In a world where things change frequently, it can be challenging to distinguish between what is a fad and what will ultimately become a revolutionary technology.
Real-world asset tokenization is one example of this conundrum. Is this a trend that will last or a fad that will soon fade away?
In the finance world of today, adoption by traditional financial institutions has been a dependable way to make this distinction. When a revolutionary technology begins to get the attention of traditional financial institutions, then it is less likely to be a fad.
Interestingly, much of the adoption of real-world asset tokenization has been driven by traditional financial institutions, according to Forbes.
From early 2024 to early 2025, the market value of blockchain-based tokenized real-world assets increased from $10 billion to $18 billion, an 80% year-on-year growth. Some of the players that have played a huge role in this growth include J.P. Morgan, BlackRock, VanEck, and Franklin Templeton. They have tokenized US Treasury bills, US Treasury bonds, stablecoins, mortgage-backed securities, and money market funds.
It is no wonder, then, that interest in how to tokenize real-world assets and how to invest in them is surging.
In this article, we will consider how to tokenize real-world assets and why asset owners should be interested in adding these assets to their portfolio. We’ll cover:
- How to tokenize real-world assets
- Why asset owners should be interested in tokenized RWA
- Risks of investing in tokenized RWA
- How asset owners should approach RWA tokenization
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1. How to tokenize real-world assets
RWA tokenization is the process of transforming real-world assets into digital tokens that can be stored on a blockchain and traded on centralized, decentralized, and permissioned exchanges (just like Bitcoin and other cryptocurrencies).
Finance RWAs that can be tokenized include traditional asset classes like treasury bills, treasury bonds, and mutual funds, and alternative asset classes like private equity shares, precious metals, commodities, and real estate. Use cases of RWA tokenization outside of finance include fine art, collectibles, carbon credits, and intellectual property.
Though RWA tokenization is a part of the decentralized finance (DeFi) ecosystem, it has also been embraced by traditional finance (tradFi), as we saw above.
Before considering the benefits of tokenization, let’s focus on how the process works.
There are at least seven steps involved in tokenization, according to STOEX, a tokenized RWA trading platform:
The Real-World Asset Tokenization Process
Source: STOEX
- Asset selection: Not all assets (whether finance RWA or non-finance RWA) can be tokenized.
First, there has to be a legal framework that permits the asset’s tokenization in the jurisdiction where the asset exists.
Secondly, there should be sufficient demand for the asset. An artwork that people don’t care about or a junk bond from a company in a financially ruinous situation may not be the best options for tokenization. While tokenization can improve liquidity, it does not perform magic.
- Asset valuation: There must be a valuation process to determine the fair value of the asset.
- Legal setup and framework: The ownership rights to the asset have to be structured and defined. This is best done by a legal counsel who is conversant with local laws.
- Token creation: The rules guiding token creation will be defined in smart contracts.
These contracts encode the rules guiding the ownership, transfer, and governance of the tokenized assets, as well as payments that will be made to owners (rent payments for real estate and dividend payments for equity, for example).
It also contains rules regarding regulatory compliance (for example, a rule might exist that prevents certain persons from buying the assets) and the number of tokens that will represent the RWA (a single token or multiple digital tokens representing fractional units of the asset).
Once these rules have been defined, they will be deployed on the blockchain. Tokens will then be created (or minted) based on the logic and structure contained in the smart contract.
A token is a digital representation of the RWA on the blockchain. Digital tokens represent ownership rights, and they can be fungible (interchangeable and divisible) or non-fungible (unique).
Similarly, tokens can be created on a single blockchain network (public or private) or made available on all blockchain networks through Chainlink’s scalable and secure Cross-Chain Interoperability Protocol (CCIP).
Ethereum continues to be the leader among blockchain networks and decentralized apps (dApps) builders. It's no wonder that most tokenization projects take place there.
- Trading platform selection: Tokenized RWA can be traded on centralized as well as decentralized exchanges on web3. Compatible platforms for the tokenization project would be defined in the smart contract rules.
- Token issuance, sale and distribution: The token issuer carries out an initial offering (can be a Security Token Offering or an Initial Token Offering) of the digitized assets to potential buyers and investors. When a sale has been agreed, the tokens are distributed to the wallets of the initial buyers and investors.
- Ownership, trading, and investments: The initial buyers and investors can then trade the tokenized RWA in secondary markets. As said above, these can be centralized or decentralized exchanges.
But why go through the stress of tokenizing real-world assets, and why should asset owners prefer these digital tokens to the real-world assets themselves?
It is to that question that we now turn.
2. Why asset owners should be interested in tokenized RWA
A good grasp of how to tokenize real-world assets will help us here since the benefits of tokenized RWA correspond to certain features of the token creation process.
