Blockchain-based investments could provide liquidity and operational efficiency for institutional investors.
Institutional allocators and asset managers are gaining interest in tokenized assets, or assets that are tokenized by transferring ownership rights for an asset on a blockchain; making a digital version of a preexisting thing.
Essentially, an investment, such as a stake in an alternative investment fund, can be traded as a cryptocurrency.
It is “a technology that could be applied to many different areas,” says Edward Woodford, co-founder and CEO of blockchain infrastructure company ZeroHash. “It could be for example, tokenized yield-baring instruments, it could be tokenized stocks, it could be, really anything.”
Franklin Templeton, for example, offers a tokenized fund that invests in government securities through its BENJI Token. BlackRock, VanEck, Hamilton Lane and BNP Paribas are among firms offering tokenized investments to investors.
“We’re starting to see a strategic shift from experimentation to a more deliberate integration of tokenized assets into long-term portfolio strategies,” says Jesse Knutson, head of operations at Bitfinex Securities, a tokenized securities platform, providing capital raising and secondary trading of tokenized securities. “In the fixed income space, family offices and [high net worth individuals] are becoming increasingly interested in holding tokenized securities.”
Asset tokenization offers a number of benefits to asset owners, from liquidity to increased efficiency, but regulatory questions remain.
A benefit of tokenization is the liquidity it can provide, as these assets can be traded instantly, foregoing any intermediaries, such as a transfer agent. Asset owners in discussions to adopt tokenized assets are most focused on liquidity.
“I think a lot of it has been discussed in the context of liquidity, and how tokenization can improve the liquidity of illiquid assets for a number of pensions and endowments,” says Zoubair Esseghaier, general manager of risk and performance, at Clearwater Analytics.
There is also growing demand, especially for tokenized alternative investments, at a time when private equity exits have slowed down, leading to an increase in transaction volume on the secondaries markets as limited partners seek liquidity.
Tokenization could simplify access to sought-after illiquid investments , as tokenized investment stakes can be traded with ease.
“In the 1990s and 2000s, a lot of the return from technology companies was made in the public markets where retail investors and institutional equity investors could participate,” says Martin Green, CEO of Cambrian Asset Management, a quantitative investment firm focused on digital assets trading. “Lately the great returns happen in the private markets as tech companies such as SpaceX and Stripe and OpenAI stay private for longer, leaving out retail investors and your average institutional investor who’s allocating to public equities. I think tokenization represents a solution for this.”
Hamilton Lane’s partnership with wealthtech company Allfunds, for example, allows investors to access tokenized versions of Hamilton Lane’s private market funds.
Because tokenized assets are on a blockchain, they can be traded 24/7 and can settle immediately. “Tokenized infrastructure offers faster settlement, enhanced transparency, and greater precision in how assets are structured and accessed,” says Sandy Kaul, head of innovation at Franklin Templeton.
For asset owners, tokenization provides the opportunity to modernize their portfolio operations without introducing unnecessary complexity, Kaul says.
ZeroHash’s Woodford notes that more than $400 billion is tied up in the largest traditional clearinghouses. “If you can allow capital to be moved more cheaply and efficiently… it reduces tail risk,” Woodford says. “Because if you need to transfer a value on a Saturday, you can do so, you’re not tied in from a risk perspective.”
Real-time settlement provided by tokenization also offers additional efficiency gains from the reduction of operational complexities, such as back and middle office costs, according to a primer published in January by the CFA Institute .
“I believe institutional interest in tokenized assets will continue to grow thanks to the technological advantages and the vastly superior user experience they offer,” Knutson says. “Only tokenization can offer attractive features such as real-time settlement, 24/7/365 trading, [and] the ability to trade off-market, peer-to-peer.”
McKinsey & Co., in a 2024 report, forecast that tokenized market capitalization could reach around $2 trillion by 2030 (excluding cryptocurrencies like Bitcoin and stablecoins like Tether). The consulting firm also noted that the operational efficiency of tokenization is particularly useful for asset classes that require highly manual issuing or servicing, such as corporate bonds. In particular, McKinsey wrote that tokenization would enable, “embedding operations such as interest calculation and coupon payment into the smart contract of the token[and] would automate these functions and require less hands-on human effort.”
Franklin’s Kaul adds, “In today’s environment where institutional allocators are under pressure to do more with less, these innovations will free up billions of dollars in collateral held against operational risks and create new opportunities for financing and liquidity.”
According to a survey of institutional investors by EY, most prefer to invest in tokenized assets through traditional intermediaries. Many investors also view regulatory uncertainty as a hurdle to the adoption of tokenized assets.
According to the CFA Institute, blockchain and tokenized product regulation is misaligned across regions and jurisdictions, with no international standard emerging. The lack of regulatory standards is acting as a limiting factor to the adoption of tokenized assets.
“Institutional adoption will depend on whether tokenized assets are transparently audited, fully compliant with existing regulations, and structured to project long-term credibility,” says Arthur Linuma, founder of blockchain consultancy Linuma.io. “Without those safeguards, the promise of tokenization risks being undermined by opacity and mistrust.”
EY found top investor hurdles around tokenization include the lack of trusted service providers in the market, the lack of internal education around blockchain technology, and the lack of established marketplaces and alternative trading systems.
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