Tokenization: Feasibility, Necessity, and Methodology - An Analysis of Major Asset Classes

Author: Chuanwei Zou, Director of Frontier Finance Research Center at Shanghai Finance and Development Laboratory

Executive Summary

Tokenization represents a cutting-edge frontier in digital finance with growing implications across academic, commercial, and policy spheres. This article introduces a three-dimensional framework—feasibility ("can it be tokenized?"), necessity ("why tokenize?"), and methodology ("how to tokenize?")—to evaluate tokenization's viability. Additionally, it assesses asset-class compatibility through five lenses: form of existence, property rights verification, holding methods, trading/settlement mechanisms, and regulatory requirements. The analysis covers tokenization prospects for monetary assets, securities, funds/investment products, and real-world assets (RWAs), concluding with policy recommendations.

Research Background

Tokenization refers to representing off-chain assets via blockchain-based tokens, where token transfers symbolize asset transactions (Aldasoro et al., 2023). While theoretically all asset types can be tokenized, practical adoption varies widely.

Early Successes and Trends

• Monetary Tokenization: Central bank digital currencies (CBDCs), tokenized deposits, and stablecoins dominate. BIS reports 94% of central banks are exploring CBDCs (Di lorio et al., 2024). Stablecoins like USDT now command a $1.71 trillion market cap (DeFiLlama, 2024).
• Securities: Trials include Nasdaq’s Linq (2015), World Bank’s Bond-i (2018), and Hong Kong’s tokenized green bonds (2023).
• RWAs: Projects like Ant Group’s tokenized EV charging stations (2024) highlight utility in non-liquid assets, with BCG projecting a $16 trillion tokenized RWA market by 2030.

Institutional Visions

BIS’s "Unified Ledger" (2023) and Finternet (Carstens & Nilekani, 2024) conceptualize interoperable tokenized ecosystems for CBDCs, securities, and RWAs.

Tokenization Evaluation Framework

Three Key Dimensions

1. Feasibility ("Can It Be Tokenized?")

   • Resolves "trusted on-chain asset representation"—ensuring authenticity and value alignment between off-chain assets and on-chain tokens.

2. Necessity ("Why Tokenize?")

   • Benefits: Lower holding thresholds, broader investor access, enhanced liquidity, programmable use cases.
   • Market Needs: Fundraising, investor exits, asset diversification, infrastructure modernization.
   • Competitive Edge: Must offer unique advantages over traditional systems.

3. Methodology ("How to Tokenize?")

   • Ownership Tokenization: Tokens represent asset ownership (e.g., property deeds).
   • Revenue Rights Tokenization: Tokens securitize cash flows (e.g., income-sharing tokens), often classified as securities.

Five Compatibility Criteria

1. Form of Existence: Digital assets tokenize more smoothly than physical ones.
2. Property Rights Verification: Ranges from "possession equals ownership" (e.g., cash) to registry-based systems (e.g., real estate).
3. Holding Methods: Custody solutions often preferred over self-custody due to regulatory and security concerns.
4. Trading/Settlement: Centralized exchanges suit standardized assets; OTC markets handle non-standardized ones.
5. Regulatory Requirements: KYC/AML compliance, investor eligibility (e.g., accredited vs. retail), and jurisdictional restrictions.

Four-Step Assessment Process

1. Asset-to-Token Mapping: Resolve on-chain trust issues.
2. Investor Eligibility: Define holder base and custody preferences.
3. Trading Mechanisms: Design P2P or exchange-based models.
4. Value Proposition: Validate commercial viability and infrastructure improvements.

Tokenization Prospects by Asset Class

1. Monetary Tokenization

• Stablecoins: Dominated by USD-pegged variants (e.g., USDT), but lack robust reserves and oversight.
• Tokenized Deposits: Safer than stablecoins but face adoption hurdles without regulatory parity.
• CBDCs: Retail CBDCs need privacy solutions; wholesale CBDCs excel in interbank settlements.

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2. Securities Tokenization

• Stocks: Limited liquidity uplift; firms prefer traditional exchanges over ATS platforms.
• Bonds: Institutional OTC trading persists; tokenization enhances cash flow visibility but not secondary liquidity.

Common Challenges:

• Custody preferences favor intermediaries.
• Regulatory boundaries (e.g., accredited investors) remain rigid.

3. Funds and Investment Products

• ETFs and私募 funds see niche benefits (e.g., LP secondary markets), but most funds lack tokenized secondary trading demand.

4. RWA Tokenization

• Ownership Tokenization: Stymied by asset authentication (e.g., art, real estate).
• Revenue Tokenization: Gains traction (e.g., tokenized EV charging revenue), but competes with REITs and faces standardization issues.

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Policy Recommendations

1. Monetary Systems: Strengthen stablecoin regulations to mitigate risks; accelerate CBDC pilots.
2. Securities: Focus tokenization on post-trade efficiency, not circumventing investor rules.
3. RWAs: Prioritize revenue-rights models over ownership tokenization for illiquid assets.

FAQs

Q1: Can tokenization bypass securities regulations?
No. "Same activity, same risk" principles apply, requiring compliance with existing frameworks.

Q2: Do tokenized stocks improve IPO prospects?
Unlikely. Liquidity depends on exchange prestige and investor base, not tokenization alone.

Q3: Why is RWA tokenization challenging?
Physical assets require costly audits and custody solutions, often negating tokenization benefits.

Q4: Are CBDCs replacing stablecoins?
Not immediately. Stablecoins fill gaps in cross-border payments, but CBDCs offer safer alternatives long-term.

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This analysis underscores tokenization’s potential while cautioning against one-size-fits-all adoption. Strategic alignment with asset-specific traits and regulatory realities is paramount.