Management of Digital Assets: Why Tokenization Matters
- Neil Mathieson
- Apr 29
- 4 min read
Updated: Apr 29
Take-Aways
Tokenization is the digital representation of a real-world or digital asset and its ownership rights.
Tokens are securely traded and managed online using smart contracts and the Blockchain.
Digital assets can improve accessibility and liquidity, making them attractive for funding-raising and secondary trading.
Digital asset management can improve transparency, settlement speed and cost efficiency.
Risks exist but adoption is growing and regulation will improve standards and open a massive addressable market of issuers and investors.
Quick Navigation
What is tokenization in investment?
Tokenization is the process of creating a digital representation of an asset, or ownership rights in an asset. Assets can be real-world like funds, shares, real estate and art, or pure digital assets like cryptocurrency or stablecoin.
Why does tokenization in investment matter?
Despite two decades of FinTech, asset management remains relatively under-digitalized.
The cause is complex. On an infrastructure level, exchanges remain the primary venue. Numerous stakeholders exist from the issuer to investor, manager, and custodian. Settlement often takes days, paper is the medium, and regulation is high.
The benefits of digital assets are potentially significant for investors and issuers; better transparency, speed and efficiency.
The addressable market is massive, exchange-listed equity has a market capitalization of approx. USD 115tn, fixed income USD 141bn, private markets USD 15tn (AUM) and crypto assets USD 3tn.
This combination of factors drives increased adoption, innovation and valuations in the digital asset space.
Crypto assets represent less than 1% of traditional public and private markets
How are crypto assets created?
Tokens contain data on the properties, rights, etc of the asset in encrypted form.
Each token issued is unique and has cryptographic properties which verify its validity.
Tokens are stored on a private or permissioned Blockchain with advanced security features (distributed ledger, immutable data, chained events, time-stamped, etc).
Tokens can be traded if the trade meets the ecosystem parameters.
Smart contracts provide a secure method to evidence ownership, authorize transactions and vote on corporate actions.
Issuers, investors and intermediaries manage online
What are the benefits of digital asset management?
Reduces Barriers
Tokenization of capital-intensive assets like real estate makes ownership more divisible, or fractional. Reducing barriers to investment attracts more participants, increasing the value of the market.
Improves Liquidity
Tokenization improves liquidity as it reduces deal sizes and makes trading easier, especially compared to (high price or illiquid) asset classes like private equity. Having a secondary market creates a liquidity premium and reference price, encouraging further trading.
Higher Efficiency
Trading on a Blockchain involves less intervention and paper, reducing the cost of issuing and managing the asset. Trading between peers using smart contracts ensures that transactions are settled, and ownership passes faster than traditional methods.
Enhanced Data Security
Holding data in tokenized form in transit and at rest makes it illegible to external hackers and internal fraudsters who may use data for illicit purposes. Inbuilt verification of tokens and users further increases trust.
What are the risks in digital asset management?
Valuation Mismatches
The value of the underlying asset remains independent from its tokenized form. This can create mismatches as real-world values may change slowly, while traded tokens may be affected by market demand. While professional investors may seek to exploit such arbitrage, ordinary investors must exercise diligence.
Technological Barriers
Whilst tokenization and the Blockchain are decades old and reliable, crypto assets are a relatively new use case. Typical challenges for institutions include choosing the right Blockchain platform, on-off ramps between Blockchain and other systems, and data migration. Investors can face challenges in protecting the credentials required to access crypto assets.
Financial Crime
As investment goes digital it is targeted by criminals who use technology to stage elaborate phishing, identity theft, account takeover and cyber-attacks. Tokens help obfuscate sensitive data from external and internal bad actors.
Does tokenization democratize finance?
Fractional asset ownership increases access for retail investors. Many investors have used this to make returns in excess of other asset classes, although losses are commonplace. Adoption levels are rising and as retail investors get comfortable with the technology, risks and returns this will accelerate.
Does tokenization help institutional investors?
High net worth individuals (HNWI) and institutional investors control or influence the greatest amount of assets under management (AUM). Whilst early scandals and volatility slowed engagement, large players such as Blackrock and Franklin Templeton have taken significant steps to build digital asset capabilities.
Tokenized Money Market Funds are growing in popularity, their short-term nature and regular transactions make them a good testbed to improve market access, settlement and costs. Similar innovation can be expected in alternative assets like real estate and private equity where pricing and liquidity prove challenging.
Recent moves by regulators in the EU (MICA), US (stablecoins) and UK build trust. A recent survey by EY indicated investors are interested in allocating 7-9% of their portfolio to tokenized assets by 2027. EY found investors will seek a higher yield on tokenized assets even though these are more liquid.
Supply-side factors such as more high-quality issuers are also critical to increasing the number of investable assets and creating diversification opportunities. As digital asset markets mature, they will create more attractive fundraising conditions, a positive loop is possible.
EY research forecasts 7-9% of portfolio allocation to tokenized assets.
Summary
Asset management is an unforgiving industry; investors demand returns, transparency, low-cost management and self-service; regulators demand data.
Digitalization is essential to delivering this, and tokenization is a key enabler in creating the trust and market access required for mainstream adoption with safeguards.
Change will be evolutionary, but all aspects from product design to distribution technology and compliance are impacted and no financial institution can ignore digital assets.
How We Help
We provide expert advice on FinTech strategy, regulation and technology. We help financial institutions understand trends, secure licenses and build capability to capture opportunity and manage risk. Contact Us to arrange an introductory call or subscribe for updates.
Comments