Understanding the Key Issues of Tokenization in One Article

Author: Theo

Compiled by: Jiahua, ChainCatcher

The core of tokenization lies in eliminating all friction.

When most people hear "tokenization," what comes to mind are speculative digital tokens. They are completely missing the point.

The real story is about settlement speed, 24/7 liquidity, fragmented ownership, and the slow demise of financial intermediaries: these seemingly dull infrastructure changes are the true forces reshaping the market.

There is a saying that sounds mundane at first, but upon reflection, it is profound: when you sell a stock today, you actually have to wait two business days to get your money. Not two seconds, not two minutes, but a full two days.

This is known as T+2 settlement, and it is so commonplace, so thoroughly embedded in the architecture of modern finance, that most investors have never stopped to ask why.

The answer is: because transferring asset ownership between two parties requires a chain of custodians, clearinghouses, and counterparty reconciliation systems. This is a bureaucratic relay race invented before the birth of the internet, never fundamentally redesigned.

Every link in this chain takes time to confirm, record, and guarantee transactions. The two-day wait is the cumulative institutional friction that has ultimately calcified into standard practice.

This is the true meaning of asset tokenization: not coins, not speculation, and not NFT avatars, but a bet—a bet that the entire settlement and custody infrastructure of global finance can be rebuilt on a programmable ledger.

When that day comes, the two-day wait, intermediary fees, accredited investor thresholds, and trading time restrictions will seem as outdated as the fax machine.

Overview of Real-World Assets

So, what is asset tokenization?

Asset tokenization is the process of representing ownership of real-world assets (a building, a bond, a fund share, an artwork, a piece of private equity) in the form of digital tokens on a blockchain. These tokens are programmable ownership records that exist on a shared, tamper-proof ledger, separate from the assets themselves.

Layman's definition: Think of a token as a digital contract. When you purchase a tokenized share of a commercial property, your digital wallet receives a token representing your ownership share.

This token automatically records who owns it, when it changes hands, and under what conditions it can be transferred, without the need for a registrar to update spreadsheets.

Unlike paper contracts or brokerage account records maintained by third-party custodians, blockchain-based tokens are designed to be self-custodied: ownership records are maintained by the network itself, not controlled by any single entity that might freeze, lose, or distort them.

The underlying operational mechanisms vary; some tokenization projects use public blockchains like Ethereum, while others use permissioned enterprise chains operated by banking consortia.

What matters is not what the specific ledger is, but the structural shift: ownership records that once existed in isolated institutional databases now exist in a shared, interoperable system. This is the change with far-reaching implications.

Four Problems Tokenization Actually Solves

Problem 1: Settlement Speed

The T+2 settlement window exists because reconciling trades among multiple intermediaries (exchanges, clearing brokers, central securities depositories) takes time. Each institution maintains its own records; synchronizing these records requires a sequential handoff process.

On the blockchain, settlement is atomic. When a trade is executed, tokens move from one wallet to another in the same transaction. No handoff, no reconciliation, and no counterparty risk window.

Settlement occurs in seconds, or in the current implementations, in less than a minute for more complex trades. The U.S. stock market transitioned from T+3 to T+2 in 2017 and will move to T+1 in 2024; meanwhile, the tokenized market skips all these stages and achieves near-instant settlement in one step.

For institutional traders, the difference between T+1 and T+0 is not just speed, but capital efficiency. Every day between trade execution and settlement is a day capital is locked in a limbo state, unable to be redeployed.

In the scale of the global stock market, this trapped capital represents tens of billions of dollars in opportunity cost.

"The two-day settlement window is the cumulative institutional friction that has ultimately calcified into standard practice, and tokenization is the first reliable solution capable of breaking it down."

Problem 2: Liquidity, or the Lack of It

A $50 million commercial real estate property is a highly valuable asset on paper. In practice, it is almost completely illiquid.

