How Tokenisation Works

What Is Tokenisation?

Tokenisation is the process of recording ownership rights of a real-world asset — a government bond, a share in a fund, a commercial property, a barrel of oil — as tokens on a blockchain. The token becomes the legally enforceable digital representation of that claim.

The key distinction: the asset itself does not move on-chain. The actual bond, property, or share remains in the real world, typically held by a regulated custodian or within a legal structure such as a special purpose vehicle (SPV). The token is a digital certificate that maps to that real-world holding.

Think of it like a warehouse receipt system: a coffee trader in 17th-century Amsterdam could deposit physical coffee in a warehouse and receive a paper receipt that could be traded without physically moving the coffee. Tokenisation does the same thing with a blockchain ledger instead of paper.

The tokenised real-world asset (RWA) market has grown from near-zero in 2020 to over $20 billion in tracked AUM by 2026, with institutions including BlackRock, Franklin Templeton, and HSBC running live issuances. BlackRock's BUIDL fund alone holds over $2 billion in tokenised US Treasury assets.

The Tokenisation Stack

Three layers must work together for tokenisation to function. Think of it as a sandwich: the legal layer on top, the smart contract in the middle, and infrastructure at the base.

Asset Categories

Six major asset classes are being tokenised at scale today, each with different risk profiles, liquidity characteristics, and regulatory treatment.

Tokenised treasuries dominate the market today because they combine a well-understood underlying asset (US T-bills) with a straightforward legal structure and strong demand from DeFi protocols seeking yield-bearing, low-risk collateral. The private credit and real estate categories are growing fastest in terms of issuer count, though AUM remains smaller due to lock-up constraints limiting secondary liquidity.

How a Token Is Created

The journey from a real-world asset to a tradeable on-chain token involves nine distinct steps spanning legal, technical, and operational teams.

1. 1
   Asset selection & legal structuring

   The issuer identifies the asset and works with lawyers to select the right legal wrapper — SPV, trust, fund — depending on the asset type, target investors, and jurisdiction. This stage typically takes weeks to months and is the longest in the process.

2. 2
   Regulatory filing & approval

   Depending on the jurisdiction and investor type, the issuer may need to file an offering document with the SEC (Reg D, Reg S, Regulation A+), FCA, MAS, or another regulator. Many issuances today target accredited/professional investors under exemptions to avoid full registration.

3. 3
   Issuance platform selection

   The issuer selects a tokenisation platform (Securitize, Tokeny, Apex, Superstate) that provides smart contract templates, KYC/AML infrastructure, investor portals, and ongoing compliance tooling.

4. 4
   Smart contract deployment

   The token contract is deployed on the target blockchain (Ethereum, Polygon, Solana, or a private chain) with compliance rules embedded — whitelist checks, transfer restrictions, jurisdiction blocks. The contract is often audited before deployment.

5. 5
   KYC/AML & investor onboarding

   Investors complete identity verification through the issuance platform. Their wallet addresses are added to the on-chain whitelist only after passing all compliance checks. This is the primary ongoing operational overhead for tokenised securities.

6. 6
   Primary issuance (investment → minting)

   An approved investor wires fiat (or sends stablecoins) to the issuer's account. Once funds are confirmed, the smart contract mints the corresponding number of tokens directly to the investor's whitelisted wallet address.

7. 7
   Custody confirmation

   The underlying asset is purchased and lodged with the custodian. The custodian provides attestation — on-chain or off-chain — that the assets backing the tokens are held in safekeeping. This attestation is the anchor of the token's value.

8. 8
   Secondary market trading

   Investors can trade tokens peer-to-peer, on whitelisted DEXs, or through OTC desks — subject to both parties being whitelisted. Liquidity varies enormously by asset class; most tokenised securities have thin secondary markets and investors primarily exit via issuer redemption.

9. 9
   Redemption (token burn → fiat out)

   An investor submits a redemption request through the issuer portal. The issuer sells the underlying asset (or draws from reserves), the investor's tokens are burned on-chain, and fiat is wired to the investor's bank account — typically within T+1 to T+2.