What then are these benefits?
Fractional investment
Purchasing an high-value asset like an apartment building in a desirable location will usually require a large investment outlay. But some buyers are only liquid enough to purchase one of the apartments.
Also, a seller might struggle to find a single buyer who will pay for everything. But it might be easier to find twenty individual investors who will purchase each of the apartments.
With tokenized RWA, sellers can fractionalize finance real-world assets in a way that makes them accessible to multiple buyers, thus fast-tracking the selling process.
This is similar to how fractional stock investing increased stock market accessibility and unlocked more capital from small-money investors.
Asset owners who want to invest in real estate, private equity, and infrastructure equity (among others) with manageable funds can explore this opportunity.
Liquidity
One consequence of fractionalization is improved liquidity.
Asset owners can easily trade otherwise illiquid assets like real estate, private equity, and infrastructure equity (among others) on multiple blockchain networks.
Given that these assets have been fractionalized, buying and selling fractional units on-chain will be far easier than trading them off-chain.
Also, the global nature of blockchain technology supports the improved liquidity of digitized RWAs.
The total value locked in tokenized RWA is now up to $25.49 billion, according to RWA.xyz, a tokenized RWA analytics platform.
An Overview of the RWA Market
Source: RWA.xyz
Forbes projects that the market will reach a $50 billion market cap by the end of the year.
Also, tokenized RWA represents a $30 trillion global opportunity, according to Colin Butler, global head of institutional capital at Polygon Labs, the creator of Polygon (a layer 2 blockchain).
He believes that the need for high-net-worth individuals (HNWIs) to increase allocation to alternative assets will drive this demand. More importantly, it is their traditional wealth managers and private bankers that will recommend this increased allocation to them.
In essence, tokenized RWA represents a more liquid alternative to the marketplaces for illiquid alternative assets, and it will only become more liquid as more players enter the market.
Efficiency
We have talked about how smart contracts are deployed on blockchain networks to create tokens based on certain rules.
This process has certain advantages.
The automation of smart contract rules (once a condition has been met, a given action follows) streamlines on-chain transactions by removing the need for intermediaries (brokers, dealers, escrow agents, custodians, etc.).
Similarly, since transaction details are stored and publicly verified on the blockchain, title offices, registries, and notaries (among others) are not needed.
There are two consequences of this: lower transaction costs and faster transaction time. With this efficient financial system, asset owners can gain speedy access to the assets they want while minimising transaction costs.
Portfolio diversification
Asset managers understand the need to reduce portfolio risk through portfolio diversification.
Tokenized RWA can make portfolio diversification more efficient.
An asset owner who wants to reduce exposure to alternative assets without entirely liquidating them can benefit from the fractionalization of these assets. They can sell half of their digital tokens, for example, to achieve an optimal portfolio allocation. Doing that will be harder with real-world assets.
Unlocking of trapped value
The liquidity of tokenized RWAs ensures that funds are not trapped in illiquid assets when asset managers need to take advantage of some new opportunities.
Suppose a given stock ETF has just fallen by 20%. An asset manager who is a value investor may see this as an opportunity to reduce average cost and increase potential returns. With digital tokens, such a manager can sell some holdings in an alternative asset (especially if they are overvalued at the time) to take advantage of such an opportunity.
Transparency and security
Since transaction records on blockchain networks are publicly available, they cannot be tampered with. Transaction history can be verified and audited by anyone.
Similarly, smart contracts make regulatory compliance programmable. The necessary rules can be encoded such that non-compliant transactions are automatically rejected. This removes the need for manual oversight and other bureaucratic complexities.
3. Risks of investing in tokenized RWA
While tokenized RWAs have scaled the hurdle of acceptance by tradFi, certain significant hurdles to their global popularity remain.
The four most significant ones are:
Regulatory uncertainty
It has been said that regulations often lag behind technology. The same situation subsists with tokenized RWA.
In the US, the regulatory environment is well-established even though tokenized RWA would be classified differently depending on the underlying asset.
The UAE provides more integrated regulations under its Virtual Assets Regulatory Authority (VARA) framework.
The Markets in Crypto-Assets Regulation (MiCA) in Europe has also been designed to integrate and harmonise the legal framework for digital assets in Europe.
However, many nations in Africa, Asia, and Latin America still don’t have clear regulations on digital assets as a whole and tokenized RWA in particular.
Also, since access to a global market is one of the drivers of liquidity in the tokenized RWA market, lack of global standards may end up making inter-jurisdictional trading difficult and legally complex.
Cybersecurity risks
Smart contracts are crucial to the entire tokenization process.
