In a recent report, Bank of America (BofA) highlighted the transformative potential of tokenization in the financial sector, while also cautioning about the significant challenges it faces. This innovation could redefine how financial assets are managed and accessed, offering distinct advantages over traditional systems. However, the road to widespread adoption is fraught with obstacles that cannot be ignored.
Unlocking New Possibilities
At its core, tokenization involves converting ownership of real-world assets—ranging from stocks and bonds to real estate, private equity, and art—into digital tokens recorded on a blockchain. This process isn’t entirely new; it follows a lineage that began with mutual funds and evolved through separately managed accounts, collective investment trusts, and exchange-traded funds (ETFs). Bank of America’s analysts, led by Craig Siegenthaler, believe tokenization could revolutionize asset management by offering a plethora of benefits.
One of the most touted advantages is enhanced liquidity. Tokenization could enable 24/7 trading, opening up secondary markets for previously illiquid private assets. This could lead to faster, frictionless settlements, eliminating the multi-day delays prevalent in today’s financial markets. Moreover, the concept of fractional ownership becomes feasible, reducing investment minimums and expanding access to a wider range of investors.
Transparency is another compelling benefit. Blockchain ledgers provide immutable and publicly accessible records of ownership and transactions, fostering trust and accountability. Lower fees are also a possibility, as intermediaries are cut out of the process. Smart contracts can automate key processes like dividend payments, coupon distributions, and voting rights, streamlining operations and potentially reducing costs.
Navigating the Challenges
Despite these promising prospects, BofA’s report warns of significant hurdles that need to be overcome for tokenization to gain mainstream traction. Regulatory uncertainty is at the forefront. Although U.S. policymakers have expressed support for tokenization, future administrations could change course, and many jurisdictions are still in the process of drafting appropriate regulations.
Custody issues present another major concern. If private keys are lost, investors could lose access to their assets, a risk that looms large as institutional-grade custody solutions are still under development. On the technological front, vulnerabilities in smart contracts or blockchain platforms could be exploited, posing risks to asset security. Integration with existing financial infrastructure also presents challenges, as most institutions still rely heavily on traditional systems.
For publicly traded assets, the case for tokenization is less compelling. Existing U.S. markets already offer deep liquidity, low fees, and robust investor protections. The added value of tokenizing such assets is not immediately evident, especially when considering the established efficacy of current systems.
A Balancing Act
As of now, the value of real-world assets represented on-chain has exceeded $28 billion, according to data provider RWA.xyz. This figure underscores the growing interest and investment in the space, suggesting that while challenges abound, the momentum for change is strong.
Nonetheless, the path forward requires balancing innovation with caution. The potential for tokenization to democratize access to investment opportunities, enhance liquidity, and streamline operations is significant. However, without addressing the regulatory, technological, and infrastructural challenges, the promise of tokenization may remain unfulfilled.
Looking Ahead
As the financial industry grapples with these challenges, it’s clear that collaboration between regulators, technology providers, and financial institutions is crucial. Building a robust framework that addresses these concerns will be essential for tokenization to reach its full potential.
In the meantime, efforts like those by Ondo Finance, which is rolling out tokenized U.S. stocks and ETFs, indicate a burgeoning interest in equity tokenization. These initiatives could serve as valuable case studies, highlighting both the potential and pitfalls of tokenization in practice.
Ultimately, whether tokenization becomes a cornerstone of future financial systems will depend on how effectively the industry can navigate these hurdles. For now, it represents both an exciting opportunity and a formidable challenge, one that will require careful consideration and strategic action to realize its full potential.
Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