Transfer Restrictions & Compliance

Unlike standard ERC-20 tokens, tokenised securities are regulated instruments. The smart contract must enforce securities law in code — something traditional ERC-20 was never designed for.

Compliance is enforced through an on-chain identity registry — a mapping from wallet addresses to verified investor profiles. Before any transfer is executed, the contract checks both sender and receiver against this registry. If either party fails the check, the transaction reverts.

The registry typically encodes:

The compliance layer also handles forced transfers — the ability of the issuer or regulator to move tokens between addresses (e.g. in a court-ordered recovery or death/estate situation). This is a legal requirement for tokenised securities that distinguishes them from censorship-resistant cryptocurrencies.

Settlement & Custody

Settlement is where tokenisation delivers some of its most tangible efficiency gains — but also where the gap between on-chain ideals and real-world constraints is most visible.

Traditional securities settlement operates on a T+2 cycle: if you buy a stock on Monday, you legally own it on Wednesday. This delay exists because clearing houses need time to reconcile trades, manage counterparty risk, and move cash and securities between custodians.

Tokenised securities can achieve near-instant settlement — once both parties are whitelisted and the transfer conditions are met, the blockchain confirms the transaction in seconds. In practice, most tokenised RWAs don't yet achieve instant settlement because the cash leg of the trade still relies on traditional bank rails.

The ideal model is Delivery versus Payment (DvP) — an atomic swap where the token and the cash transfer simultaneously with neither party bearing counterparty risk. This requires the cash to also be on-chain:

Custody in the tokenised RWA context operates at two distinct levels:

First, the underlying asset custody: a regulated, qualified custodian holds the real-world asset — the actual T-bills, the mortgage deeds, the gold bars. Institutional custodians active in this space include BNY Mellon, State Street, Anchorage Digital, and BitGo Trust. They provide regular attestations that the assets exist and are unencumbered.

Second, token custody: the investor holds the tokens in a blockchain wallet — a self-custody hardware wallet, an institutional custody solution (Fireblocks, Copper, Anchorage), or a custodian-managed wallet. The issuer maintains the authoritative mapping between the on-chain token register and the custodian's records.

Yield Distribution

How a tokenised fund or bond pays its investors is a surprisingly nuanced design decision with significant implications for DeFi composability, tax treatment, and operational complexity.

There are three primary models:

Risks & Limitations

Tokenisation introduces new efficiency gains but also layers new risks on top of the traditional risks that already exist in the underlying asset class. Investors and builders need to understand both.

Token Standards

The Ethereum community has developed several token standards specifically designed for tokenised securities, each with different tradeoffs between flexibility, compliance expressiveness, and DeFi composability.

The industry has converged on a two-layer approach: ERC-3643 for compliance enforcement, with an ERC-4626-compatible wrapper for DeFi integrations. This lets the same underlying tokenised T-bill serve both institutional investors (who need compliance controls) and DeFi protocols (which need standardised yield-bearing vault interfaces).

Why It Matters

Tokenisation is not a solution in search of a problem. It addresses concrete inefficiencies in the $500+ trillion global financial system — and creates genuinely new capabilities that did not exist before.

The most transformative near-term use case is DeFi composability: a tokenised US Treasury fund like BlackRock's BUIDL can be used as collateral in a DeFi lending protocol, earning T-bill yield while simultaneously backing stablecoin borrowing. This "yield-bearing collateral" model was impossible before tokenisation because real-world assets could not interact with permissionless smart contracts.

Longer term, proponents argue that a fully tokenised financial system — where stocks, bonds, property, and commodities all exist as programmable tokens on interoperable ledgers — would eliminate the vast majority of the operational overhead in financial services: reconciliation between counterparties' records, settlement fails, corporate action processing, and proxy voting complexity.

The realistic near-term picture is more incremental: tokenised treasuries and money market funds will mature and grow as DeFi demand for yield-bearing collateral increases. Private credit and real estate tokenisation will grow as secondary market infrastructure develops. Full tokenisation of public equities at scale remains a long-term project, dependent on regulatory reform in major markets.