However, they face certain risks that can jeopardise everything else. “Smart contracts may contain vulnerabilities or logical errors that expose them to attack or undermine their intended function,” according to Halborn, a blockchain security firm.
Also, given the novelty of the technology, financial institutions creating a link between traditional solutions and smart contracts can make mistakes.
Furthermore, on-chain trading is subject to the threat of lost or stolen private keys and compromised accounts, as anyone familiar with the cryptocurrency and web3 industry knows well.
Similarly, there is the threat of whale dominance, according to Defactor, a company providing tokenization services. This occurs when governance decisions (how rental income or profits should be divided, when to carry out audits, whether to take regulatory action, etc.) are dominated by large token holders
Low liquidity
Though the tokenized RWA market has grown significantly over the past year, its 318,061 users and $24.9 billion total locked value (TLV) are still insignificant in the scheme of things.
Thus, some tokenized RWA markets are illiquid, making them subject to price manipulation. “Due to lower liquidity in some RWA markets, price manipulation (pump-and-dump schemes) remains a concern for early investors,” according to Defactor.
Custody challenges
Since there is both a physical asset and a digital token, investors and traders face custody challenges on multiple fronts.
A compromise to one layer of custody can result in asset loss. Not only must the digital tokens be protected (wallets, private keys, etc.), but the underlying asset must also be kept safe.
Safe-keeping of real-world assets often involves paying custodians and trustees, which adds to the cost of tokenization.
More importantly, there is a need to verify that the custodian is reliable (that they won’t sell the asset while investors hold tokens that are not backed by real-world assets).
4. How asset owners should approach RWA tokenization
How then should asset owners approach the tokenization of financial instruments and physical assets?
The first thing to say is that this is a new market. Though traditional financial institutions are embracing it with speed, the risks outlined above require a more cautious (and perhaps graded) approach.
This means that the more (less) liquid, secure, and regulatory compliant the market becomes, the more (less) asset owners should embrace it.
It is worth noting, though, that the tokenized RWA market is making much progress on all fronts.
“We’re already seeing some efforts from regulators to clarify the rules for digital assets, and institutions are adopting Chainlink’s cross‑chain messaging to avoid the ‘walled‑garden’ problem,” said Colin Cunningham, Head of Tokenization and Alliances at Chainlink Labs, the company behind Chainlink (a decentralized oracle network), in an interview with Forbes. “I expect the tokenized market to expand materially over the next twelve months, both in the volume of assets onchain and the breadth of traditional finance players participating.”
In other words, progress is being made in regards to regulations, interoperability, and liquidity (driven by traditional financial institutions).
Similarly, the use of Chainlink oracles to verify asset status and balances, insurance-backed custodians, on-chain identity and attestation protocols, and multi-signature wallets has been helping to solve custody challenges.
Finally, cybersecurity risks are also not intractable.
Security tests at every stage of development, pre-release audits, the use of updateable codes, and monitoring after deployment, can all protect smart contracts from attacks, according to Halborn.
In the same way, multifactor authentication, strong passwords, cold storage, data encryption, and security audits can protect both the buyers and sellers of tokenized RWA.
Nevertheless, asset owners interested in tokenized RWA should embrace the following rules when trading them:
- Confirm that the asset is legally viable for tokenization based on the regulations that apply in the jurisdiction it originates from.
- Ensure the real-world asset has a clear title and stable valuation (low volatility).
- Confirm that the smart contracts were created with adequate security protocols.
- Confirm that the market is liquid enough based on your investment needs.
- Verify that custodians of real-world assets are reliable and insured.
- Ensure the governance structure is not easily subject to whale control.
Another important point is to discuss tokenized RWA with other asset owners and managers, even as you monitor its development.
This is especially necessary if you follow the graded approach discussed above. Having a community that can point you to recent changes in the tokenized market (and exciting tokenization projects in the offing) can help you make better allocation decisions.
At cio investment club, we provide you with such a community. You will connect with other institutional investors and investment experts with whom you can share investment opportunities and ideas.
We also organise exclusive roundtables and investment breakfasts where you can network and interact with financial markets players.
Do you want to be a part of a community where you can get updates on developments in the tokenized real-world assets market? Register today to become a part of the cio investment club.
Takeaways
- Tokenized RWAs are gaining traction, with traditional financial giants like J.P. Morgan and BlackRock helping the market grow from $10b to $18b in one year.
- Tokenization allows fractional ownership, faster transactions, and more accessible investing in traditionally illiquid assets like real estate and private equity.
- Regulatory uncertainty, cybersecurity threats, low market liquidity, and custody issues continue to challenge widespread adoption.
- Asset owners should assess legal, technical, and market factors before investing, and stay connected to informed communities for updates and best practices.
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