Selling it requires finding a buyer willing to bid, negotiating a price, hiring lawyers for both parties, conducting due diligence, and then waiting months to complete the transaction. There are no exchanges, no bid-ask spreads, and if you urgently need $200,000 in cash on Thursday, you cannot just sell a small portion of that building.

This is not unique to real estate. Private equity, infrastructure assets, art treasures, venture capital fund shares, litigation financing rights: vast pools of wealth remain locked in assets that trade infrequently, are extremely opaque, and are limited to large institutions with patience and resources.

Tokenization does not automatically make illiquid assets liquid. But it creates the infrastructure for a secondary market.

If ownership of a building can be divided into tokens traded on a digital exchange, then a limited partner needing liquidity does not have to wait for the fund's redemption window or find a buyer for their entire stake. They can sell tokens. Not selling the entire asset, but just slices of it. This changes the investment logic for every asset class historically deterred by illiquidity premiums.

More experienced builders in this space have recognized a deeper lesson: issuing tokens is only half the job done.

A tokenized asset without a secondary market, without an accepted collateral framework, and without integration into trading venues is functionally worthless. It is just a better proof of ownership, but not a better financial instrument.

A few platforms are now starting to make liquidity a design requirement from day one, rather than something that develops naturally after launch. Theo was founded by former market makers from IMC Trading and Optiver, launching thBILL (an on-chain exposure investing in institutional-grade U.S. Treasury strategies managed by Wellington Management and in partnership with Standard Chartered's Libeara).

This product integrated market-making, lending protocol support, and cross-chain deployment (covering Ethereum, Base, Arbitrum, and HyperEVM) from the outset. These tokens can be traded, used as collateral, or directly deployed in DeFi protocols without conversion.

This is a vivid demonstration of what it truly takes to solve the liquidity problem: not just issuing infrastructure, but a complete market structure that gives tokenized assets holding value.

Problem 3: Fragmented Ownership and Access Barriers

Most private credit funds have a minimum investment of $500,000. Many commercial real estate syndicates have a minimum investment of $100,000.

These thresholds exist not because small-scale investors would worsen the economics, but because the cost of managing relationships with a large number of small investors is extremely high: tracking ownership, handling profit distributions, managing redemptions. The paperwork cost for each investor does not decrease proportionally with the reduction in investment amount.

Traditional Ownership vs. Tokenized Ownership

Smart contracts eliminate most of the management overhead. Dividend distributions can be programmed to execute automatically when conditions are met, without manual processing or custodial fees. Ownership records are updated in real-time. Investor communications can occur on-chain.

The management costs allocated to each investor approach zero, meaning minimum investment thresholds can drop by several orders of magnitude without undermining the fund's economic model.

The regulatory environment here is indeed very complex: securities laws in most jurisdictions still require specific investments to qualify as accredited investors, and tokenization cannot change these rules.

What it changes is: once regulations allow, or in the growing asset classes where those regulations already permit, the economic viability of serving a broader investor base.

Problem 4: Removing Intermediaries (Actual Mechanism)

Every intermediary in financial transactions exists to solve trust issues. Custodians ensure that neither party absconds with funds during property delivery. Clearinghouses guarantee that if your counterparty defaults, you still receive your securities. Custodians hold assets on behalf of clients who cannot be trusted to safely self-custody.

Smart contracts replace trust with code. A tokenized bond can be programmed to automatically pay coupons to token holders on specific dates, release collateral upon loan repayment, and execute early redemption when certain conditions are triggered.

None of this requires trustees, payment agents, or contract administrators. The terms of the contract are enforced by the network, not by any single entity that might be corrupt, bankrupt, or simply negligent.

1. Assets are represented as tokens Legal ownership is encoded in smart contracts on the blockchain, with tokens serving as transferable certificates of these rights.

2. Terms are programmed into the contract Payment schedules, transfer restrictions, redemption conditions, and governance rights are embedded in code, self-executing without manual intermediaries.

