For example, a token issued on one blockchain may not be easily transferable to another blockchain, limiting the liquidity and utility of tokenized assets across multiple platforms.

Cross-Chain Compatibility: Many blockchain networks have their own ecosystems with different rules, consensus mechanisms, and token standards. This creates barriers when trying to transfer assets from one blockchain to another. If assets cannot be moved between blockchains, investors are limited to the ecosystems in which their tokens were created, which reduces flexibility and market potential.

The Problem of Limited Secondary Markets in Tokenization

One of the major promises of tokenization is increased liquidity, allowing traditionally illiquid assets, such as real estate or fine art, to be bought, sold, and traded more easily. However, a key challenge lies in the lack of active secondary markets where tokenized assets can be freely and easily traded. While tokenization opens up the possibility of fractional ownership and global investment, the absence of well-established and liquid secondary markets limits the ability to realize this potential fully.

Limited Liquidity: The concept of tokenization is designed to make illiquid assets more liquid by allowing fractional ownership and global trading. However, many tokenized assets currently struggle to find enough active participants (buyers and sellers) to create liquid markets. Without sufficient trading activity, investors may find it difficult to sell their tokens or realize the value of their investments, defeating the purpose of increased liquidity.

Lack of Broad Adoption: For a secondary market to function efficiently, there must be a large and diverse pool of market participants. However, tokenized assets have not yet achieved broad adoption, especially among retail and institutional investors. Without widespread market participation, trading volumes remain low, and price discovery mechanisms are weak. This limits the effectiveness of tokenization in providing the liquidity that investors expect.

Addressing Information Asymmetry in Asset Tokenization

A major risk in tokenized markets is that investors often struggle to accurately evaluate the quality and value of assets prior to making investment decisions.

Adverse Selection: Potential investors struggle to accurately assess the quality of tokenized assets. Because tokenized assets can be fractionalized and easily traded, investors may find it difficult to perform adequate due diligence, leading to the risk of purchasing low-quality or even fraudulent assets. This can result in a market where high-quality assets are undervalued, while lower-quality assets dominate trading activity, reducing overall market trust and efficiency.

Information Asymmetry: Investors often have limited access to comprehensive information about tokenized assets, especially in emerging or fragmented markets. This lack of transparency exacerbates adverse selection and moral hazard, as it becomes difficult to assess the true value and risks associated with tokenized assets. Without sufficient information, investors may either avoid these markets or take on uncalculated risks, leading to inefficiencies.

Asset Tokenization: Separating Hype from Reality

Tokenization has gained a lot of attention recently because of its potential to transform industries. However, the rapid growth of tokenization projects has revealed a pattern where excitement around blockchain technology often overshadows the need for practical solutions and real-world benefits.

Many tokenization projects focus more on the appeal of blockchain rather than understanding how it can meet specific market needs or solve actual problems. While tokenization may sound innovative, without a clear purpose, these projects lack depth and struggle to demonstrate why tokenizing an asset is better than using traditional methods.

Furthermore, to take advantage of blockchain buzz, many projects emphasize marketing and speculation over real functionality. They may generate excitement by promoting tokenization as cutting-edge, but they fail to provide tangible benefits such as increased efficiency, transparency, or accessibility—areas where traditional systems might still be superior.

Some projects are even created solely for the purpose of attracting investment or attention by riding the blockchain and tokenization trend. These initiatives often don’t have a solid business plan or strategy for delivering real value to investors and users.

While tokenization holds the potential to improve access, liquidity, and transparency across industries, many projects fall into the trap of overhyping the technology without providing meaningful value. To succeed, tokenization projects need to move beyond blockchain buzzwords and focus on solving real problems. Success depends on having a clear value proposition, legal certainty, and a strong commitment to addressing practical challenges, rather than just riding the wave of blockchain enthusiasm without substance.

How Asset Tokenization Solves Real-World Problems

When considering tokenization, it's essential to start by identifying the specific problem that needs to be solved. 

Tokenization is not a one-size-fits-all solution, and its benefits should be applied to situations where it can genuinely improve existing systems or create new opportunities. A thoughtful approach ensures that tokenization is not used merely as a trend but as a tool for addressing clear challenges such as illiquidity in certain asset classes or barriers to entry for smaller investors.

• Identifying the Problem:Tokenization can be particularly useful in markets where assets are traditionally illiquid, such as real estate, fine art, or private equity. Tokenizing these assets allows fractional ownership, making them more liquid and accessible to a broader range of investors. For example, an individual investor might not have the capital to buy a piece of real estate, but tokenization allows them to purchase a small fraction. However, if liquidity is not a real issue in the asset class being considered, tokenization may not provide any substantial benefit. 

• Evaluating the Necessity of Tokenization: Not all assets benefit from tokenization, so it is important to evaluate whether the asset in question requires tokenization or if traditional methods already work effectively. Some assets may already have robust markets, efficient trading mechanisms, and sufficient liquidity without the need for blockchain-based solutions. In these cases, tokenization could introduce unnecessary complexity rather than adding value.

• Assessing Market Demand: Understanding market demand is essential before embarking on any tokenization project. Tokenization should be pursued only when there is a genuine demand from investors or participants. Conducting market research to determine whether tokenization offers a solution to specific pain points, such as increasing accessibility or liquidity, will help ensure that the project is addressing real-world needs rather than being a trendy, technology-driven experiment.

Conclusion

Asset tokenization is a promising innovation, with the potential to unlock new liquidity and investment opportunities across a wide range of assets. However, its widespread adoption depends on overcoming significant regulatory and technical challenges. 

Furthermore, as more projects come online, it's important to focus on building practical and scalable frameworks. Tokenization should be applied thoughtfully, not universally, and where it delivers genuine benefits. Success will depend on targeting real-world challenges that tokenization can solve, allowing it to evolve into a robust part of the financial system. 

With careful innovation and regulatory alignment, tokenization could reshape the future of finance for a global audience, creating fresh opportunities for investors worldwide.