3. Tokens trade on secondary markets Token holders can sell their positions in exchanges built specifically for tokenized assets, with settlement occurring in seconds and without clearing intermediaries.

4. Cash flows are automatically distributed Rental income, coupon payments, and other distributions go directly into token holders' wallets when triggered, without payment agents, fund float, or processing delays.

Why This Has Nothing to Do with Cryptocurrency

It is understandable to conflate tokenization with cryptocurrency speculation, but this is of little help. Yes, tokenization uses blockchain technology. Yes, the same ledger infrastructure supports Bitcoin. But that is where their similarities end.

The value of Bitcoin and its speculative derivatives comes from scarcity and narrative. In contrast, tokenized real estate, bonds, and private equity represent assets whose value derives from income, cash flow, and tangible operations. Tokenization is a new layer of ownership and settlement for existing asset classes.

Institutions building tokenization infrastructure include JPMorgan, BlackRock, Franklin Templeton, Goldman Sachs, and HSBC, all of which rely on managing real assets for real clients as their entire business model.

JPMorgan's Onyx platform has processed hundreds of billions of dollars in tokenized repo transactions. BlackRock's BUIDL fund (a tokenized money market fund) surpassed $500 million in assets within weeks of its launch. These are all investments in infrastructure for faster, cheaper settlement.

"Institutions building tokenization infrastructure include companies like BlackRock, Franklin Templeton, and JPMorgan, whose survival depends on reliably managing core assets."

Unavoidable Real-World Barriers

Portraying tokenization as an absolute inevitability is dishonest. There are structural barriers that will slow its adoption, and these barriers are not related to the technology itself.

Most jurisdictions' legal frameworks still define asset ownership in terms of paper records, registered agents, and custodial accounts. Tokens on the blockchain do not automatically have legal standing; they require explicit regulatory recognition, which varies greatly between countries and asset classes.

Some governments are taking action. The EU's DLT Pilot Regime and the UK's Digital Assets (Property etc.) Bill are early examples. But legal certainty for tokenized assets remains patchwork.

Interoperability between different blockchain platforms is another unresolved issue. A tokenized bond issued on JPMorgan's Onyx chain cannot automatically settle with a tokenized fund share issued on Ethereum without a cross-chain bridge, which reintroduces another form of counterparty risk.

Ironically, the proliferation of competing settlement networks is recreating the "isolated institutional database" problem that tokenization was supposed to solve.

Finally, there is the issue of profit distribution. The intermediaries being replaced are not passive bystanders. Custodians, clearinghouses, and transfer agents provide substantial fee income to institutions that are also trying to build tokenization platforms. These existing interest groups have every incentive to adopt this technology slowly and advance it in ways that protect their existing revenue streams.

What Is Changing and What Has Not Changed

Portraying the endpoint of tokenization as a frictionless perfect market is unrealistic. It is certainly not a frictionless utopian market. Settlement risk has not disappeared; it has merely shifted from counterparty credit risk to smart contract code risk, which has its own vulnerabilities.

Fragmented ownership does not automatically create deep liquidity: a thousand small retail investors in a tokenized building still cannot force a sale of the asset, and unless market makers actively participate, the market for tokens will remain very thin.

What is truly changing is the cost structure of the entire "underlying pipeline."

The T+2 window is continuously compressed toward zero. The minimum viable investment amounts for illiquid asset classes are decreasing. The cost of processing payments or recording ownership transfers for a single transaction is becoming closer to the cost of a database write, rather than the administrative costs of manual operations.

These changes may not seem drastic in isolation. But when they are layered on top of all assets currently locked in slow, expensive, and heavily intermediated structures, it constitutes the largest restructuring of financial infrastructure since electronic trading replaced open outcry.

This is a story about infrastructure. Your investment logic, your inquiries into regulation, your predictions about timelines, all depend on whether you truly understand this. Yet, currently, most people focused on tokenization still do not see through it.